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What are the Duties of Being a Trustee?

Although we often encourage our clients to name a professional fiduciary, such as a bank or trust company, to serve as trustee of their revocable trust in the event of death or incapacity, most people (including this writer’s parents!) name a family member or members, usually children or other close relatives, to serve in this capacity.

The role of trustee carries with it significant responsibility and failure to be aware of these responsibilities, normally referred to as “fiduciary duties”, can lead to unexpected risk of liability attendant to one’s service as a trustee.

So let’s take the typical scenario: your parents are both deceased and you and your sister are named as co-trustees of Mom’s and Dad’s trust.

You have always heard that a trust makes the job easier, so what can possibly go wrong? Well, if you follow the rules, things usually will not go wrong, but the trustees must be aware of their duties and carry out those duties in a proper manner.

Creating Legal Documents

While it is not necessary for a court to get involved in the process of administering the trust (after all, this is why Mom and Dad made the trust, to keep the estate out of the courts, i.e. PROBATE), there are certain legal documents which must be prepared to legally install you and your sister as the trustees.

Do you know what is probate?

Let’s say the estate includes a home which is titled in the name of the trust. But normally, the name of the trust will include the names of the trustees; therefore, Mom’s and Dad’s names will usually appear in the county records as the named trustees of the trust.

Since they are deceased and cannot sign for the trust, it is necessary to change the title on the recorded deed from their names as trustees to your and your sister’s names as trustees.

Affidavit of Successor Trustee

This is accomplished by creation, signing and recording of a document called an Affidavit of Successor Trustee (“AST” for short).

Once this document (with death certificates attached, showing Mom and Dad are no longer alive) is properly prepared and recorded in all the counties where the trust real property is located, including counties out of state, the property will still be under the name of the trust, but the records will show the names of the trustees to now be you and Sis instead of Mom and Dad.

By doing this, you and your sister have the authority now to sell or otherwise transfer the property in the trust administration process.

Normally this AST is also presented to any financial institutions where the trust has funds deposited.

Again, by presenting the AST with the death certificates, normally this will be sufficient for the financial institution to remove Mom and Dad’s names from the account and add your and your sister’s names to the account as trustees, thereby giving you the power to access the account, manage the investments, use the funds in the accounts to pay expenses, and ultimately distribute the accounts among the heirs of the trust.

Act in Best Interest of All the Beneficiaries

In most cases where children are named as trustees, they are also beneficiaries of the trust.

This is where the children as trustees/beneficiaries must take care to not overstep the bounds of their authority. As trustees, they must act in good faith and in the best interests of all the beneficiaries.

If the trust provides for distribution of the estate among the children equally, then the trustees cannot just decide to live in the home rent free or purchase the home from the trust, even at a fair price, unless such arrangements are agreed to in writing among all the heirs, or the trust itself provides for some such favorable treatment to a trustee in his or her capacity as a beneficiary.

A considerable body of law exists in defining the importance of acting impartially, fairly and with reasonable haste in administering the estate.

Determine Financial Obligations of the Trust

Before distributions are made, the trustee should determine what the financial obligations of the trust are.

For example, there may be a mortgage which must be paid (this can usually be paid upon sale of the property by the trustees); also, there may be credit cards with balances and other financial obligations.

In order to protect the trustee from future liability, a notice to creditors must be published in a local paper, which after a period of several months has run, will cut off any creditor from being able to make a claim against the estate if that creditor has not come forward within the allotted time.

If you are aware of certain obligations of the estate, the notice must also be sent specifically to these known creditors.

Record Keeping

As trustee, you must keep good records, so be sure to engage a good CPA to work with you in this process. The CPA will help you keep track of expenditures and receipts of funds, and also filing tax returns so that if any persons, such as other heirs, complain that you have not handled the estate properly, these records can be presented as proof that you are fulfilling your fiduciary duties.

Sometimes it is important to distinguish between what is income of the trust and what is principal; the CPA will provide invaluable service in keeping all of this straight.

Assets in the Trust

The trustee is normally granted the freedom to hold onto assets in the trust that are received as part of the trust estate at the time of taking over as trustee, and the trustee will not be liable or responsible for losses that occur during the administration process, such as declining property values or stock market corrections.

Nevertheless, just to be safe, it may be wise to look to liquidate the estate as soon as reasonably possible in order to avoid problems which may result where there are significant changes in market value following death of Mom and Dad.

Reasonable Compensation

Being a trustee may or may not be a thankless task. Usually the trust will provide for reasonable compensation for serving as trustee.

If you and your sister are the sole heirs, it would make no sense to take compensation for service as trustees; you would only be paying yourselves, normally causing tax-free bequests to become taxable income for service as trustee.

However, if you are trustee and are doing a lot of work and there are other beneficiaries, you may want to determine a reasonable compensation for serving as trustee.

Normally professional fiduciaries, such as banks and trust companies, charge between 1% and 2% per year for serving as trustee, based upon the value of the trust estate, so as a non-professional trustee, it would not be unreasonable for you to charge a similar amount.

If you and your sister are acting as co-trustees, then you will split the fee, based upon your agreement or your relative contributions of providing services as trustee.

Obtain Releases from All the Beneficiaries

Once it is time to distribute the estate, your estate attorney can help you with obtaining releases from all the beneficiaries, where they acknowledge receipt of their inheritance and release you from any further liability with respect to administering and distributing the estate.

Without these signed releases, there is always the risk that a beneficiary could sue you in your capacity as trustee. The release will normally state that the beneficiary, by accepting the distribution, accepts the funds as his or her full share of the trust estate. Unless you have committed a crime or fraud or acted recklessly, this release will normally protect your from anyone coming back later and alleging wrongdoing.

Before accepting the trusteeship, you should consider your duties of being a trustee and decide whether taking on this responsibility is what you want to do.

If the trust estate is not terribly complicated, then becoming trustee will usually work out fine, but where there are more complex matters, such as real property which needs to be managed, valued and sold or businesses which must be managed and sold, you may want to think twice before you take the plunge.

The attorneys at Grant Morris Dodds have been providing trust administration services now for decades. We would be happy to discuss the options available to you in dealing with administering a trust of which you have been named to serve as successor trust.