Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

Being asked to serve as trustee of a family member’s trust might sound like an honor. It involves stepping into the shoes of the person who created the trust to play an important role. Your responsibilities might include providing for the care of people who can no longer manage their own affairs, becoming the financial guardian of young or disabled children, or distributing the assets of someone who has died.

By way of background, a trust is an invisible legal wrapper for holding assets, such as cash, bonds, a life-insurance policy, or publicly traded securities. It is created by a document that looks like a contract and is called the “trust instrument,” set up during a person’s life (an “inter vivos trust”) or with a will (a “testamentary trust”). Title to any assets put into the trust passes to the trustee. The trustee is the person or company chosen to carry out the wishes of the person who set up the trust, known as the “settlor” or “grantor.” Sometimes, family members serve as co-trustees with each other or in conjunction with professional advisors (such as lawyers and accountants), or corporate trustees.

Being a trustee can be hard, emotional work. You may find yourself in contentious situations not of your making and may need to navigate some difficult family dynamics. For instance, the trust beneficiaries—those entitled to money or other assets under the trust—might challenge your authority. And the job may offer few, if any, monetary or psychic rewards.

Here are the most important things you need to understand about being a trustee:

1. You may need professional help managing the trust.
Traditionally, the primary obligations of a trustee are to interpret the trust document, make distributions of income or principal and keep records of these payouts, and invest and maintain the trust’s investments in an ever-changing market. The trustee must also prepare the trust’s tax return. If you do not have the know-how to perform all of these functions yourself, you should hire experts to help you; their fees, assuming they are reasonable and necessary, can generally be paid out of the trust coffers.

2. You must be impartial.
Legally, a trustee is a fiduciary, meaning there’s a duty to always put the beneficiaries’ welfare first when carrying out the settlor’s intent. But often, trustees find themselves wrestling with how to interpret the settlor’s wishes, as expressed in the trust document. That is especially true with broad powers, such as those calling for the trustee to make distributions to “maintain reasonable comfort” of a beneficiary, to preserve the person’s “accustomed manner of living,” or “for any purpose.” (Often, these powers show up in trusts for the benefit of a surviving spouse or children.)

But even with narrow powers, directing the trustee to pay out income and occasionally principal only for very specific reasons, such as “health, education, maintenance, or support,” trustees can get bogged down with personalities. For example, paying money to educate a perpetual student may not be what the settlor intended, but refusing to fund that beneficiary’s latest degree could cause conflicts.

3. Choosing investments can be tricky.
Without specific directions to do otherwise, trustees have a legal obligation to invest in a diversified portfolio—in other words, not put all the eggs in one basket. The precise asset allocation should reflect the needs of beneficiaries. That will determine if the portfolio is invested for growth or value, or to generate income, for example.

It might sound straightforward, but it is not when family wealth was created with a concentrated position in a particular stock, as is often the case. If the trust instrument does not say you must hold the security and the beneficiaries want you to, getting their written consent and a release from liability is advised.

4. You could get sued.
However frivolous the claims, this is a risk for all trustees, as beneficiaries might challenge everything from investment losses to your exercise of discretion about distributions. And though you would hope beneficiaries would be less likely to sue their own kin than outsiders, a lot will depend on family relationships.

To defend these claims, you will inevitably fall back on the trust terms. So, before you agree to be a trustee, read the trust document, and if you do not understand what it says, hire a lawyer on an hourly basis to explain it. Ideally, it should give you wide latitude to make decisions, and it should include words to the effect that you are only liable for “gross negligence or willful misconduct.”

To protect yourself, it is recommended that you document all decisions. For instance, if the trust instrument requires that you take into account other sources of income when making distributions, your notes should indicate that you examined the beneficiary’s tax returns and explain the basis of your decision. This can help protect you if conflicts arise while also creating continuity, both in your own actions and for the trustee who might take over after you.

5. Do not expect to enjoy it.
Beneficiaries might be glad to have a family trustee who knows the players. But for the family member who takes on this role, being a trustee can seem like a thankless job. Though entitled to compensation—under the trust instrument, state law, or both—typically trustees take on these responsibilities without pay, as a courtesy to the settlor.

Many family members come away from the trustee experience vowing to never do it again. Both the amount of work and aggravation associated with these arrangements can make them very tiresome, especially when they continue for many years.

6. Make sure there is an escape hatch.
Many family members have no idea what they are getting into until it is too late. Make sure you have the ability to resign, either under state law or, even better, according to the terms of the trust document. Still, untangling yourself can take time—you cannot just throw in the towel and tell the beneficiaries, ’Find another trustee!’. You may be the person responsible for naming a successor. In the meantime, as a fiduciary, you are duty-bound to keep doing the job.

 

©Morningstar 2016. All Rights Reserved. Used with permission.