Trusts enable individuals to ensure the financial health of loved ones long after they are gone, but only if they are properly set up and administered. Trustees are appointed in the document creating the trust whether it is a trust or a will and they bear a great responsibility in ensuring that the trust is handled properly. Following are some of the responsibilities that will need to be carried out.
The trustee’s responsibilities are spelled out in the document creating the trust. Any power not so given cannot be exercised, with certain narrow exceptions. A trustee has very broad powers not only to control the distributions in amount and timing but also to invest the principal. A trustee can also have the power to invade principal to make a distribution to a particular beneficiary to the exclusion of other beneficiaries.
Some trusts contain provisions where the trustee can make uneven distributions to people in the same class of beneficiaries; this is called a sprinkling power.
For example, the income beneficiaries can be the grantor’s children and grandchildren. Some of the children or grandchildren may be very wealthy, while others may be less so. A trustee with a sprinkling power can decide to make distributions to the poorer children while distributing nothing to the wealthier children. This can create conflict, especially since in many instances these are subjective decisions. A person nominated as a trustee should be aware of this, as well as the potential for conflict, before accepting the role and responsibilities of trustee.
It is also usual for a trust to permit an invasion of principal to benefit a beneficiary if there are “ascertainable standards of health, education, and/or support” of a beneficiary. When this occurs, the trustee should try to have the grantor prepare a letter or description of when this power may be exercised.
Other duties of a trustee are to pay the trust’s bills, maintain insurance for trust property, develop an investment strategy, oversee the investments, maintain detailed records, report promptly to beneficiaries, and make timely distributions to beneficiaries. A trustee can also make payments on behalf of a beneficiary rather than making such payments directly to the beneficiary (e.g., medical bills, tuition, mortgage payments). Separate trust accounts should be opened for operating expenses and distributions, and there must be no comingling of funds with the trustee’s personal funds.
An important function of a trustee is investing the trust’s assets which includes specific investment decisions and deciding on a big-picture asset allocation plan and trying to balance the interests of the income and corpus beneficiaries. For instance, trustees must decide whether to invest the funds to maximize current income or to provide for either the safety or growth—or both—of the ultimate principle. In many cases, this is a massive guessing game, with the conflicting parties wanting what appears best for them at the time. Furthermore, as with most investment decisions, success is a moving target.
How a trustee invests the funds is a very real issue and in many situations, it might be advisable to engage the services of an investment manager or financial professional to advise on alternative asset allocation plans and expected returns. Perhaps an investment policy statement should be prepared, possibly with the acquiescence of the various classes of beneficiaries.
Investing the trust’s assets can be particularly troublesome when there is a second marriage; when some beneficiaries are well off and others not so comfortable financially; when there are large age gaps among beneficiaries; when some beneficiaries have many children and others none; when a beneficiary is not capable of handling his affairs or is overloaded with debt or a large amount of personal guarantees; when a beneficiary is a gambler, alcoholic, or drug addict; when a beneficiary is going through a divorce; when some beneficiaries are risk-takers and others very risk adverse; when there is a period of great turbulence in the economy or financial markets; or when the trustee is or was completely trusted by the grantor but is totally inept with financial affairs. All of these issues and many more need to be considered when choosing trustees. This is why some choose a professional trustee to work alongside a trusted friend or relative.
Trusts are effective tools for transferring and managing wealth across generations and accomplishing family wealth management objectives. They are necessary under the right circumstances, but they are also fraught with dangers and complicated rules. Because of this, the choice of trustee, as well as the responsibilities such a trustee will have, represent very important decisions and should not be made lightly or without careful consideration.
I presented two speeches of this topic recently and will email you the handout if you send a request to GoodiesFromEd@withum.com and just say “Trustees responsibilities handout.”
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