Common Mistakes When Serving As Trustee
/My last post discussed the pros and cons of institutional trustees vs. family member trustees. Regardless of whom is serving as trustee, in the course of my law practice there are common themes which repeatedly arise in the area of trust disputes and litigation. Specifically, it is easy for trustees---especially inexperienced family member trustees---to make mistakes when administering a trust. Some of these were nicely summarized in a recent article, published in Barron's Penta, entitled "The Five Biggest Ways To Bungle A Trust."
(1) Not Keeping Good Trust Records---The Arkansas Trust Code, and presumably trust laws in most if not all other states, contain requirements mandating that trustees provide beneficiaries with accountings of trust assets, income, expenditures, etc. The timing and extent of those accountings can vary based upon certain factors, including whether one is an income beneficiary or a remainder beneficiary. However, at all times the trustee is to act in the interest of the beneficiaries, which includes maintaining comprehensive and accurate records. Trustees who do not keep such records act at their own peril, as gaps and inaccuracies in documentation (even if purely innocent) can create an aura of suspicion and sometimes later liability for breach of trust, breach of fiduciary duty, etc.
(2) Not Diversifying Trust Investments---Another duty which too often goes unfulfilled is the trustee's obligation to properly diversify trust investments. Just because the trustee might handle their own investment portfolio in a certain manner does not mean that the investments are being properly handled with regard to the beneficiaries of the trust. For example, if the beneficiary is an elderly person in need of income, having the trust's assets invested in 100% tech stocks is not likely to be deemed a wise investment strategy. Arkansas has a Prudent Investor Act which must be reviewed and followed, and it is based upon a well-recognized uniform act that is utilized in many other jurisdictions as well.
(3) Not Distributing Trust Assets Fairly---A trustee owes a fiduciary duty to current beneficiaries, as well as to remainder beneficiaries. Sometimes this can create problems when a duty to one conflicts with a duty to another. Also, sometimes in the case of family member trustees, the trustee is herself a beneficiary (e.g., perhaps the father named his daughter as trustee of his trust after his death, but also named her as a beneficiary like his two sons/her two brothers). Especially when no trustee fee is involved (see below), we have seen cases in which the trustee is tempted to take extra distributions, etc. as purported justification for being saddled with the extra time and work associated with acting as trustee. This can be dangerous as it can constitute an actual impropriety, or at least suggest an appearance of impropriety. It is therefore wise to maintain clear and well-documented records of all distribution decisions.
(4) Not Properly Handling The Trustee Fee---The fact is that administering a trust can involve a lot of work. It can be very profitable, which is precisely why institutional trustees exist. Families often do not want to see their assets being consumed in part by the fees of an institutional trustee (notwithstanding some of the advantages to using one), and so often a family member is named as trustee. The family member, however, might have a time-consuming occupation and/or an active family life. Adding the trustee duties on top of an already-busy schedule can naturally trigger a desire for some sort of compensation associated with the extra work. Whatever the trustee fee arrangement is (assuming trustee fees are paid at all), similar to asset distributions discussed above it is wise for there to be a well-documented record of how trustee fees will be paid, when they will be paid, and how they will be calculated.
(5) Not Watching Your Back---A trusteeship has been viewed as involving the highest duty owed another under the law. It entails a tremendous amount of responsibility, and should not be lightly regarded. Individuals named as trustee in a trust instrument often view it as an honor, which is fine so long as the trustee treats it as such. However, money has an uncanny way of sometimes causing people---including trustees and beneficiaries---to engage in actions and behavior which they (and others) perhaps never previously conceived. Occasionally this will result in nasty disputes between trustees and beneficiaries which can ultimately erupt into actual litigation. A trustee might innocently take on that "oath of office," so to speak, never imagining that they might someday be mired in stressful, expensive disagreements with once-close friends or family members. On that note, typically the trustee's dispute is not with the person who named them as trustee (i.e., in a revocable trust situation the grantor of the trust can simply remove or change the trustee)---instead, the fight will frequently be with the children or grandchildren of the grantor.
Matt House can be contacted by telephone at 501-372-6555, by e-mail at mhouse@jamesandhouse.com, by facsimile at 501-372-6333, or by regular mail at James, Fink & House, P.A., Post Office Box 3585, Little Rock, Arkansas 72203.