Most of your clients may never be asked to serve as a trustee by a friend, relative or business acquaintance. If and when that does happen, however, it's important that they understand the responsibilities they would face and then decide if they are capable of handling the job.
Any involvement with trusts by someone who is not an attorney, a CPA or otherwise professionally trained in this area often starts entirely innocently. A family member, friend or business acquaintance usually approaches the person based on the strong trust they have in his or her reliability, honesty and character. Such a request is flattering and people usually accept. But it's not a decision that should be made lightly.
Trusts involve complex legal issues with substantial risks and uncertainties for a trustee. Most often, there is little or no compensation, and there can be considerable financial risk unless the trustee fully understands the relevant issues. What seems at first an honor may become over time a serious burden involving long-term personal risks and obligations.
Covering The Basics
The person establishing a trust is known as the settlor or donor. A strong argument can be made that the donor is best served by choosing a professional trustee with appropriate training, licenses and insurance. Nonprofessional trustees are generally chosen on the basis of personal relationships and often lack the knowledge and experience of professional trustees. A nonprofessional trustee should, at a minimum, consult with an attorney or another professional familiar with trust law before accepting the position.
Novice trustees are most often recruited for private trusts known as "donative" or gift trusts or for testamentary trusts. These are voluntarily established and funded by private persons to benefit family, friends or specific causes. The donor or settlor of an irrevocable inter-vivos ("while living") donative trust permanently cedes control and ownership of assets to benefit a class of described persons before and also possibly after his or her death. A revocable trust, by contrast, can be terminated by the settlor and possibly others. If not revoked, it may outlive the donor and become irrevocable.
Testamentary trusts are funded in whole or part upon the donor's death using funds allocated by his will and/or life insurance. There are also "special purpose" trusts for education, charitable remainders, Medicaid, generation-skipping transfers, special needs and other things.
To assess the risks he may face, a prospective nonprofessional trustee should ask the donor or his attorney a few polite but tough questions in a businesslike and formal manner, including, but not limited to: What kind of trust is it, exactly? What is its purpose? How is it funded? How will it be funded in the future? When will funding take place? Who else is a trustee? Why is your client being asked to fill the role?
The person should ask to see all trust documentation and amendments and review them carefully-10 or more pages of dense legal wording typically merits the guidance of an independent professional. The documents should be checked for key information. How is the trustee selected and how can he resign or be removed? What are the trustee's duties and the terms for the ending of the trust? Is the trustee protected from liabilities for negligence or good faith errors? What, if anything, is said about compensation to trustees? If the trustee can't find the answers to these questions, or if he fails to understand the documentation, he should not even consider becoming a trustee.
The Fiduciary Standard
Fiduciary duty is the key concept governing the conduct of private trustees. It exists "when one reposes faith, confidence and trust in another's judgment and advice." The central principle is the fiduciary's duty to act for the benefit of the other party regarding matters within the scope of the relationship.
When the existence of a trust is in doubt or disputed, the person asserting the existence of the trust must prove that one exists. Like corporations, trusts with transferable shares representing beneficial interests may sue and be sued. A trust is not a separate entity and acts solely through its trustees, except for the purpose of suing or being sued. The trust itself is not legally distinguished from the trustee acting for it.