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.
The trustee does not act as the agent or employee of the trust; a trustee is instead the embodiment or legal personification of the trust in dealing with trust property and in making contracts that affect trust property. If a trust sues a third party or a current or former trustee, the amount recovered belongs to the trust, not its beneficiaries.
A trustee must carry out the terms of the trust as directed by the settlor, unless a judge declares the terms invalid. The tendency today is to give the trustee broad power of sales for both real and personal estate. In some cases, even where such power is not expressly given, it will be implied from the nature of the duties that the trust calls upon the trustee to perform.
Trustees must exercise good faith and act solely in the interests of the beneficiaries. They must dispense with all self-interest, particularly if it becomes adverse to the rights of the beneficiaries. The office of trustee can never be used for personal advantage or gain except for reasonable compensation for the trustee's work. A trustee owes trust beneficiaries the duty of good faith and loyalty, a duty not to engage in self-dealing conduct, a duty to fully disclose possible conflicts of interest and a duty to always segregate trust property from the trustee's personal property.
The general principle governing the conduct of fiduciaries dealing with trust property, funds or assets is they are never allowed to derive any personal gain or advantage from the use or sale of trust property. Fiduciaries must account for and remit all profits arising from such improper use, if profits are made by misconduct. A trustee must fully disclose to all beneficiaries all facts surrounding any self-interested transaction and obtain fully informed consent. However, trustees are allowed to receive modest and reasonable fees for their work. Many nonprofessional trustees work for free and are not paid at all if the trust assets are relatively small.
The single most important role of a trustee is representing the trust and officially acting in its name. Trustees act most properly and safely when expressly named "as trustee." With that designation, trustees may enter contracts, be listed as owning bank accounts or other assets of the trust and may conduct all business for the trust. This means that trustee John Greene signs only "John Greene as Trustee of the Marc Greene Family Trust" in any transaction for the trust. A title or bank account name of a trust will typically read "X as Trustee of the Y Trust." If a trust is amended, official records must also change: After an amendment, John Greene now signs only "John Greene as Trustee of the Marc Greene Family Trust as Amended and Restated." Failure to follow these signing protocols could cause the trustee to be held personally obligated for debts intended to be obligations of the trust.