While serving as a professional trustee can be a rewarding experience, it is not without risks. Trustees, for example, often find themselves in conflict with unhappy beneficiaries. Sometimes such situations are unavoidable. But trustees can take actions to minimize the likelihood of being in the hot seat. What follows are some scenarios that sometimes lead to conflict and how they can be navigated relatively safely.
Determining An Income Beneficiary's Standard Of Living
One of the most common types of conflicts a trustee has to deal with is the tension between a trust's income beneficiary and the remaindermen. This conflict often comes in the form of a grantor naming his second wife as income beneficiary and the children of his first marriage as remaindermen. A common issue that the trustee must resolve is establishing a standard of living to which the second wife is entitled.
The two sides can wildly diverge on what's appropriate. While the second wife may believe that she is entitled to live like the Queen of England, the children may believe that she is entitled to a considerably more modest lifestyle-one that is more likely to involve a trailer than a palace. In this type of situation, it may be impossible for the trustee to satisfy everyone. The trustee is in the unenviable position of potentially being viewed as too stingy by the income beneficiary or too profligate by the remaindermen. How is a trustee to resolve this dilemma in a way that will avoid litigation-or at least increasing the chances of prevailing in court if a lawsuit is unavoidable?
It is imperative, of course, that the trustee remains neutral and does not favor any particular beneficiary or class of beneficiaries-something the trustee is obliged to do in faithfully discharging his duties. Complete neutrality also helps alleviate hostility and helps in avoiding litigation.
To determine the wife's standard of living, the trustee should try to develop a clear understanding of the terms of the trust. But even after a trustee's best efforts, the intent of the grantor may not be clear. For example, must the trustee take into account the income beneficiary's other assets? May the trustee do so? Is the trustee affirmatively precluded from taking the income beneficiary's other assets into account? Questions such as these can come up, leaving a gray area that can turn into a battle ground for the income beneficiary and remaindermen.
When issues such as these arise, the trustee should consider filing a complaint for instructions to protect against a claim by the beneficiary. A ruling on the proper interpretation of a trust is critical in terms of defending against any future lawsuits. An additional advantage to a complaint for instructions is that the trustee generally is able to have his reasonable fees and costs paid from the trust.
Another effective strategy to protect a trustee's decisions regarding the needs of the income beneficiary is to have the trustee's accounts allowed on a regular basis. Allowance of accounts discharges a trustee from any liability for transactions covered by the accounting. Once allowed, accounts generally cannot be questioned in a collateral proceeding in law or in equity, absent fraud or manifest error, and only rarely are reopened.
A trustee also should consider whether, under the applicable state law, he has the power to adjust between income and principal. In states that have adopted the Uniform Principal and Income Act, a trustee may have the ability to align the interests of the income beneficiary and remaindermen by exercising the power of adjustment-for example, by creating a unitrust that pays a fixed percentage of the value of the principal to the "income" beneficiary.
Communicating With Beneficiaries
As trustee, you prudently manage the trust's investments. You faithfully follow the terms of the trust and scrupulously abide by your duties of impartiality and loyalty. You keep meticulous records and regularly have your accounts allowed. Yet you may find at least one beneficiary never seems satisfied with what you are doing and makes repeated requests that you provide him with additional information regarding the trust. May you ignore these requests, confident in the knowledge that you are fully performing your duties as trustee? Simply stated, no.
Trustees have a separate duty to inform and communicate with beneficiaries. The trustee's duty to inform, however, is not uniformly defined across all states. Therefore, a trustee must educate himself on not only the terms of the trust, but also the law of the relevant jurisdiction when it comes to sharing information with beneficiaries.