When wealthy individuals establish trusts they often appoint friends or family members to serve as trustees after they pass away. If you are a trustee you become responsible to oversee investment management, distributions, and trust administration.
But these friends or family members who accept this role often don’t realize that they have a fiduciary responsibility to always act in the best interests of beneficiaries.
If you are a trustee and don’t understand these duties, you may fail in your fiduciary duty. How? By favoring certain family members, benefiting from quid-pro-quo arrangements, not overseeing the investments properly, paying yourself excessive fees from trust assets, or failing to take action.
Beneficiaries often take the trustees to court when these lapses occur.
Think this is a rare occurrence? It isn’t. In fact, it is extremely common for beneficiaries to sue the trustee for breach of fiduciary duty. This doesn’t just happen with the super rich either. In every single case, beneficiaries claimed that a family trustee had violated their fiduciary responsibility.
If you are a trustee what can you do to prevent these lawsuits from occurring?
Step 1: Make Sure to Understand your Fiduciary Responsibilities
- Trustees must act in the best interests of all beneficiaries. This duty includes managing trust assets prudently (or choosing an investment adviser to prudently manage trust assets), distributing assets in accordance with trust provisions, avoiding conflicts of interest, keep accurate records for all decisions and communicating effectively with beneficiaries.
- Trustee fees must be reasonable. There are well-known industry standards that outline appropriate fee ranges for different activities depending on the size and complexity of the trust. One “unreasonable” example is when family trustees outsource investment decisions but still charge the same fees as a traditional trust company that manages investments in-house.
- Trustees must be committed to full disclosure. They should clearly and transparently communicate to beneficiaries the specific services they provide to prove their fees are necessary and appropriate.
- Trustees must respond to beneficiaries’ concerns. They need to be prepared to respond when beneficiaries challenge their fees or how they handle their fiduciary duties. And they must keep accurate records, (aka document, document, document) just as corporate trustees must do.
- Trustees should be willing to seek professional guidance. Trust administration can be complex and challenging, and trustees should get the advice and guidance they need from attorneys, accountants, trust administrators, and financial advisors to ensure that they are fulfilling their fiduciary duties.
Beneficiaries should understand these responsibilities as well.
Step 2: Empower All Stakeholders with the Knowledge They Need to Keep Trustees Accountable
The more both trustees and beneficiaries understand the details of their family trust, the less likely that lawsuits will occur.
- Go over the provisions of the trust document. In addition to specifying when and how distributions should be made, the trust document should also outline how trustees are compensated. Meetings with trustees and beneficiaries (and their attorney) to review the document to ensure that everyone knows what the trustee’s fees should be and what they’re doing to earn them.
- Compare fees to industry standards. Beneficiaries consult with their accountants or lawyers to obtain information about standard trust administration fees to determine if the current compensation for family trustees is reasonable.
- Provide documentation of fees. Beneficiaries can request a detailed accounting of the trustee’s fees and expenses to ensure that these costs are reasonable, authorized, and necessary.
- Spell out actions that could constitute fiduciary breaches. Both trustees and beneficiaries should be aware of actions such as self-dealing, favoritism, or discretionary distributions that constitute violation of their state’s trust laws.
- Seek legal advice. If beneficiaries have concerns about trustees but don’t feel that they have the knowledge to challenge them, advise them to seek legal advice from a trust or estate planning attorney. This professional can review the trust document, fee accounting reports, and other actions taken by the trustee to determine if the beneficiaries’ concerns are justified and what legal options may be available.
Of course, one way these potential conflicts and lawsuits can be avoided altogether is to suggest that all stakeholders agree to appoint an experienced corporate trustee to administer the trust either as sole or co-trustee.
As a sole trustee, a corporate trustee can ensure that every aspect of trust administration, from the investment management to distribution requests the trustee reviews and fulfills, is carried out in a prudent, transparent, and cost-efficient manner.
And as a co-trustee, an trust company like can ensure that family co-trustees are always acting in the best interests of all beneficiaries and are paid appropriately for the services they provide.
At Almega Wealth Management, we work with several reasonably priced independent trust companies who are capable to serving as co-trustee or being named as sole trustee. Often by working with an independent trust company the family has a say in the investment management process and even hire their own investment manager. The family can also have input with the trust where oftentimes larger trust companies won’t listen to the family unless the trust is large enough to justify a dedicated trust officer work with the family.