What New Family Trustees Need to Know

When a family member or friend asks you to become their trustee, it conveys a high level of trust in you. However, many of our clients tell us that they did not fully understand the enormity of the job when they accepted it.

The role of a trustee is to act as a custodian for the assets held within a trust. The job also includes reporting responsibility as well as the administration and distribution of trust assets on behalf of the beneficiaries. Since trustees are fiduciaries, they can be held personally liable for any breach of that duty.

Understanding the role and responsibilities of a trustee is an essential part of accepting this job. Yet those involved in the creation or drafting of wealth transfer vehicles are reluctant to discuss the roles and responsibilities and liabilities of the trustee. This article examines the key information a trustee should know when deciding whether or not to take on this responsibility.

What are the goals and objectives of the trust?

The wealth management community typically works with the wealth owner (grantor) to think through the goals and objectives of their financial lives. These discussions include what to do with their assets upon their death, generally focusing on tax-efficient strategies and the legacy of the grantor.

Some of the assets may go to philanthropic endeavors, leaving a legacy through complex structures, and others may be designated as gifts to children, family members, or friends. However, wealth management decisions rarely are as simple as they appear on the surface.

Here are some of the questions wealth managers ask wealth owners. Knowing the answers to these questions can benefit the trustee.

• How will you fund your investment, trust, and retirement accounts, and what is the proper titling of any other accounts you own?
• When do you plan to retire?
• What is your exit plan for your business endeavors?
• Do you have children or other heirs, and what is the intent for your heirs in terms of business continuity and wealth transfer?
• How do you want to divide the estate?
• Have you thought about your legacy?
• What are effective wealth preservation strategies?
• If your heirs include multiple generations involved, do documents or structures need to be reassessed for life events, regulatory changes, etc.?

What is the formal structure of the trust?

After the grantor and their wealth manager have discussed the above concepts, the next step is to create a formal, legal structure for the trust. In other words, at this point, the lawyers step in.

Here are the steps the legal team will take:

• Draft the legal paperwork, such as the will and trust documents.
• Review the tax and trust codes for the state of creation as well as where the beneficiaries live.
• Take steps to help avoid probate court.
• Help the grantor determine who will become the trustee.
• Assist the grantor with filling any other needed positions—such as trust protector, successor trustee, family advisor—depending on the wealth transfer structures. 

A certified public accountant (CPA) will step in to determine the cost of the various structures and execute the financial aspects of the plan. A CPA also will provide the following services:

• Recommend strategies to minimize wealth taxes
• Ensure that the trust is run correctly and funded
• Determine the expected transfer costs under various options
• Set up an estate account, including obtaining a federal ID number, preparing tax filings, and paying the final distributions to beneficiaries

What are the responsibilities of the trustee?

Once these roles and responsibilities are established, the documents are executed, and the trustee becomes the trust administrator.

The trustee will need to consult the trust documents to find if they can delegate any task, authority, or liability to another individual. If you need help finding the answer to what you can and cannot delegate, the drafting attorney should be able to help you find the information you need. However, if a clause requires interpretation, you may need to hire separate counsel.

Now, we can go down the rabbit hole of who pays for that legal consult, the trust or the trustee? If the trust pays for the consult, where does the privilege lie—with the trustee or the beneficiaries?

The real question, though, is who is responsible for counseling the trustee regarding their legal responsibilities and personal liability. Unfortunately, the answer is vague at best. The trust lawyers represent the grantor, not the trustee or beneficiaries. The beneficiaries have the standing to seek an accounting of the assets, and the burden of proof rests with the trustee to prove they fully performed their duties.

Some organizations can help educate and provide resources to trustees, but typically trustees only find the organizations through word of mouth. Here are a few resources to consider:

• The ITA Independent Trustee Alliance
• The ABA Trust Officer School
• Cannon Financial Courses

How can the trustees protect themselves?

Even if a trustee is able to delegate some of their duties, they can never transfer their role as a fiduciary. Therefore, it is critical to surround yourself with a team of professionals, such as lawyers, accountants, and perhaps administrative trust companies.

However, the only way to transfer the risk of personal liability is through the purchase of trustee liability insurance. Trustee liability insurance (also known as trustee indemnity insurance) is a type of error and omissions (E&O) insurance that can protect against claims of negligence.

The keys to being a successful trustee are being properly educated, building a superior professional team, doing the due diligence needed to hold people accountable for non-performance, and being fully insured.

If you have questions about trustee liability insurance and how it can help you safely fulfill your responsibilities as a trustee, Woodruff Sawyer is happy to help. Please contact your Woodruff Sawyer representative today.