In recent weeks I’ve encountered calls from clients who, unbeknownst to me, took on the responsibility of acting as a trustee for a friend’s or relative’s trust and found themselves at the wrong end of a negligence lawsuit. Acting as a trustee carries with it many fiduciary responsibilities such as prudently investing trust assets consistent with and balancing the trust beneficiaries’ needs, providing annual accountings, and notices of significant transactions, engaging competent professionals such as attorneys and accountants, and filing tax returns to name just a few.
While you might be friends or a close relative of the person who creates the trust, that’s not really who you should worry will watch over your shoulder offering criticism. It’s the beneficiaries of the trust you need to worry about. You may or may not be familiar with them. The beneficiaries may or may not get along with one another, which speaks to the many issues you must address when balancing their respective needs. When you treat everyone fairly, it’s not uncommon for everyone to be unhappy because no one got their way.
Consider, for example, a trustee who must balance the income needs of a surviving spouse against the needs of the adult children beneficiaries who inherit when that spouse dies. If the trustee invests to achieve maximum income so the surviving spouse can live in comfort, he’s probably sacrificing growth to keep pace with inflation. When the adult children inherit, the trust might be worth much less than what they expected. If, on the other hand, the trustee invested for growth, the surviving spouse complains that she doesn’t have enough money to live on.
Such an arrangement might work well in a family where mother and father are the parents of the adult children. What happens when the surviving spouse is merely a stepparent to the deceased spouse’s children? Could there be a greater chance for conflict? In my thirty plus years as an estate planning attorney I would say “you bet there is!”
Trustees are often faced with decisions worthy of King Solomon when he had to choose between two women both claiming to be the mother of a baby. In the biblical record Solomon was said to have drawn his sword, suggesting he would cut the baby in half. When one woman begged for him to sheath his sword, he found its true mother, judging that only a true mother would give up her rights to a baby that would otherwise be killed.
I’ve seen disputes between beneficiaries who all claimed the same diamond wedding ring, or a charm bracelet or even sea kayaks! I’ve had to call the sheriff to stop a beneficiary who pulled a U-Haul truck up to the deceased’s home ready to empty it of its contents. Siblings have sat around my conference room table hollering at one another over whether to sell the island home or have one of them buy out the other’s shares.
These decisions ultimately rest with the trustee. After the decision is made, someone is unhappy.
If the unhappy beneficiary is aggressive enough, or feel wronged enough, they’ll hire an all-to-eager attorney to file a lawsuit. Sometimes that’s those fine gentlemen you see on television.
Then we’re off to the races.
The trustee can usually use trust funds to hire counsel to defend herself. But the plaintiff’s attorneys know that. So, the first thing they do is petition the court to remove the trustee for violating a fiduciary duty or standard. If they’re successful, now the trustee must come out of her own pocket to pay for her own defense. Worse, if the plaintiffs get a judgment against her, she’s personally responsible to pay it out of her own assets.
Trust litigation often takes years. In today’s COVID-19 environment with limited court access, a lawsuit may stretch over many years.
It’s not worth it. My advice? Before taking on the role of trustee, it doesn’t hurt to make sure you have a professional fiduciary at your side if there’s any hint of a problem. Talk to your friend or relative and insist they name a bank or trust company as a co-trustee. They might object, citing the expense. But a good professional trustee will often SAVE thousands of dollars of grief and heartache.
Short of that, please consult with your own independent counsel to determine what precautions you might take to avoid the many problems that could arise.
© 2020 Craig R. Hersch. Originally published in the Sanibel Island Sun.