When you’re named as a trustee to a trust, especially a trust in which you are also a beneficiary, you are subjecting yourself to several legal responsibilities of which you need to be keenly aware. The foremost of those responsibilities is the potential conflict of interest that you may have in conducting any aspect of trust business.
Suppose, for example, that Son is the trustee of Father’s trust, as Father has become incompetent. Son was named as the successor trustee. Father went so far as to tell his estate attorney that he named son to fill that role because of Son’s business acumen. When Father dies, Son and Daughter are the beneficiaries of the trust.
Assume further that Son is a real estate developer working on a project that needs a cash infusion. The project could result in millions of dollars in profits, but it could also go bust. Son is the confident sort who never expects one of his ventures to fail. Upon examination, the trustee powers contained in the trust document include the power to invest in stocks, bonds, mutual funds, real estate and business ventures.
So is that enough for Son to take Dad’s trust assets and invest in the venture? Does it matter if Son invests Father’s trust as an equity partner – buying shares in the venture or if Son loans money from Father’s trust, effectively making it a creditor of the venture?
What should Son do? Or should Son just keep Father’s trust’s existing asset mix?
It’s not such a simple question, right or wrong. Son was correct by first determining whether the trust instrument to determine if he even had the power to act as trustee to make such an investment. But the power alone is not enough.
Assume, for example, that Son intends to invest $750,000 of Father’s trust into the real estate venture. If the total value of Father’s trust approximates $1.5 million, then Son would be investing an unusually large percentage of the whole into a risky venture. This would probably fall outside of the “prudent investor rules” that Son should follow as trustee.
The “prudent investor rules” (Chapter 518 of the Florida Statutes) indicate that a Trustee should act reasonably given the risk tolerance of the beneficiaries, the investment portfolio mix and the goals of the trust. To take such a large amount of Father’s trust to put into a risky real estate venture would likely fall outside of the prudent investor rules.
Assume, instead, that Father’s Trust is worth $5 million and that Father made his money in real estate ventures before turning the family business over to Son. Now it would appear that a $750,000 venture may not fall so blatantly outside of the prudent investor statutes.
But what if Daughter is uncomfortable with the decision to so invest? Could that change our conclusion? As trustee, Son not only has a duty to Father to ensure that the trust is properly used for Father’s benefit for the rest of his life, but Son also has a duty to the remainder beneficiaries – including Daughter. Daughter’s risk tolerance should also be considered when making trust and investment decisions.
In addition to the prudent investor rules, Son has the obligation to account to all “qualified beneficiaries” of the Trust. In my example, Son himself and Daughter are “qualified beneficiaries” even though they are not vested, meaning that their interest in the trust property is not certain until Father’s death. The accounting not only must report the income, capital gains, losses and expenses of the trust, but must also report material transactions. The material transaction would likely include the real estate venture.
What if Daughter objects to the transaction? Can she block it? Since Son is the trustee, he is the one who decides where to invest the trust assets. If Daughter has enough lead time she could conceivably file a Court action to stop the investment. Usually, however, the trustee has already made the investment. In this case, if the deal doesn’t work out then Son would likely have personal liability to Daughter should she sue based on breach of fiduciary responsibilities.
Finally, let’s take the worst case scenario where Son simply takes Father’s trust money for his own use and never reports it to Daughter. When a beneficiary suspects that the Trustee is using the Trust property and assets for his own use and not for the express purposes of the trust, the proper course of action is to file an action to remove the trustee.
From time to time I’ll receive a call from a beneficiary of a trust complaining that they don’t have enough information to even determine whether their suspicions of improper activity are taking place. In these instances the beneficiary should demand an accounting, as is their right under Florida law and most other state’s laws. The accounting should indicate whether the beneficiary’s suspicions are true or not. If true, then the next steps of removing the trustee and seeking retribution payments back to the trust would be appropriate.
One can now see how important the selection of a trustee is. Don’t take this choice lightly, as a high degree of wisdom, integrity and judgment is constantly necessary when making daily decisions. I’ve written a book entitled Selecting Your Trustee addressing this and a host of other issues that you want to consider when naming someone to follow you in your estate plan. You can have the best plan in the world drafted, but if you select the wrong individual or entity to serve as your trustee then your plan could fail. If you’re interested in obtaining a complimentary copy call my office at 239.334.1141.
The Sheppard Law Firm is located in Fort Myers and Naples by appointment.
© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.