Metz Lewis Brodman Must O'Keefe

Metz Lewis Brodman Must O'Keefe

Posted on December 28, 2015

The Standard.  A trustee must manage a trust according to a “prudent person” standard.  A trustee is a fiduciary, which means the trustee’s actions must be in the best interests of the beneficiaries.  The prudent person standard is fairly simple to meet if the trustee obtains competent advice in key areas (discussed below).  The stakes are high – a trustee is personally liable to the beneficiaries for breaches of duty, such as distributions that aren’t permitted under the governing document and negligent investments.

Know the Trust Document.  Read the document, especially as regards the standards for when distributions can or must be made, and the powers and obligations of the trustee.  Although state law sets many of the rules regarding trust administrations, the document can vary many of them.  If you don’t understand something, ask your lawyer.  Generally, trustee’s fees for legal advice (not for defense) can be paid as a trust expense. “I didn’t know that” is not a great defense and trust documents can have complex operations.

Communicate with Beneficiaries.  Under the law of Pennsylvania and most states, a trustee has a duty to respond to reasonable requests by a beneficiary for information.  There are no secrets here.  A trustee is dealing with the beneficiaries’ economic interests, and it makes sense they should be kept informed.  In fact, communication and transparency may well be the best ways to keep the trustee-beneficiary relationship happy and healthy.  Trustees should actively communicate with the beneficiaries regarding trust operations.

Get Investment Advice.  Every investment decision requires the input of an investment advisor.  Following the advice of a competent advisor is a defense against a beneficiary who later tries to sue the trustee for a decline in trust value.  The cost for the advisor is borne by the trust, so there’s no real reason to go-it-alone.

Get Legal Advice.  Not every decision requires the input of a lawyer.  But some aspects of trust administration can be tricky.  A good example is properly accounting for receipts of gas royalties and rental real estate expenses.   If you’re not sure, you should get legal advice.  Much like investment advisors, following the advice of a competent lawyer on a legal question is a defense against a beneficiary who later tries to sue the trustee for negligence.  Same as with investment advisors, the cost of legal advice comes out of the trust, making it foolish to go cowboy.

Keep Accurate Records and Provide Annual Statements.  It should go without saying, but as a trustee you have to be prepared to account for every penny you received, spent or distributed.  Under Pennsylvania law, a trustee can limit personal liability to beneficiaries by providing annual statements to the beneficiaries, with a notice that the beneficiaries have a time limit for lodging objections (the law has fairly specific requirements for the notice).  There’s almost no reason for a trustee not to provide these annual statements.

Tax Reporting.  A trustee should work with a competent accountant to ensure the tax reporting is timely and accurate.  This will also help avoid upsetting beneficiaries whose tax returns may be delayed as a result of a late trust tax filing.

Manage Distributions with Impartiality and Fairness.  Every trust has current beneficiaries (the ones who are entitled to distributions now), and future beneficiaries (the ones who are entitled to distributions later).  A trustee must invest and distribute with any eye towards even-handedness to both classes of beneficiaries.  That means a trustee cannot ignore the current beneficiaries just to preserve funds for the future beneficiaries.  Similarly, a trustee cannot over-benefit the current beneficiaries to the detriment of the future beneficiaries, even is those beneficiaries are still minors or have yet to be born.  The trustee must strike a delicate balance.

Be Loyal to the Interests of the Beneficiaries – Avoid Self-Dealing.  A hallmark of the trustee’s fiduciary obligation is the requirement of absolute loyalty to the beneficiaries of the trust.  An easy way to breach that duty is for a trustee to use trust assets for the trustee’s advantage, such as a loan for the trustee’s personal business venture or a bargain sale of a trust asset to the trustee.  These acts are called “self-dealing” and they are forbidden.  If a trustee is ever uncertain about whether an action is self-dealing, the trustee should seek legal advice.

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