If You’re Asked To Be a Trustee…
•When to Say No
•How to Protect Yourself If You Say Yes
Martin M. Shenkman, CPA
Don’t be surprised if you are called on someday to be a trustee —that’s the person chosen to oversee the trust of a friend or family member. There has been an explosion in trust planning because of the large number of divorces, lawsuits and complicated family situations that prompt people to seek ways to safeguard finances. Trusts allow people to protect assets by transferring ownership to a separate legal entity. A trust can be used during a person’s lifetime, as well as after death for a variety of purposes, including…
To save money on various types of taxes, including estate taxes.
To oversee the finances of a person who has dementia, a disabled person or an underage beneficiary.
To limit a person’s directly owned assets so that he/she remains or becomes eligible for Medicaid.
To preserve assets meant for children from a previous marriage.
To avoid having an estate go through probate—the court-supervised process to distribute assets.
If you are named as a trustee, you should consider it an honor that someone put that much confidence and trust in you, but it’s also a serious responsibility. You will be called upon to provide a number of vital services and make key decisions—including how to invest trust assets and how to dispense money to beneficiaries.
The job can range from straightforward to tremendously complicated and time-consuming, depending on the number of beneficiaries…the amount of the assets involved…and the purpose of the trust. If you make a mistake or act negligently, you could even face a lawsuit filed by angry beneficiaries.
By far, disagreements over how trust money should be invested and distributed create the most problems for trustees—and result in the most lawsuits.
Example: As trustee, it’s your duty to balance two goals—how much annual income the trust investments generate for the surviving spouse and how much capital appreciation to seek for the children’s long-term advantage.
Steps you need to take to make sure that you do the best job and avoid problems as a trustee…
HIRE A LAWYER
Most trustees hire the same attorney who drafted the trust. That lawyer knows the trust document better than anyone else and presumably earned the confidence of the trust’s creator. If you don’t want to retain that attorney, you can find another one by seeking recommendations from accountants and investment advisers you know or from friends who have dealt with trusts.
Have the lawyer explain the details of the trust document and lay out your responsibilities. These responsibilities often include having to say “no” to proposed uses of trust assets. Example: Say an education trust that stipulates payment for college is set up for a young beneficiary. Should the trust also pay for a car for the beneficiary to get to and from the campus…or rent for an off-campus apartment? Many trusts are left intentionally vague about financial particulars so that the trustee has flexibility to deal with unforeseen circumstances. A trust attorney can help sort through these quandaries based on his/her experience in interpreting trust language and state law.
Fees: The costs of any professional used by the trust are paid for out of trust assets. The amount will depend on the time and work involved and may range from less than $500 to several thousand dollars.
HIRE AN ACCOUNTANT
Federal and state taxes must be filed annually by the trust. Because of the complexity of trust taxes, you should hire a certified public accountant (CPA) with lots of trust experience. Ask your trust attorney for a recommendation. Typical fee: $750 to $2,000 to prepare a trust income tax return, plus $150 to $500 per hour for consultations.
HIRE AN INVESTMENT ADVISER
The investment adviser could be a fee-only planner who reviews your investment choices or someone who is paid a percentage of the assets for managing them. Although some trusts have prestipulated investment and distribution plans, you usually need to establish a diversified mix of stocks, bonds and cash, depending on the needs and desires of the person who named you as trustee and those of the beneficiaries, as well as how soon distributions have to be made.
If possible, use the same adviser for trust assets that the family uses for nontrust assets. That person can coordinate a better overall investment strategy. If you expect to have major disagreements with family members, however, you may want to choose a separate adviser.
Alternative ways to find an adviser: If the trust is substantial, say $500,000 or more, you can hire a trust company or a bank to advise on and oversee the investment of the assets. If the trust is smaller than that, consider a large investment company, such as Fidelity Investments or Vanguard Group, which offers trust-investment services. Fees are typically about 1% of managed assets.
KEEP YOUR ASSETS SEPARATE
Commingling assets of a trust with your personal assets can lead to criminal charges. Never transact business with the trust unless the trust attorney confirms it is allowed (often it won’t be)…necessary permissions from beneficiaries are received…and every aspect of the transaction is handled as if it were between unrelated parties. This means don’t lend trust money to yourself for personal or business purposes, no matter how much it ultimately benefits the trust…and don’t buy real estate held in the trust or sell property to the trust.
PAYING YOURSELF
Each state has guidelines as to what you are allowed to get paid for being a trustee. In general, the annual fee is about 1% of the value of the assets, which would mean $5,000 for a $500,000 estate. The rate declines for higher amounts of assets. Ask an estate attorney or search for “trustee fees” and your state’s name on the Internet.
DECLINING TO SERVE AS A TRUSTEE
I often see clients who didn’t realize they were appointed until the person who set up the trust died. You may not have the time, ability or desire to carry out the duties of a trustee. If that’s the case, have the trust attorney draw up a letter in which you reject the appointment. (Trusts sometimes carry a standard provision on how to do this).
Caution: Once you agree to become a trustee—even if it’s just to help out in the weeks after someone dies—you are legally bound. To withdraw, you may have to go to court, provide a formal accounting and resign.
Bottom Line/Personal interviewed Martin M. Shenkman, CPA, a Teaneck, New Jersey, estate-planning attorney, and author of more than 30 books, including The Complete Book of Trusts (Wiley). www.laweasy.com
(Article originally published September 15, 2007)
Reprinted with the permission of:
Boardroom Inc. and Bottom Line Publications, Inc.
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