The 9 Biggest Mistakes Almost Every Adult Child Makes as a Trustee
In this article, I am going to assume that you have been named as trustee of a trust. Now you are trying to figure out the next steps. This list provides the most common pitfalls that I have seen in my probate practice.
- Not hiring a lawyer to help. Trust administrations can be technical and full of hidden mines. There are tax issues, interpretation issues, judgment calls regarding creating sub trusts, how much of the trust assets to distribute now and how much to withhold as a reserve for future expenses.
An attorney can provide very valuable advice based on years of experience. For instance, your situation may involve a blended family (with children from two different marriages). In that event, you may not realize what kind of landmine you are dealing with. You also may not know the best ways of diffusing conflict.
Many trusts still refer to A/B trusts, or other sub-trusts that are to be created when the initial settlor (persons who created the trust) dies. This is often ignored at the trustee’s peril, especially if one sub-trust lists children as beneficiaries and the other sub-trust lists a surviving spouse (or someone else) as the primarily beneficiary.
The trust documents may contain amendments, and may refer to additional documents. A probate and estate planning lawyer is best able to read the various documents together interpret what is supposed to be done.Another thing that often happens is that the surviving spouse attempts to amend part or all of the trust to benefit him or herself. An untrained person is unlikely to be able to figure out whether the attempted amendment is value.
- Not meticulously following the terms of the trust documents. This is related to the first point, above. A lawyer is best able to interpret what the trust documents require you the trustee to do. A trust is to be administered with an eye toward carrying out the wishes of the person who created the trust. If the trust says you should to do something, then you should normally comply with the direction (unless your attorney instructs you otherwise).
Real Life Example: The trust document stated: “Upon the death of Grantor, if Grantor’s investment interest in Corporation is then an asset of the Trust Estate, this investment shall be sold by the Trustee as soon as reasonably practical. If at the time of such sale Beneficiary is then surviving, and in the event the proceeds from such sale exceed $90,000, the excess proceeds from such sale up to a maximum of $50,000 shall be distributed to Beneficiary.” The Trustee and the Beneficiary was the same person. The Trustee simply paid herself the $50,000, but did not sell the stock in the Corporation.
The Trustee breached her fiduciary duty by distributing $50,000 to herself, contrary to the express terms of the Trust. This breach of trust will justify the Trustee being removed. The Trustee will be responsible for any damages that her conduct caused. She will also be responsible for the beneficiary’s legal fees and costs incurred in removing her.
Not following the Arizona Trust Code. The Arizona Trust Code has extensive provisions that cannot be covered in this brief summary. One major requirement is that, unless the trust says otherwise, the “trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.” A.R.S. § 14-10813, Subsection A. If you don’t know who the “qualified beneficiaries,” as your lawyer. Here are key requirements of the trustee’s duty to inform and report:
- If a beneficiary requests a copy of the trust, the trustee needs to provide at least a copy of the portions of the trust that are necessary to describe the beneficiary’s interest.
- Within sixty days after accepting trusteeship, the trustee needs to notify the qualified beneficiaries of the acceptance and of the trustee’s name, address and telephone number.
- Within sixty days after the a trust becomes irrevocable, the trustee needs to notify the qualified beneficiaries of the trust’s existence, of the identity of the settlor(s), of the trustee’s name, address and telephone number, of the right to request a copy of the relevant portions of the trust instrument and of the right to a trust accounting.
- If the trustee wants to change the method or rate of compensation to the trustee, the trustee needs to notify the qualified beneficiaries at least thirty days in advance.
Not treating all beneficiaries fairly. If one of the adult children has been named as trustee, that person needs to treat the other beneficiaries impartially. For example, if you are the trustee, then just because you got to the house first does not mean you are entitled to take all of the family photos and help yourself to the jewelry. You cannot live in the house rent free and fail to put the house on the market. You need to be equal and fair in dividing personal property.
Not knowing when to go to court. Trust documents often contain ambiguities that you should not resolve yourself. If one interpretation of the trust will benefit one group of people, and another interpretation will benefit someone else, then you had better act independently and have a judge resolve the difference.
Agreeing to be trustee, but not willing to do the work. It is certainly an honor to be named as the trustee of your parents’ trust. However, that duty comes with a very high responsibility – a fiduciary duty to administer the trust with reasonable diligence and competence. You should only accept the responsibility if you will actually carry out your duties.
Not complying with the Uniform Prudent Investor Rule. The Arizona Prudent Investor Rule says that “A trustee shall invest and manage trust assets as a prudent investor would by considering the purposes, terms, distribution requirements and other circumstances of the trust. In satisfying this standard the trustee shall exercise reasonable care, skill and caution.” A.R.S. § 14-10902.
Real Life Example: Some trustees held onto real estate or securities during the 2007 to 2009 recession. Many of these unfortunate people may have been acting in good faith, thinking they were doing what their parents wanted. However, that did not keep the other beneficiaries of the trusts from suing them for breach of fiduciary duty, and holding them (the trustees) responsible for the losses in value to the trust property, plus requiring the trustees to pay the beneficiaries’ legal fees. Ouch!
Not dividing personal property fairly. Most of the time, there is no evidence that personal property was ever transferred to the trust. For tangible personal property to have been transferred to the trust, there would normally have to be a document called something like an “Assignment of Personal Property.” However, even if there is such transfer document, it might be dated prior to when some of the personal property was acquired. For instance, if the trust is dated 1990, and the assignment/transfer document is from that same year, it would not necessary govern cars, computers, photographs, and other tangible property acquired after 1990.
If you are sure that the tangible personal property is in the trust, then look to the terms of the trust to determine what to do with it.
In cases in which some or all of the property is not in the trust, then it is part of the probate estate.
Accepting an unreasonable trustee fee. Too often, trustees see administering a trust as a get rich quick scheme. It is not. A trustee should be paid reasonable compensation. That means that if you are not training in bookkeeping and/or trust administration responsibilities, you cannot be earning $100 per hour or more. Reasonable compensation for untrained trustees ranges from $12.00 per hour to perhaps $40.00 per hour, depending on the results obtained, the time it took to complete the tasks, and the person’s background and experience. There is no set rule regarding compensation. It is also not required that the trustee be paid, so some trustees will forego being paid in order to keep the peace with the relatives.
Brian Starr is the founder of the Phoenix law firm of Starr Law Firm, PLC. You may contact Brian at 866-920-0549.
Disclaimer: The information contained in this article is made available for general informational purposes only, and is not intended to constitute specific legal advice or to be a substitute for advice from qualified counsel. For that reason, you should not act or refrain from acting based on any information in this article without first obtaining advice from professional counsel qualified in the applicable subject matter and jurisdictions.