When an individual creates a trust, that person (known as the “Settlor”) must make a number of very important decisions. One of those is who to appoint as the Trustee of the trust. After all, the Trustee is responsible for managing, protecting, investing, and distributing the trust assets as well as the overall administration of the trust. If you were recently informed that a Settlor appointed you to be the Trustee of a trust, and you have never before served in that capacity, you may be feeling a bit intimidated at the prospect. To help you during your upcoming Westchester trust administration, consider the following pitfalls to avoid before you get started.
The Role of Trustee – What Does a Trustee Do?
At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. A testamentary trust is one that activates upon the death of the Settlor via a provision in the Settlor’s Last Will and Testament . A living trust activates as soon as all formalities of creation are in place.
The job of a Trustee in any trust is to protect, manage, invest and eventually distribute the trust assets and to administer the trust using the trust terms created by the Settlor. A Trustee is in a fiduciary role, meaning that as the Trustee of a trust, you must use even more care with the trust assets than you would use with your own assets. Every decision you make must be made with the best interest of the beneficiaries in mind.
Common Trustee Pitfalls
If you are a first time Trustee, it may be easy to make a mistake. Unfortunately, a mistake could cost the trust – and even you personally in some cases –a considerable amount of money. Knowing what some of those common mistakes are will hopefully help you avoid making them.
- Misunderstanding a trust term. Read through the entire trust agreement several times until you are sure you understand every provision. If anything is vague or confusing, make a note to ask the trust attorney immediately. Ignorance is not an acceptable excuse if you make a mistake as Trustee and in some cases you could be held personally responsible for an error.
- Not consulting a trust administration attorney. As Trustee, you will likely have numerous legal questions and concerns. It is not a role you should take on without a legal professional to provide you with advice and guidance.
- Not understanding and/or using the “prudent investor standard.” When you invest assets owned by a trust, you must do so using the “prudent investor standard” which essentially means you must avoid risk, guard the trust principal, and be more careful with the assets and income than you would be with your own assets and income.
- Forgetting about future beneficiaries. If the trust has both current and future beneficiaries, all decisions you make must consider the best interest of both classes of beneficiaries.
- Not honoring the trust purpose. It is very difficult to set aside your own opinions; however, as the Trustee, everything you do must further the Settlor’s intended purpose and must abide by the trust terms unless a term is illegal or unconscionable.
- Creating a conflict of interest. If the Settlor was a family member or friend, there is a good chance you know at least one beneficiary. This can create a conflict of interest if you allow it. Make sure that any personal relationship you have with, or knowledge of, a beneficiary does not in any way interfere with your duties as Trustee.
- Tax errors. A trust is a separate legal entity. Therefore, a trust must file a trust tax return each year. If any taxes are due, they must also be paid in a timely manner. To ensure the tax returns are prepared correctly and any tax due has been calculated accurately it is best to hire a certified public accountant (C.P.A.) to help you and to help you keep the detailed financial records required as Trustee as well.
Contact Harrison, Westchester Trust Administration Attorneys
For more information, please download our FREE estate planning worksheet. If you have questions or concerns about trust administration, contact the experienced Westchester trust administration attorneys at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.