What Might the Prospective Appointee’s Responsibilities Include? 

One of the most important, and sometimes most difficult, decisions you can make in your estate plan is choosing who to name or appoint to each of the many positions in your plan. Choosing a guardian for a minor child can be a heart-wrenching decision, even when the decision is obvious. However, another dimension to your decisions is the responsibilities each person named to each position will have. It is important to consider this when evaluating who can fulfill each role. Each person you appoint will eventually have to understand what responsibilities they will have. They may not be comfortable with some or many of the tasks that could be required. While it may be uncomfortable to have this discussion now, after all, you might change your will many times before you die and an executor is actually appointed, that may be prudent (see the discussion elsewhere in this paper on that point). Some people might be concerned about the liability that they might face if they accept the role, you have appointed them to. 

Example. Your two nieces are your only heirs. They do not get along and have had an antagonistic relationship forever. You want to leave money in trust for them so that the funds are protected and used prudently. The person you name to be the trustee in charge of that trust might be reluctant to get in between the two combative nieces. Not only could that role be unpleasant, but they might reasonably be afraid that the constant bickering could result in legal battles that could engulf them. The solution may be to name someone else, create a separate trust for each despite the additional cost, or perhaps have an annuity purchased for each of them on your death instead of creating a trust. As with many appointment decisions, the person you name and the role you appoint them to are often entangled with other critical considerations.

While this paper discusses many roles you may name people to, the most common are fiduciary roles like agent under your financial power of attorney, personal administrator or executor under your will, and trustee under a trust. In these roles, the person named will serve in a trusted capacity and have legal duties or obligations to the people named as beneficiaries. The following discussion will focus on the duties and responsibilities of a trustee as illustrative of the requirements applicable to agents and executors. This information will help you better understand the positions involved, evaluate the people you should name, and guide you in explaining to those you name what their serving will involve.

The Legal Document is the Rule Book. The legal document that creates their role is the roadmap of what every fiduciary has to do. For the executor, this is a will; for the trustee, it is a trust; and for a financial agent, it is a power of attorney. The first step any person appointed to serve should take is to review the legal document appointing them. The reality is that these legal documents are usually long and complicated. Given the potential liability exposure the fiduciary might face, they must understand the ground rules. There is another twist to this. The legal documents often refer to state law. For example, a will might state that the executor (personal representative) and trustee have all the following powers. After a long list of steps they can take is listed, the document might say something like “and any other power permitted by a personal administrator under state law.” So, even though the legal document is the guide, state laws are often referenced in the documents. However, state law will have a significant impact regardless of whether it is referenced. For example, a will may use a term like “descendants.” How is that critical term defined so the executor can determine what to do? If the document doesn’t define it, state law likely will. The bottom line in all of this is you should recommend that when the appointment of a person becomes relevant under one of your documents (e.g., you pass away and your executor has to act), the first step of reviewing the legal document should probably be done with an attorney. The family members, friends, or other non-lawyers you appoint may not realize this. So, informing them of that step, and that your estate will cover the cost for them, could be pretty significant.  A practical step might be for them, with the attorney’s guidance, to annotate the key document (power of attorney, will, or trust document), highlighting and explaining the provisions that will be key to the role they will serve. That way, they have an explanatory guide to refer to as they perform their role. The mere fact that you prepared the document using an online service or that you have a wealth advisor or CPA who is very capable and involved with your family doesn’t negate the importance of that initial legal consult.

Example. You have a family business you inherited from your grandfather, and you want to pass it on to your heirs. So, in your will, you bequeath the business to a trust for your descendants and mandate that the trustee can never sell the business. Despite that mandate, and perhaps depending on the language used in the trust about that requirement, state law may override that mandate, at least in some circumstances. If your trustee relies only on what is stated in your will that creates the trust, they might miss important legal requirements that change what they must do.

The scope of each fiduciary’s role will vary depending on the legal document appointing them, the provisions in that legal document, state law, and even the circumstances involved. Even someone who has been an executor for other family members, for example, should review your will when the time comes with legal guidance. 

Your Intent. The duties of the trustee you appoint are based on your objectives or intent. What have you indicated that your wishes are in your will, trust or other legal document?  The trustee is charged with carrying out your intentions when you created the trust.  This is why it is essential that you understand what the document does and that it, in fact, reflects your intent. This is why the trustee must read and understand the trust. 

Example. As in the prior example, you inherited a family business from your grandfather, and you want to pass it on to your heirs. If your trustee doesn’t read your will, they might miss that provision and not realize it was your express intent. If they sell the business without being aware, they might be liable to your heirs for that failure. Intent is really important. That doesn’t mean that state law might not interpret or limit your intent, but the trustee must pay attention to your intent.

Respecting your intent is closely related to but somewhat different from the trustee’s other obligation to adhere to the terms of the trust.

Adhering to the Terms of the Trust. The Trustee must carry out the terms of the trust agreement. If the trust document mandates that income be paid annually to a particular beneficiary, that is precisely what the trustee must do. If the trust agreement reflects certain religious requirements, e.g., that lead to or include a prohibition on owning or investing in businesses or stocks that operate bars or alcohol production (e.g., a distillery, etc.), then unless state law overrides that requirement, the trustee is obligated to follow the terms of the trust. Sometimes the trust requirements might not be optimal in the current circumstances. For example, the trust mandates that all trust income be distributed to a named beneficiary. Still, that beneficiary has developed a drug or alcohol addiction, and paying income would fuel that addiction and harm the beneficiary. The trustee should not ignore the trust terms but consult with an attorney to document a basis for avoiding strict adherence. The trust provisions may provide a means to do that. For example, the trust might permit paying income not only to the beneficiary but “for the benefit of the beneficiary.” In that case, it may be possible to pay the income to treatment programs to benefit the beneficiary. But if that is not feasible because of the terms of the trust, state law, or the circumstances, the attorney may guide the trustee to petition a court to modify the trust. The critical point is that whoever you appoint as a trustee should understand that it is important to adhere to the terms of the trust and get professional help if an issue arises.

Fiduciaries Must Act Prudently. The Trustee must act in a prudent manner. That means acting in a way that is reasonable and reflects good judgment and common sense. This doesn’t require that the trustee have a crystal ball. It is not a standard of performance or result. In other words, would a prudent and reasonable person with good judgment have taken the same actions as the trustee? This means in practical terms to your trustee that they should act in that manner and probably document why they take the steps they are taking when taking them. That way if circumstances work out differently, they can show that they were reasonable when the action was taken. Certainly, a practical way to demonstrate that the trustee has met this standard is to consult with experts in the field. 

Example. The trustee buys online property, casualty, and liability insurance on a rental property you owned, which passed to your trust. The property burned down, and it turns out that the insurance was inadequate. Can the trustee demonstrate that their actions were prudent? The mere fact that the property was destroyed or that the insurance wasn’t sufficient doesn’t mean that the trustee was imprudent. If the trustee documented, for example, how they derived the value of the house they insured at that time, and those steps were reasonable, that might suffice. This is qualitatively different from how many family members or friends appointed as trustees would generally act. If your aunt buys insurance, she might make reasonable decisions but not do more. When she is doing that, as your trustee, it may behoove her to document how she came up with the insurance (and other) decisions so that if the decision proves inappropriate, she can demonstrate why it was reasonable. The people you designate should understand this different mode of operating as a fiduciary than how they would otherwise conduct their own financial affairs.

This prudence concept will be discussed further in the context of the investment of trust assets below.

Loyalty. The Trustee actions must be taken with loyalty to the trust, and hence the beneficiaries of the trust, in all matters. For example, the trustee should avoid self‑dealing. The trustee should obviously not receive any personal benefit from serving as trustee other than a trustee fee if permitted by the trust and not in excess of what state law provides. But common sense or reasonable judgment can quickly run afoul of the duty of loyalty.

Example. The trust owns the house you live in. None of the beneficiaries want the house. The trustee agrees to buy the house for its appraised value. That means that the trust will receive the full value of the house unreduced by brokerage commissions. That is a great benefit to the trust. However, it may still violate the trustee’s duty of loyalty. No trustee should undertake any such transactions without first having a lawyer confirm whether or not it is feasible. It may be much better for the trustee to avoid doing a wrong act than trying to unwind it later.

If a trustee wants to transact business with the trust, the beneficiaries should be represented by an independent attorney, not the attorney the trustee or trust uses. That attorney should be fully apprised of all of the details of the proposed transaction. After the beneficiaries are advised by that attorney and then they sign off on the transaction, it may be reasonable to be consummated. However, even then, the trustee should discuss with their attorney whether it is appropriate even in those circumstances. This sounds costly, complicated, and time-consuming. It is., That is why the better answer in many cases is for the trustee to not engage in transactions with the trust if it can be avoided.

First, the people you name to serve as trustees should understand how careful they must be. If they or you are concerned that they cannot be, it might make sense to consider a professional trustee, trust company, co-trustees, or other actions to backstop the trustee’s role.

Second, this duty of loyalty may significantly impact the arrangement of various positions in your trust. 

Example. You want to give someone the power to add beneficiaries. An heir is LGBTQ and is planning to have a family. You feel that giving someone the power to add a beneficiary will assure that your heir’s child will assuredly be able to be a beneficiary of your trust. See the discussion below on a special LGBTQ trust protector. You might have already named a person to serve as a trust protector in your trust. That person can remove and replace the trustee. But if the trust protector is designated as acting as a fiduciary, then that same role or person may not be able to add a beneficiary as you wish. That is because they, as fiduciaries, have an unfettered duty of loyalty to the trust and its beneficiaries. If so, they may not be able to add a new beneficiary that would dilute the economic interests of the current beneficiaries. So, you may have to have your trust contain two different positions not one. The person given the power to add beneficiaries probably should be a non-fiduciary position. You’ll probably have to appoint two separate people. 

This again demonstrates that many estate planning documents and mechanisms can be incredibly flexible to help you accomplish your goals. But the decisions can be complicated and nuanced to get you where you want to be. Sometimes, you might decide to forgo a particular mechanism or position to simplify your plan and documents. But that should be your intentional decision after you understand the pros and cons involved. Also, while it may be enticing to you to use online forms or the least costly attorney you can find, after all, a “will is just a will,” you know that is a fallacy. How important are your goals and loved ones? Reconsidering the above example, how concerned are you that your heir’s child may not qualify as a beneficiary? Perhaps very concerned. How can you be assured without the above mechanism in your will that the child will, in fact, be classified as a beneficiary under state law? How can you predict how state law might change in the future? You can’t.

Duty to Personally Administer the Trust. The trustee’s responsibility to personally administer the trust might sound like it was contradicted by the advice above, which recommended that the trustee have an attorney guide them on specific key actions. Doesn’t this duty require that the trustee personally administer the trust? The discussion later about trust investments will suggest that unless the trustee is an investment professional, working with one may be prudent. Doesn’t that too contradict the requirement that the trustee personally administer the trust? The answer is no, and it’s because of a fine distinction in the concepts. The trustee must personally administer the trust. That means that the trustee can and often should get professional investment advice from a financial professional, tax advice from a CPA, and advice on distributions from a combination of professionals. But in all these cases, the trustee should be personally involved and responsible for the final decisions based on the professional guidance received.

Investing. The trustee must determine an investment strategy for trust assets. This should be documented with the creation of an Investment Policy Statement (“IPS”) that is consistent with the terms of the trust (or other governing document), the assets held, the needs of beneficiaries, state law, etc. If the fiduciary does not have the professional expertise to model trust income and expenses and create an appropriate investment plan based on this, they should hire a professional. If an investment professional budgets for trust expenses and beneficiary needs prepares financial forecasts, and, based on that, an investment plan to meet trust objectives, the trustees might reduce their fees to reflect that the trustee has delegated a portion of their duties.

Once an investment plan is created, the trust assets must be invested in accordance with that plan. If there are assets that must be managed and protected, such as a beneficiary’s home that is owned by the trust, the fiduciary should create a written agreement detailing the beneficiary’s obligation to pay or not pay rent, obtain appropriate insurance coverage, maintain the property, etc.

A common error trustees make is assuming that a house, insurance policy or other asset that was in the trust when they became trustee can simply be held. The language in the trust as to retaining assets, the performance of that asset and other factors should all be evaluated. See the discussion above about the possible issues of even holding a family business when the trust mandates that. 

Distributions.  Planning for distributions from a trust is one of the most important actions. While traditionally many trusts mandated that income be paid out, unless that is required for tax purpose (e.g. for a marital trusts) more modern trusts often have discretionary distribution standards that leave it up to the trustee to make distribution decisions. That is done because it provides better protection from claimants. This is because if there were a mandated income stream the claimant might be able to attach that income stream. With distributions in the trustee’s discretion the trustee can simply cut off distributions to a beneficiary being sued, going through a divorce, etc. Also, discretion may give more flexibility for tax planning because the trustee can pick which beneficiary will get a distribution. Distributions generally flow trust income out to the beneficiary receiving a distribution so that the trustee can use distributions, for example, to lower the income tax burden between the trust and all permissible beneficiaries. All of this makes the trustee’s job more challenging and can require more coordination between the investment advisor, attorney, CPA and trustee on how to achieve the various goals. To administer such a trust the trustee might periodically poll the beneficiaries about their other sources of income and financial status (dependent on what is in the legal documents) and their tax status (e.g., do they live in a high-tax state like NY or CA?). Additional detailed documentation is recommended to show how the trustee made the decisions.

Rules may vary on the distribution of income and principal based on the type of trust. For example, a QTIP marital trust that qualifies for the unlimited gift and estate tax marital deduction requires that all income must be distributed to the spouse/beneficiary. However, the rules on principle are flexible, so the trust document could provide almost any type of standard. Thus, how the fiduciary may distribute income could be quite different than the rules as to whether they can, should, or perhaps must make mandatory or discretionary principal distributions.

Expenses. The trustee is responsible for ensuring that the trust’s expenses are paid. These should be documented, and decisions may have to be made as to whether trust expenses are paid from income or the trust’s principal, as that might affect the interests of the beneficiaries. 

Tax Filings. The fiduciary will need to file income tax returns on behalf of the trust. While the fiduciary can hire an accountant to assist with the filing, they will still need to be involved in the process and provide the accountant with copies of any required documentation to complete the return.