May 21, 2019

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Trustee Duties are Not for the Faint of Heart

One of the most important and farthest-reaching decisions involved in the creation of a trust is the naming of a trustee. It may seem simple enough at the outset to choose either oneself or a family member in place of a corporate trustee, but the duties inherent in the role can quickly overcome an unprepared trustee. Taking on the duties of a trustee can be akin to taking on a family feud, replete with high emotional and financial stakes. The role of a trustee warrants more discussion, especially in the settling of the trust, as a grantor may not fully grasp the scope of trustee duties. The trustee is more than a figurehead that retains legal title to assets for the benefit of others. The role of trustee can be frustrating, time-consuming, and even risky for the unwary, and the choice of person, persons or entity to fill that role should be as careful and well-reasoned as the decision to create the trust.

The first thing to understand is that a trustee is the sole individual or entity responsible to the beneficiaries of the trust for the management of the trust assets. Less-than-prudent administration of the assets creates liability to the beneficiaries, who may then choose to sue to the trustee for breach of trust. That is an important point - even if you are the settlor of the trust yourself, the beneficiaries can still sue you as trustee for mismanagement of the trust. The settlor should take this into account when naming a trustee: if the settlor or family member as trustee were unable to discharge the duties of the trust competently, would this liability be too much of a burden? A trustee may hire attorneys, accountants and investment managers, but that does not absolve the trustee of the responsibility for the trust. The trustee must still supervise those advisers, informing her- or himself about the way in which they are handling trust assets and making decisions on the trustee's behalf.

We have established that a trustee is accountable to the beneficiaries, but what duties must the trustee carry out? The trustee is a fiduciary of the trust, an officer that owes a certain level of skill and care in the execution of the duties of the office. In 2014, Kentucky adopted the Uniform Trust Code, which clarified the duties a trustee owes in Chapter 386B.8 of the Kentucky Revised Statues. The trustee must: administer the trust in good faith and in accordance with its terms and purposes and the interests of the beneficiaries; administer the trust solely in the interests of the beneficiaries and with no self-dealing or conflicts of interest; act impartially as between beneficiaries; prudently administer the trust, exercising reasonable care, skill, and caution, incurring only reasonable costs; control, protect and keep records of the trust property; enforce claims of the trust and defend claims against the trust; collect trust property; and report to the beneficiaries.[1] If that sounds like a tall order, that is because it is.

The trustee must work continually in the best interest of the beneficiaries, all while meeting the specified purposes of the trust. The trustee must act as a prudent investor under KRS 286.3-277, which requires a diversification of the investments of the account. Those investments, however, cannot benefit one beneficiary over another, which may breach the duty of impartiality as between beneficiaries. For instance, if a trust has an income beneficiary - usually a surviving spouse - and then remainder beneficiaries, investing the trust assets primarily in bonds would be favorable to the income beneficiary rather than investments that would better increase the trust corpus for the remainder beneficiaries.

The trustee is also responsible for the preparation of all necessary filings and other everyday business of a trust. For instance, the trustee must file tax returns, pay bills and ensure compliance with any regulations governing the trust. As mentioned in the trustee's duties, a trustee must also inform and report to the beneficiaries. By statute, this must happen at least once per year upon request of the beneficiary, but a trustee has a further duty to keep the beneficiaries reasonably informed about the state of the trust.

A decisions to name oneself or a family member as trustee cannot be taken lightly, and the settlor should dispassionately consider who may be best suited to the role, taking into account all the duties and liabilities that accompany the office. A settlor should determine if the potential trustee possess enough responsibility, care, and dedication to devote to the trust. The evaluation should then look to whether the potential trustee will have the time to spend on trust matters. The settlor should evaluate the potential trustee's expertise in handling investments, financial transactions and any other complex issue that may affect the trust. Overall age and condition of the potential trustee should come into consideration, as a trust may last for a significant duration; continuity of leadership in a trust is important.

The role of the trustee has extensive duties and standards of care that may not be met by the settlor or family member acting as trustee. If the settlor or a family member cannot discharge the duties inherent with the position, the settlor should consider choosing a corporate trustee instead. Although there are costs associated with this choice, those may be mitigated by the fact that a non-corporate trustee likely would have had to pay additional advisers out of trust assets anyway. An able trustee will have the ability to discharge the duties of the position with the utmost care and attention, as well as the time to devote to the role, and quite often, a corporate trustee is the best option. This choice will provide peace of mind and continuity of management of the trust, as well as compliance with all legal and financial requirements of the trust.

© 2019 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.

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About this Author

Terri R. Stallard, McBrayer Law Firm, Estate Planning Attorney
Member

Terri R. Stallard is a Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC and practices from the Lexington and Louisville offices. Ms. Stallard concentrates her practice in the areas of estate planning, trust and estate administration, and charitable planning. She is licensed to practice law in Kentucky, Georgia, and Tennessee, and in the U.S. Tax Court. She received her B.A. from Transylvania University, her J.D. from the University of Louisville Louis D. Brandeis School of Law, and attended the LLM program in Taxation at Emory University School of Law.

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