What are the duties of a trustee?
April 26, 2014    Disclosures    POSTED IN  Personal Finance

In general

A trustee has many specific duties to fulfill, including the duty to preserve, protect, and invest the trust assets. Some of the more important duties follow. However, keep in mind that as a grantor you may modify the trustee’s duties to some extent through appropriate provisions in the trust document.

Duty of loyalty

The most basic duty of a trustee is that of loyalty to the beneficiaries. This duty needn’t be specified in the trust document. It arises out of the fiduciary relationship between the trustee and the beneficiaries. This requires the trustee to administer the trust solely in the interests of the beneficiaries. In case of conflict of interest between the trustee and the beneficiaries, the trustee must resolve the conflict in favor of the beneficiaries, since this is the purpose of the trust.

Duty to keep and render accounts

A trustee must keep clear and accurate records of income, expenses, and investment gains and losses. These records are necessary for filing the annual fiduciary income tax return. Additionally, the trustee has a personal stake in maintaining accurate records. First, he or she is personally liable for costs that arise due to incomplete or inaccurate records. Second, the court can deny or decrease the trustee’s pay or remove him or her from office. Third, beneficiaries may, within reason, compel a financial accounting.

Duty not to delegate

A trustee may not delegate the administration of the trust or the performance of his or her duties to others, unless the terms of the trust allow it. On the other hand, in areas where the trustee does not possess specialized knowledge or skill, it would be prudent for the trustee to employ professionals, such as accountants, appraisers, attorneys, bankers, and brokers. No hard and fast rules exist about this. Individual circumstances must dictate the appropriate actions.

Duty to keep trust property separate

A trustee commits a breach of trust if he or she commingles trust assets with his or her personal assets, even if the commingling provides him or her with no benefit. This rule makes trust assets easier to trace, prevents them from being seized by the trustee’s personal creditors, and makes them less subject to waste. Even if the trustee doesn’t commingle trust assets, he or she commits a breach of trust if he or she takes title to the assets. Trust assets must belong to the trust. Otherwise, the trustee could claim that profitable investments were his or her property, while unprofitable investments belonged to the trust.

Duty to exercise reasonable care and skill

A trustee must exercise reasonable skill and care in administering the trust. The trustee’s actions must meet the prudent person standard, meaning he or she must administer trust assets with the same degree of skill and care that a person of ordinary prudence would use in managing his or her own personal assets. Thus, a trustee can be liable for mismanaging trust assets if his or her actions fail to measure up to the prudent person standard.

Duty regarding investment

A trustee must satisfy the prudent person standard when investing trust assets. He or she must consider both the safety of the capital as well as the likelihood of income. The trustee is not required to invest the funds for capital appreciation. Rather, his or her main responsibility is to conserve the original trust assets and invest them to yield a reasonable income. On the other hand, the trustee is not required to invest in the most conservative investments, such as government bonds. If another investment prudently yields a higher return, the trustee may purchase it. The trustee’s goal should be to preserve the assets to carry out the objectives of the trust.

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