Have you been named the trustee for a close friend or family member? Did you feel honored when they asked? Well, it’s okay to feel honored, as the request does show a high level of trust and respect from your friend or family member. But think twice before accepting this “honor,” especially if there are no professionals on board as co-trustees. Trustees take on a lot of legal risk, especially for any mistakes they make, and there are plenty of ways to bungle a trust. Barron’s recently listed the five most common:
1) Faulty Records: a trustee has to provide regular comprehensive, accurate accountings to beneficiaries, both primary beneficiaries and the family members down the line who will receive the principal once the trust has been dissolved, also known as the remaindermen. Failure to do so could lead to lawsuits by beneficiaries or remaindermen.
2) Failure to Diversify: just because a stock is working now, has worked in the past, or has sentimental value doesn’t mean you – as a trustee – should keep it in the investment portfolio. As a trustee, you have a legal duty to thoroughly diversify investments. Investment management is the area that probably leads to the most litigation against trustees.
3) Biased Distributions: trustees owe a fiduciary duty to the current beneficiaries and the remaindermen. The problem is that many individual trustees don’t realize there is a duty to both, and sometimes their interests conflict. Barron’s tip is to keep records of each decision, citing why you chose as you did and offering supporting documentation.
4) Expecting a Payday: You may assume that you will be paid a trustee fee for all of your work, and that the payment will be reasonable and paid within a reasonable timeframe. You may be wrong. In reality, it takes a lot of time and effort to get paid, largely because of laws that give beneficiaries the right to voice objections, even start litigation. Their objections can delay your payments. The best thing to do is settle the matter of payments early on.
5) False Sense of Safety: Few individuals comprehend the extent of the risk they take on when assuming the role of trustee. As Adam von Poblitz, h ead of Estate Planning at Citi Private Bank said, “this is a role that potentially has unlimited liability.” Trustees could be held liable not just for investment losses, but also for profits that could have resulted from more prudent investing.