While every trust agreement is unique, one thing that all trusts have in common is the appointment of a Trustee whose job is to oversee the administration of the trust. If you were appointed to be the Trustee of a trust for the first time, you likely feel somewhat apprehensive about fulfilling your duties and responsibilities. To help you get started, the Los Angeles trust administration attorneys at Schomer Law Group, APC offer some best practices for trust administration.
Trust Administration Basics
A trust agreement is the legal document used to create a trust. The Settlor (creator) of the trust must appoint a Trustee when the trust agreement is drafted. The Trustee’s overall job is to manage the trust assets and administer the trust using the terms established by the Settlor in the trust agreement. The Trustee is in a fiduciary position, meaning that the utmost care must be taken to protect the trust assets and the rights of the beneficiaries during the administration of the trust. Care should also be taken by the Trustee because a Trustee can face personal liability for mistakes made while administering a trust.
Trust Administration Best Practices
Given the important nature of a Trustee’s job, it is always best to consult with a financial advisor and a trust administration attorney before you begin to administer a trust. Nevertheless, it may be helpful to familiarize yourself with some trust administration best practices before getting started as well.
- Document everything. Document, document, document…everything. This includes everything from keeping detailed financial records to writing down when and why you made investment or distribution decisions. Also be sure to keep copies of all communications you have with beneficiaries, professionals (such as accountants and attorneys), and anyone else with whom you discuss trust business.
- Have a clear investment policy. Because your role is a fiduciary one, you should not make risky investments; however, there is a considerable amount of flexibility in the general investment policy you set for the trust. The trust terms often provide guidance on the issue of investment policy so be sure to consult the trust agreement itself. All Trustees are held to the “Prudent Investor Rule” that appropriately balances risk and return. If you are unfamiliar with the Prudent Investor Rule, consult with a financial professional to learn more about the rule.
- Investment management. While the Trustee has the overall responsibility of administering a trust, a Trustee is allowed to delegate the management of investments if doing so would be prudent. Unless you have the experience necessary to manage the investments yourself, delegating is often the wise choice. Doing so can also shift some liability from you to the investment manager; however, you remain open to liability for your choice of manager so choose wisely.
- Principal and Income. Make sure you understand the difference between principal and income and that you understand how each can be used. The principal refers to the assets used to fund the trust while income is money earned through investing the principal. If the trust has future beneficiaries, the distribution of income each year can become particularly tricky.
- Current vs. Future Beneficiaries. A trust may include both current and future beneficiaries. If so, the trust terms may provide for distributions of income to the current beneficiaries with the principal distributed to future beneficiaries down the road. This can make the trust’s investment policy more challenging because current beneficiaries want all income distributed to them while future beneficiaries want the principal to grow. As the Trustee, you must remain impartial and invest for “total return.”
- Understand the distribution standards. As the Trustee, you are responsible for making distributions to beneficiaries. A Settlor can provide very narrow, detailed distribution standards or may give the Trustee considerable discretion when it comes to making distributions to beneficiaries. The most important thing for a Trustee is to understand the standards set forth in the trust agreement so that he/she can abide by them. Even if you can make discretionary distributions, the trust agreement may include guidance to be used when making them. For example, the trust agreement might allow discretionary distributions for the “support” or “education” of a beneficiary. If you make discretionary distributions, document your reasoning for authorizing the distribution.
- Communicate with beneficiaries. Beneficiaries have a right to be kept informed and a Trustee has a duty to inform about trust business.
- Avoid conflicts of interest. As the Trustee, you should not personally benefit from the trust, other than the receipt of a fee for your services as the administrator of the trust. Keep your personal interests and business interests at arm’s length to avoid conflicts that could lead to personal liability.
Contact Our Los Angeles Trust Administration Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about best practices for trust administration in California, contact the experienced Los Angeles trust administration attorneys at Schomer Law Group APCby calling (310) 337-7696 to schedule an appointment.