The Responsibilities and Liabilities of Trustees and Personal Representatives
One of the questions with which our clients will have to deal in the preparation of their estate and financial plans is the designation of personal representatives under their wills and trustees under their trusts. In many cases, insufficient consideration is given to the appointment of individuals to fill these most important positions of trust. Therefore, we thought it would be beneficial to list some of the responsibilities of these fiduciary positions and suggest some alternatives for your consideration in appointing parties to fill these positions. The appointment of a relative or child not experienced in such matters could result in serious problems not only for the intended beneficiaries of your trust or will but for the person upon whom you have placed the responsibilities for which he or she is not prepared. Therefore, depending on the assets that will be administered under the terms of the trust or will, you might wish to consider the appointment of a corporate trustee, such as a bank trust department, or a trusted family adviser, such as your accountant or our Firm.
The responsibilities which follow are generally those of trustees, but in some cases also apply to personal representatives designated under wills. A trustee must:
- Exercise the care, diligence and skill of a "prudent man" in making, retaining, disposing, or changing the trust's investments in accordance with the terms of the trust agreement and state law.
- Carry out the administration of the trust loyally and in good faith and comply with the terms of the trust.
- Not delegate his or her responsibilities as trustee, except to the extent specifically permitted by the trust agreement.
- Refrain from self-dealing, private use, application or appropriation of trust property.
- Continue and/or sell a business where the trust agreement requires such an activity.
- Insure the assets of the trust.
- Keep the assets of the trust properly invested and productive, exercising discretion reasonably, prudently, soundly, and in good faith.
- Make distributions of income and principal of the trust to its beneficiaries as required by the terms of the trust agreement.
- Keep and render to the beneficiaries of the trust full and accurate records and accountings.
- Comply with various income tax liabilities, including the payment of estimated tax payments and the filing of income tax returns for the trust on IRS Form 1041.
In carrying out his or her duties, a trustee is subject to various liabilities, including:
- Breach of trust of fiduciary duty.
- Failure to properly carry out the responsibilities of the office of trustee as provided in the trust agreement.
- Losses arising out of the unauthorized delegation of responsibilities or resulting from commingling trust assets with the personal assets of the trustee or using trust assets for personal purposes.
- Losses arising from unfavorable investments made by the trustee, where the investments were unauthorized by the terms of the trust agreement or were not allowed by law.
- Failure to distribute trust assets to beneficiaries entitled to such distributions.
- Legal fees resulting from a proceeding where the trustee is found guilty of misfeasance in administering the trust and is therefore found to be liable to the trust.