Dutiful, obedient, loyal, and protective – traditionally, these are the traits dogs have exhibited that have won them the title of "man's best friend." Indeed, here at Chambliss our mascot is Jac the Labrador, the canine embodiment of our commitment to being "fiercely loyal" to our clients. But in the world of estate planning, where an ever-increasing number of individuals and families are using trusts to manage and transfer wealth, there is another "best friend" – the trustee.
Generally, a trustee is a fiduciary who is appointed to administer a trust pursuant to the terms of a written trust agreement, as well as applicable law. Similar to our four-legged friends, a trustee is tasked with dutifulness and obedience (to the trust agreement), loyalty (to the trust beneficiaries), and protectiveness (against the claims of creditors). Beyond these general fiduciary duties, the following list represents some of the statutorily-imposed duties that a trustee must uphold.
- Duty to Administer the Trust. A trustee must administer the trust until it terminates or until a successor trustee is appointed. Administration must always be done in accordance with the terms and stated purpose of the trust agreement, the interests of the beneficiaries, and in accordance with the law. Often times this includes making distributions of trust income and/or principal to the beneficiaries depending on the terms of the trust agreement.
- Duty of Loyalty. A trustee must always administer a trust solely in accordance with the best interests of the beneficiaries. Often times, a trustee's actions require court approval to ensure that they are in the best interests of the beneficiaries.
- Duty of Impartiality. Where a trust has two or more beneficiaries, a trustee must act impartially in investing, managing, and distributing trust property, taking into account each of the beneficiaries' respective interests.
- Duty of Prudent Administration. A trustee must exercise reasonable care, skill, and caution in administering the assets held by the trust. This means that in most cases, the trustee must manage the trust's property as if it was his or her own, taking reasonable steps to ensure that trust property is not wasted or unnecessarily depleted.
- Duty to Control and Protect Trust Property. A trustee must take reasonable steps to control and protect trust property. This is also an aspect of the trustee's duty of prudent administration.
- Duty to Keep Records and Identify Trust Property. A trustee is tasked with keeping adequate records of the administration of the trust. A trustee is also prohibited from commingling trust assets with his or her personal assets.
- Duty to Enforce and Defend Against Claims. A trustee must take appropriate and reasonable steps to enforce any claims of the trust against third parties. Similarly, the trustee must take reasonable steps to defend claims made against the trust.
- Duty to Inform and Report. Any beneficiary who is entitled to distributions from the trust has a right to be kept reasonably informed by the trustee about the administration of the trust.
Note, however, that while a trustee is subject to these duties, most trust agreements afford trustees a wide degree of discretion in the day-to-day administration and decision-making concerning trust assets. Additionally, if a trustee is failing to accomplish the duties set forth by law or in the trust agreement, there are mechanisms by which to remove and replace a trustee.
Based on the number and nature of duties imposed on a trustee, it is important for the grantors of the trust (persons establishing a trust) to carefully select the individual(s) or entity(ies) that will serve as trustee(s). Some factors that merit consideration when selecting a trustee include the following.
- Is the trustee familiar with the grantor(s) and the beneficiary(ies)? The trustee will be tasked with administering the trust in accordance with the grantor's written intent as expressed in the trust agreement, as well as the best interests of the beneficiaries. A trustee who is familiar with family history, values, and dynamics may be ideally suited to manage trust assets and to determine if and when distributions should be made to the beneficiaries.
- Can the trustee make sophisticated financial decisions? A trustee has a duty to manage assets. This could include moving assets around and/or changing their form for increased diversification or to take advantage of more favorable investment opportunities. The more complex and diversified the trust's assets are, the more important it is that the trustee have knowledge and experience with sound wealth management strategies.
- Will the trustee remain engaged? Many of the duties imposed on a trustee require that the trustee keep detailed records, meet deadlines, keep abreast of any day-to-day changes in the nature or location of trust assets, as well as stay informed of the current state of the beneficiaries' finances and other life situations. Being a trustee is not a once-a-year obligation – it requires the trustee to be engaged and attentive at all times.
- Does the trustee have a backbone? Sometimes it becomes necessary for a trustee to simply say "no." For instance, while Tom Trustee may make distributions from the trust to pay for Benny Beneficiary's first four years of college, if it appears that Benny is taking advantage of the trust to finance a series of college "victory laps," it may become Tom's duty to say "no more." A trustee is tasked with acting in the best interests of the beneficiaries, not with acceding to a beneficiary's every whim.
Ultimately, picking a trustee is a matter of personal taste and fit. A family friend might work for some types of trusts; however, a bank or trust company may be better suited to manage other types of trusts. Just remember, you are looking for a trustee who exhibits those same qualities as Old Yeller, Lassie, or Air Bud – dutifulness, obedience, loyalty, and protectiveness. If the trustee has those qualities, you can be assured that he or she will serve as a best friend to the beneficiaries.