As a trustee, it’s natural that you want to take steps to protect yourself from challenges to actions you take or don’t take or other decisions you make. In fact, taking these steps is a good idea. But what can you do?
Get the Beneficiary’s Consent
One of the simplest things you can do is to get the beneficiaries to consent (ie agree) to an act you want to take or a decision you want to make. Consent is something that is obtained before or at the time of your act or decision. It is best to get the consent in writing. In order for the consent to be effective, a number of rules must be followed.
As trustee, you must give a full disclosure of all the “material” facts and circumstances surrounding a particular transaction or act, including your interest (if any) in the particular transaction or act. The consent cannot be induced by improper conduct. An example of improper conduct would be threatening to withhold distributions unless a beneficiary gives his/her consent. The transaction or act has to be fair and reasonable. It is a good idea to suggest the beneficiaries consult with their own legal counsel.
A beneficiary who consents to an act or omission cannot hold you liable for breach of fiduciary duty. It is important to understand, however, the consent is only effective as to that beneficiary. It may be difficult to get the consent of all beneficiaries, especially where there are minor, unborn, unascertainable, or incapacitated beneficiaries.
Get the Beneficiary’s Release or Affirmance
Another option is to get the beneficiaries to provide a release or to affirm your act or decision. Both of these are obtained after the act or decision and, if effective, preclude the beneficiary from holding you liable for that act or decision. Again, it is best to get this in writing.
With a release, the beneficiary essentially gives up any claim for breach of trust based on the act or decision released. To be effective, the beneficiary must be aware of his/her rights and the material facts pertaining to the act or decision as known to you. As with consent, the release cannot be induced by improper conduct, and it is a good idea to suggest the beneficiaries consult with their own legal counsel.
By affirming an act or omission, the beneficiary ratifies your act or decision. Like a release, to be effective, the beneficiary must be aware of his/her rights and the material facts known to the trustee. Again, the affirmance cannot be induced by improper conduct of the trustee, and it is a good idea to suggest the beneficiaries consult with their own legal counsel.
Notice of Proposed Action
You can alternatively provide the beneficiaries with a Notice of Proposed Action. This can be used to alert beneficiaries to an act you are contemplating and provides the beneficiaries an opportunity to object before you take, or don’t take, the action. The minimum time for beneficiaries to respond is 45 days.
The Notice must describe the action proposed to be taken and give an explanation of the reasons for the action. The Notice must be sent to all beneficiaries entitled to receive income. This includes beneficiaries entitled to receive income at your discretion or who would receive a distribution of principal if the trust were to terminate at the time the Notice is given.
A beneficiary may object to the proposed action by providing you with a written objection within the time specified in the Notice. You are not liable to any beneficiary for taking the proposed action if you don’t receive a timely written objection.
Get Instructions from the Court
You may also file a Petition for Instruction through which you seek guidance (instruction) from the court regarding a contemplated act or omission. This process will take much longer than the minimum 45 day notice period of the Notice of Proposed Action procedure. However, the Petition for Instruction procedure can be useful. For example, where you believe that a beneficiary will object to a proposed action, you may desire to avoid the minimum waiting period required with a Notice of Proposed Action. Also, you may want to obtain the court’s “blessing” with respect to a particularly difficult or complex decision.