As trustee, you occupy a position that comes with many responsibilities and important duties. In serving as a trustee, you stand in a special relationship of fiduciary responsibility to the settlor (the person who created the trust) and the beneficiaries. It is crucial that you understand the nature of the trust (ie whether revocable or irrevocable), to whom you owe these very important fiduciary and other duties, and that you adhere to your responsibilities.
A revocable trust is one that can be modified or completely cancelled by the settlor. This type of trust is commonly referred to as a living trust – meaning the settlor created the trust during their lifetime and the settlor is still alive. Typically, these trusts remain revocable until the settlor’s death. While the settlor is alive and able to manage his/her own financial affairs, the settlor and the trustee will typically be the same person. This Article is written for someone who is trustee of a revocable trust that is not the settlor of that trust.
Duties are Owed to the Settlor
One unique aspect of acting as trustee of a revocable trust is that you owe fiduciary and other duties only to the settlor or other person having power to revoke the trust. This can include someone to whom the settlor granted the power to revoke or someone appointed to act on behalf of the settlor (such as a conservator). You generally don’t owe any fiduciary or other duties to remainder beneficiaries named in the trust while the settlor is alive and the trust remains revocable. This is because they are only “contingent” beneficiaries since the trust can be modified or cancelled at any time. For this same reason, the remainder beneficiaries generally aren’t entitled to receive information regarding the trust while the trust remains revocable.
Follow Settlor’s Directive
Another unique aspect of acting as trustee of a revocable trust is that you have a duty to follow a written directive pertaining to the trust or its assets given to you by the settlor or other person delegated to give directives by the settlor. This duty is unique because once the trust becomes irrevocable, a trustee generally has no duty to follow any directives from a beneficiary.
If, however, following the written directive would, in essence, be a modification of the trust, a trustee can only follow the directive if it complies with the requirements for modifying the trust. These requirements are discussed in a separate article Can a Trust be Amended?
Follow the Trust Terms
One of the most fundamental duties is to administer (or manage) the trust according to its term. The terms of the trust include the trust document as well as any amendments. By following the terms of the trust, you carry out the settlor’s written wishes and the purpose of the trust. To comply with this duty, you need to read and understand the trust terms, including the duties and powers set forth in the trust document.
Act in the Best Interest of the Trust
Perhaps just as important is the duty to follow the trust terms is the duty to administer the trust solely in the best interest of the trust and the beneficiary. This means that you cannot put your interests above those of the trust or the beneficiary. You must not deal with trust property for your own profit (ie self dealing) or for any purpose unconnected with the trust. You cannot take part in any transactions in which you have an interest adverse to the beneficiary.
Furnish Information and Communicate
You have a general duty to keep the settlor informed about the trust and its administration. This includes providing information about the trust and its assets informally as well as providing more formal reports, if requested by the settlor, or financial accountings if not waived by the trust document or by the settlor in writing.
Do Not Commingle Trust Assets with Other Assets
You must avoid mixing or commingling trust assets with other non-trust assets, especially your personal assets. You should take steps to avoid commingling of assets. You should maintain separate bank accounts for trust cash and income that are distinct from your personal accounts and appropriately titled as trust property. You should also make sure that other trust assets are titled in your name as trustee of the trust and not held by you individually.
Keep Detailed Trust Records
You should maintain a file or files to hold important trust related documents. Among the important records to keep are:
- the trust and any amendments to the trust
- directives from the settlor
- court filings and orders related to the trust
- documents related to the assets of the trust (ie bank statements, mortgage statements, investment records, asset lists)
- transmissions of information to the beneficiary
- accountings and papers related to accountings (ie those papers used to prepare the accountings)
Keeping good trust records is important for several reasons. Although you may not be asked to provide an accounting to the settlor while he/she is alive, once the settlor passes and the trust becomes irrevocable, the beneficiaries may be able to compel an accounting for the time when the trust was still irrevocable. You want to make sure you have the proper records to prepare an accounting for that time period if compelled to do so. Also, in the event that a beneficiary challenges an accounting or an act or decision that you made, if records are not kept and/or an accounting or report is not provided, all presumptions will be against you and all doubts arising from the failure to keep records will be resolved against you.
Make Trust Assets Productive
You have a duty to make prudent investments and to take action to make the trust assets economically “productive”. Compliance with this duty will mean different things depending on the type of asset, the circumstances, and the purpose of the trust. You have a duty to invest and manage trust assets as a prudent investor would by considering the purposes, terms, distribution requirements, and other circumstances of the trust. You must exercise reasonable care, skill, and caution in making investment and asset management decisions.
Powers of Trustee
As trustee, you have certain powers granted to you by the trust document itself as well as California law. These powers are what enable you to perform your duties and to achieve the objectives of the trust. It is important to understand that there are very important limitations on what you can and cannot do.
To understand your powers as a trustee, you should start with the trust instrument. Generally, the trust instrument will set forth the powers available to be used as appropriate to carry out your duties. A trustee also has powers set forth in the California Probate Code, unless expressly limited by the trust instrument. Typical powers include the ability to invest trust property, to sell trust property, to acquire trust assets, to borrow funds on behalf of the trust, to make distributions, to operate a business owned by the trust, to make loans to beneficiaries, and to hire persons to assist in the administration of the trust.
The above is meant to be an overview of some of a trustee’s most important duties and powers. Contact Galati Law to review the trust terms and for a deeper understanding of your duties as they pertain to your particular situation.