Getting sued is nerve-wracking, especially when you're trying to help a relative you love. Sarah* was asked by her grandfather to be trustee of his trust. Out of love, honor and respect for him she accepted trusteeship. Shortly afterward, a distant relative who was a trust beneficiary threatened to sue Sarah. He said he was going to get the best attorney in his state and sue her if she didn't do everything exactly right. Sarah was panic-stricken...she didn't have the money to pay for an attorney to defend herself. "Can he really sue me?" she asked. "If he does sue me, do I have to pay my legal bills myself?"
After a lengthy, reassuring conversation with a trust attorney, Sarah got her answers and felt more comfortable.
There are many things to consider before accepting the job of trustee, but here are 5 questions you should ask yourself for starters:
1. Am I prepared to deal with family conflicts?
In the above example, Sarah was intimidated by someone who was to inherit money when her grandpa dies. But sometimes the beneficiary has a right to the trust dollars immediately. David* was the trustee for his sister Jane's trust. She couldn't understand why he wouldn't give her money for all the things she wanted to buy - a new computer, some new clothes and a weekend trip to the mountains. She became resentful toward David, unable to understand that the terms of the trust disallowed David to give his sister cash. David grew weary of her begging, her tirades and her late night phone calls, disrupting his own family's life. Eventually he resigned as trustee and their relationship never improved.
Preserving family bonds and maintaining healthy relationships is essential as a trustee. This is especially critical when there are no other close family members. Once a relationship is damaged or broken, it can take years to repair, and sometimes the relationship is strained forever.
Make sure you understand the family dynamics before accepting trusteeship.
2. Do I want the personal liability?
There's a lot to keep up with new trust and tax laws. Giving the beneficiary too much money or spending it on the wrong things could rob them of significant public benefits such as Medicaid (called Medi-Cal in California). The loss of those benefits could create a financial hardship for the beneficiary and the trustee could be held financially liable for this mistakes.
If the trust is relatively simple and it's administered properly, the liability risk is low. Make sure you understand how to limit your personal liability is before signing on as trustee.
3. Am I organized?
Do you keep good records for your own expenses? Do you balance your checkbook every month? Do you organize your personal files for insurance, estate plans, real estate papers, etc? Do you keep all receipts for income tax purposes?
If you get audited by the IRS or sued by a beneficiary of a trust you'll want meticulous records showing all distributions you approved were according to the terms of the trust.
Be honest with yourself - if you're not organized, it may not be worth the risk.
4. What help will I need from professionals?
Fortunately, you're not expected to become an expert in law, investments and trust administration. It's wise to obtain professional advice to protect yourself because hiring a professional may help shield you from liability claims.
Even if you've successfully invested your own money that doesn't mean it's a wise thing to do for a trust. Measuring and managing portfolio risk using advanced statistical techniques are more important than the portfolio returns, and few people are trained to do that. Hiring an investment professional will help protect the trust assets and minimize your risk if markets go awry.
Similarly, the tax code is constantly changing so you'll want the advice of a tax professional. You'll also want the terms of the trust reviewed every few years by a trust attorney to ensure it is amended when new laws impact it.
It's important to understand what powers the trustee is given by the terms of the trust and whether the trust has sufficient resources to be properly administered. For example, if the trust assets are all in real estate, do the properties generate sufficient cash flow to pay admnistrative bills? If not, what provisions are made for this? A properly drafted trust will be clear on how to handle this.
5. Should I hire a professional fiduciary?
One way to avoid many of these concerns in this article is to hire a professional fiduciary. In the example above, David can "blame" the fiduciary for not approving cash payments to Jane, thereby preserving his relationship with his sister. A fiduciary in this case can become the bad guy when the answer is 'no.'
A fiduciary with deep experience in trust administration can also watch over your shoulder to make sure you're acting within the bounds of the trust. They take on legal liability too, so what they do to protect themselves will help protect you too. Few will agree to be co-trustee, but most will be happy to be a full-fledged fiduciary.
Ultimately, the best way to honor someone who asks you to be a trustee is to ensure the goals of the trust can be carried out according to their wishes as stated in the trust. Hiring the right team of professionals will make you most effective as trustee.
*All names have been changed for confidentiality.