Common Pitfalls for a Trustee
Non-professional trustees face a difficult job, often unprepared for the work ahead. The following are the most common causes for a trustee to fail
Stephen Trefts, President
Over the years, many of our new trusts were transferred to us from prior trustees. Occasionally a trustee is replaced because of malfeasance. More commonly, the trustee is simply unable to fulfill his or her duties due to a lack of knowledge or skills, too little time, or because of interpersonal conflicts. We have identified the following pitfalls which can cause a trustee to fail:
Trustees have a duty to provide timely and accurate reports. The trustee should also be accessible to the beneficiaries and able to listen patiently and respond compassionately to beneficiary requests. We recently encountered a situation in which the trustee not only failed to provide accountings, but he also was verbally abusive to the handicapped beneficiary. Needless to say, he did not remain as trustee.
Conflicts of Interests
Due to the high level of discretionary authority bestowed upon a trustee, he or she must act with utmost integrity. We were called upon to assist with one situation in which a trustee made substantial gifts to himself and borrowed heavily from his incapacitated relative’s trust. He felt justified in doing so because of her past history of generosity toward him. Clearly, his actions constituted a conflict of interest.
Unfortunately, even the best of families experience conflict. Problems often arise among family members when one member is chosen over the others to be trustee or guardian of the estate for a relative. The conflicts are often focused on the management of the incapacitated person’s assets. With professional financial management, family members are able to focus on the relative’s well-being rather than financial issues.
Inability to Perform
A trustee needs knowledge, skill and a willingness to handle often complex assets or difficult situations. For instance, we served as agent for a woman who wished to remain as trustee for several trusts. Later, when her incapacity prevented her from managing her complex assets, which included commercial and agricultural real estate, we stepped in as successor trustee.
Sometimes trustees have the capacity but lack the willingness to serve. One trust was transferred to us because the trustees did not want to deal with a difficult legal situation regarding a dishonest business partner. At their attorney’s recommendation, they resigned and named us as trustee to pursue legal remedies on their behalf.
Lack of Time
A trustee must perform his or her duties regardless of other personal or professional commitments. In one unfortunate situation, a trustee was so involved with his own business that he neglected the needs of the trust beneficiary. Not fully understanding his duties, he allowed the handicapped beneficiary’s family members to squander trust assets intended for her care. After our appointment as successor trustee by the Superior Court, we initiated legal action against the prior trustee which resulted in reimbursement of funds to the trust.
Disregarding Existing Professional Relationships
It is not uncommon for a trustee to replace existing investment advisors, attorneys or other professionals. While change is sometimes justified, to make a change solely to use the trustee’s preferred advisors could cause a disruption in service and create anxiety to trust beneficiaries. As trustee, we attempt to honor existing relationships and keep the trustor’s professional advisors in place.
A slight twist on the situation involved a beneficiary who was dissatisfied by the return on her trust assets, particularly when she compared it with the return on her personal assets. She requested that the corporate trustee resign and appointed us successor. We retained her personal investment advisor for the trust and she is pleased with the results.
Before accepting appointment as trustee, an individual should consider these common pitfalls and develop a plan for professional management in light of potential conflicts, communication challenges, complexity of trust management and other demands on his or her time.
Print Date: Fall 2005