The Duties of a Fiduciary
Cam McGilivray, Trust Officer
Often individuals agree to serve as fiduciaries without fully understanding their role and the legal obligation they are accepting. When an unqualified fiduciary makes errors, the result can be disastrous for everyone. Sometimes errors are due to a lack of knowledge of either the law or the trust beneficiary’s situation. Other times, there is intentional misconduct. Both are illustrated in the following examples:
The Large Institutional Trustee
Recently, we replaced the out-of-state trust department of an investment firm as trustee. The firm had inappropriately distributed principal from a net income trust without ascertaining the beneficiary’s financial needs or investigating where the assets were going. Upon being appointed successor trustee, we discovered that the trust had been greatly diminished because the incapacitated beneficiary’s unscrupulous relatives had been squandering the distributions. Although, the case was eventually resolved through court action, the damage had already been done.
The Small Local Professional
We also replaced a trustee who ran a small local accounting firm. The trust had been set up for the care of an incapacitated minor. The minor’s family had the reputation in town for being dishonest, mean and abusive. Consequently, the trustee was afraid of them. Unfortunately, they were able to intimidate the trustee into making inappropriate distributions of funds intended for the minor’s care. After we were appointed, we removed the minor from her abusive family, and through legal action compelled the former trustee to make restitution to the trust.
The Family Member
Oftentimes a trustee wrongfully uses trust funds as a personal resource. A classic example is the relative who distributed trust assets to herself, her family and friends while providing none of the required distributions or accountings to her sibling, who was a rightful beneficiary. The result was an unpleasant (and costly) legal squabble and irreversible damage to family relationships.
In each of the above cases, trustees breached their fiduciary duties. Fiduciary duty is a legal term which applies to an array of relationships where an individual, by virtue of position, owes a duty to others. Fiduciary duty exists between directors and shareholders of a corporation, personal representatives and beneficiaries of an estate, and trustees and beneficiaries of a trust. The actual definition of fiduciary duty varies in each of the above instances, but the common thread is that the person charged with the duty must deal with others with honesty and integrity.
In Washington, trustees are guided by both the terms of the trust document and by statutes pertaining to trusts. These statutes are found in Title 11, the probate and trust section of the Revised Code of Washington.
Many trust documents contain provisions that add to or may even relieve a trustee from certain directives enumerated in Title 11. However, under no circumstances is a trustee relieved from the duty to act in good faith and to exercise honest judgment.
On May 12, 2011, Governor Gregoire signed into law Substitute House Bill 1051, which substantially changes the way trusts and estates are administered in Washington. These new laws become effective on January 1, 2012. For purposes of this article, the most pertinent changes are as follows:
DUTY TO NOTIFY
The trustee has a duty to notify trust beneficiaries within 60 days of accepting the position of trustee of an irrevocable trust established after December 31, 2011, or, when the trustee acquires the knowledge that a revocable trust becomes irrevocable after December 31, 2011. Customarily, a revocable trust becomes irrevocable upon the death, disability or incapacity of the grantor.
DUTY TO KEEP BENEFICIARIES INFORMED
The trustee has an ongoing duty to keep interested persons who are entitled to notice reasonably informed about administration of the trust and of all material facts necessary for them to protect their interests, including receipts and disbursements of trust principal and income; values of assets and liabilities; trustee compensation; agreements affecting trust property for at least a five year period; and any conflict between the trustee’s fiduciary and personal interests.
We provide our beneficiaries with clear and timely financial statements and reports on a regular basis. Our statements provide a snapshot of the value of trust assets and the income and expenses of the trust over a given period.
DUTY TO RESPOND
The trustee has a duty to promptly respond to any interested party’s request about his or her rights under the trust instrument within sixty (60) days.
As well as providing timely responses to inquiries, our records are always open to the scrutiny of our clients.
DUTY OF LOYALTY
This common law duty that a trustee shall administer the trust solely in the interests of the beneficiaries is now set out by statute. This means that the trustee cannot self-deal or distribute trust assets to persons who are not named beneficiaries, or distribute trust assets to beneficiaries outside of the scope of the trust document.
As an impartial third-party trustee, we carefully scrutinize all beneficiary re- quests to make sure they comply with the provisions of the trust document and the intent of the grantor.
While the new law expands fiduciary duties, at the same time it also allows trustees to limit their liability in the event there is the potential for conflict or misunderstanding. A trustee may limit exposure by providing beneficiaries with a Trustee Safe Harbor Report. The report prevents the beneficiaries from bringing an action against the trustee for alleged breach of trust, should one occur, after three years from the time the report was sent. The Safe Harbor law aims to protect the trustee, but it only works if the trustee is aware of it and follows it by divulging certain information to the beneficiaries.
We routinely provide our clients with the same information found in the Safe Harbor Reports. We have been doing so for years.
As professional trust managers, we stay up to date with changes in trust and probate law. We have replaced many trustees who were unaware of duties under the existing law. Ignorance is no excuse, and courts have very little tolerance for breaches of fiduciary duty. It is our hope that this new law will raise non-professional trustees to a higher standard.
The time to seek professional trust management is before agreeing to take on the role of trustee, not after you find yourself in the hot seat because of a family conflict or allegations that you have mismanaged the trust have occurred. This is where we come in. We provide professional fiduciary services and consider trust and probate laws, even with the new, more stringent changes, to be the bare minimum operating standard.
Print Date: Fall 2011