Law Tips: 5 Reasons NOT To be a Trustee


5 Reasons NOT to be a Trustee

Do You Know Enough to Know You Don’t Know Enough? This is one alert raised by our Law Tips faculty participant Catherine Borkowski, Senior Vice President and Wealth Manager, Salin Bank and Trust Company, with regard to acting as a trustee.  While participating in the recent seminar, “120 Hot Tips In Estate and Trust Practice,” she provided these “5 Reasons NOT to be a Trustee.”

Reason 1. Three Words- Liability, Liability, Liability
Pursuant to IC 30-4-3-11, the Trustee is accountable to the beneficiary for the trust estate. If the Trustee commits a breach of trust, the trustee is liable to the beneficiary for any loss or depreciation in the value of the trust property as a result of the breach; any profit made by the Trustee through the breach; and any reasonable profit which would have accrued on the trust property in the absence of the breach.

The Trustee is further liable to the beneficiary for acts of an agent which, if committed by the Trustee, would be a breach of the trust if the Trustee: directs or permits the act of the agent; delegates the authority to perform an act to the agent which the Trustee is under a duty not to delegate; fails to use reasonable care in the selection or retention of the agent; fails to exercise proper supervision over the conduct of the agent; approves, acquiesces in, or conceals the act of the agent; or fails to use reasonable effort to compel the agent to reimburse the trust estate for any loss or to account to the trust estate for any profit.

Reason 2. Do You Know Enough to Know You Don’t Know Enough?
A Trustee has a duty to invest and segregate trust property. The Trustee must follow IC 30-4-3.5, the Prudent Investor Act. The Trustee should be able to increase returns or reduce portfolio volatility and must be able to diversify the portfolio. In addition, the Trustee often is required to invest for competing beneficiaries, i.e. the income beneficiary wanting maximum income, and the future/remainder beneficiaries wanting maximum growth. The investments need to be balanced to meet both of these goals. A Trustee needs to have the appropriate investment sophistication to achieve these objectives.

A Trustee has a duty of skill and care. A trust is a separate taxable entity and requires its own fiduciary income tax return. Most of the same income tax rules for individuals apply to trusts; however, there are several differences in the computation of the actual tax liability. Knowing the fiduciary income tax rules allows the Trustee to make appropriate choices in administering the trust in order to maximize tax benefits and minimize tax liabilities. Not all CPAs are versed in the preparation of fiduciary income tax returns.

A Trustee has a duty to administer the trust according to the terms of the document. On occasion, a provision of the trust may be ambiguous or may have more than one interpretation.  Such a situation will require Court intervention to direct the Trustee.

Reason 3. There’s No Paid Vacation
A Trustee has a duty to furnish information and to communicate. Acting as Trustee can be a full-time job. In addition, many trusts are written to last a decade or more. Non-corporate trustees have families, jobs/careers, and lives to lead. Non-corporate trustees also pass away.

A Trustee has a duty to account. Detailed trust records are required, and few individuals are equipped to handle this chore properly.

Reason 4. It’s Not a Popularity Contest
A Trustee has a duty of impartiality. A trust typically has current income beneficiaries and future/remainder beneficiaries. The interests of both types of beneficiaries must be balanced carefully.  Conflicts need to be resolved by a Trustee that all the beneficiaries can respect.  A Trustee often has discretion to make income and/or principal distributions according to the terms of the trust.  A Trustee may have to make unpopular decisions and tell a beneficiary, “No.”

Beneficiaries can be unrelenting when it comes to trying to obtain unauthorized distributions from the trust.  Family dynamics can be altered forever when a Trustee, who is a family member or a friend of the family, is forced to make an unpopular decision.

Reason 5. Money Changes People, No Matter What the Amount
A Trustee has a duty to avoid conflict of interest and self-dealing. Managing someone else’s property can be tempting to an inexperienced individual.  A Trustee must be able to make choices in the best interest of the beneficiaries, not the Trustee.

We are appreciative of Ms. Borkowski’s generous advice for the legal professionals in Indiana who contemplate estate practice decisions.  If you would like to take advantage of an additional 115 tips in our “120 Hot Tips In Estate and Trust Practice” seminar, it is available as an Online/On Demand Video and as a Video Replay Seminar – Click here.

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About our Law Tips Faculty contributor:
Catherine Borkowski is Senior Vice President and Manager of Wealth Management at Salin Bank and Trust Company, Indianapolis, IN. Ms Borkowski was a former tax examiner for the Indiana Department of Revenue, Inheritance Tax Division. She serves on a special task force of the Indiana Bankers Assn to review proposed state legislation for trust and probate statutes. Borkowski received her B.A. and J.D. degrees from Indiana University. She actively volunteers with many organizations, including the Indiana State Police Camp, Riley Hospital for Children and the Special Olympics.

About our Law Tips blogger:
Nancy Hurley, Law Tips blogger, has long-standing connections with Indiana lawyers.  She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We plan to utilize her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs.  When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook page, Twittering and other places her legal experience lends itself.

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