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3 Mistakes to Avoid as Trustee

Posted on: April 21st, 2017
With legal, familial, and financial matters to address when administering a trust, a trustee’s errors could have wide repercussions. While a trustee might attempt to navigate trust administration independently, a lack of professional guidance could contribute to mistakes. These blunders could eventually develop into court proceedings (and related court costs), fines, penalties, and/or removal.

For trusts created to benefit family, grantors commonly select a reliable and honest family member (who might or might not be one of the beneficiaries) to serve as trustee. Oftentimes this individual has little to no experience with investments, asset management, or legal issues. Some errors both inexperienced and experienced trustees may make include: 
  1. Unintentional or intentional disregard of the law. Some trusts have unique investments or assets. An ignorant oversight or one made with purpose that violates laws or regulations will have consequences. Depending on the circumstances, tax implications may result. Another factor to consider: A skilled trustee is held to different legal standards than an unskilled trustee. (Ex. A trustee who is a Certified Public Accountant has unique financial skills that another party serving in that role may not have and, thus, may be held to a higher standard of accountability.)
  2. Misinterpretation of trust terms. Interpretation of legal terms should be handled by parties with legal experience. Ambiguities in trust language create the risk that a trustee could interpret the terms in multiple ways. The ambiguous terms could be present in a distribution clause or other portion of the trust document. This could cloud the trustee’s understanding of their fiduciary duties and may cause conflict among beneficiaries. Depending on a number of factors, a resolution may be found by petitioning the court or alerting a trust protector. 
  3. Breach of fiduciary duty. Trustees are held to fiduciary standards, which require them to act prudently and in the best interest of beneficiaries. Various acts may constitute a breach of fiduciary duty, including when a trustee withdraws trust funds to deposit into their own account (even temporarily), develops a conflict of interest (whether with parties who have interest in trust investments or with beneficiaries), or in any way mishandles assets or abuses their role. Beneficiaries who notice a negligent trustee can review the trust document to learn about the trustee removal process. In these situations, it is imperative that beneficiaries act immediately as statutes of limitations could void delayed claims. Trustees who are unsure if their actions may constitute a breach of fiduciary duty can consult with a trust attorney. Trustees are held personally liable, and some actions may constitute criminal penalty. Oftentimes it helps to prevent breaches by retaining trustee services, which are available in varying degrees. In some cases, the trustee can plan their actions based on a lawyer’s counsel. In other cases, the trustee can retain a lawyer to serve as trustee in their place. 

For more information about trustee services, subscribe to our legal library. A legal guide for trustees is forthcoming summer 2017.
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