Table of Contents
Intro and Background
In the prior article in this sub-series, we introduced one of the most basic and fundamental duties of a trustee – the duty to inform and report to beneficiaries. In many states, especially those adopting the Uniform Trust Code (UTC), this duty can vary between tiers of beneficiary (i.e., “qualified” beneficiary versus certain remainder beneficiaries). Further, this duty to inform and report can sometimes be waived by beneficiaries – but, the effectiveness of the waiver is often subject to the beneficiary (ironically) having sufficient information and material facts to make a valid waiver of further information to begin with.
Often, the process of creating a trust is rushed. One of the decisions that is sometimes hastily made is the choice of trustees. This includes not just immediate trustees, but also designated successors. As this series develops, we will discuss more of the considerations needed to address this type of decision. However, depending on the terms of the trust, choice of trustee may (in the worst case) require a court petition if there is a vacancy or if the removal and replacement process is unclear.
I frequently see trustees named in irrevocable trusts who have done very little through the years. They may not even know, or remember, that they were named as a trustee. Instead, it is often the actual settlor of the trust maintaining books and records – including records of what assets have been transferred to the trust – instead of the actual trustee. I also frequently see trustees who are no longer in touch with the settlor, or any beneficiaries. And, when told that a signature might be needed from that trustee, there may be a reluctance to re-open contact.
I bring this up to note that this is not a new problem. However, trusts sometimes are not drafted to address these possibilities (that a trustee simply doesn’t know about their appointment or their role, or knows and has not done anything for years). This is exacerbated in states that have softened their title standards (especially for real property) to recognize the trust as an entity holding legal title, as opposed to the trustee holding legal title.
But, in the rush to create new irrevocable trusts in the coming months in anticipation of the potential sunset of the estate and gift tax basic exclusion amount, the choice of trustee may again be pushed to the side in favor of “getting things done.” So, in this article, we will discuss how to work with trustees in order to add value by highlighting two important duties.
Duty to Administer Trust
In UTC Section 801, a trustee is obligated to administer a trust (1) in good faith, (2) according to the terms of the trust, (3) in the interests of the beneficiaries, and (4) in accordance with the law governing the administration of the trust.
These seem intuitive, but there are procedural elements to consider – the first being the determination of “when” these duties kick in. Usually, a trustee cannot be bound until they “accept” their role as trustee. Acceptance should usually be in writing, especially because trusts are usually in writing. In this vein, we look for a signature from the trustee (or a representative of the trustee) accepting trusteeship. So, for example, if a trust names an initial trustee and that initial trustee signs the trust, they have accepted trusteeship. Likewise, if a successor trustee or co-trustee is later appointed under the terms of the trust or applicable law, they often will sign an instrument accepting trusteeship.
In the absence of such written, signed acceptance, what can we do? First, note that there may not even be a valid trust without acceptance by at least one trustee – which can be a catastrophic outcome outside of the scope of this article. Second, conduct may matter.
Which brings us to a broader question – can acceptance, or even rejection, of trusteeship be implied without a signature? UTC Section 701 tells us to look first to the terms of the trust and the method of acceptance determined under the trust. Unless the terms of the trust dictate otherwise, however, or unless the trust reserves its method as the “exclusive” method of accepting trusteeship, we then look to whether the trustee has (1) taken charge of any trust property, (2) performed any powers or duties, or (3) in any other way indicated acceptance.
In this vein, could a failure to respond or do anything be implied as acceptance? Unless the trust says otherwise, the answer is generally no. But, in this vein, we see a sub-requirement looking at whether and when a trustee actually knows they have been appointed as trustee. After this knowledge kicks in, if the trustee does not accept within a reasonable time, then they are deemed to have rejected trusteeship.
All that being said, the trustee may need some time to look at the trust and its assets to determine whether they actually want to act as trustee. In this vein, trustees can (and should) familiarize themselves with the terms of the trust before accepting trusteeship. (I would venture to guess this rarely happens for non-institutional trustees – instead the review process is usually limited to the settlor and drafting attorney or firm.) Likewise, trustees can inspect the trust property to determine potential liability if, for example, there are environmental issues or (within a business, for example, an interest in which is held by or transferred to the trust) there are potential lawsuits. These acts of inspection and diligence usually will not be deemed to be acts of acceptance of trusteeship. Nonetheless, it may help for a trustee to clarify (in writing) that they are going through a diligence period and that acceptance of trusteeship is contingent on the trustee’s satisfactory inspection.
On the other hand, it is possible that a trustee’s inaction over a period of time or abandonment of their duties could lead to an implied resignation. This is, however, a subject for another article – especially because this is a possibility not often accounted for within the terms of a trust.
Recordkeeping Duties
In Section 810 of the UTC, trustees are given the basic duty to maintain adequate records of the administration of the trust. As part of this duty, a trustee must be able to identify trust property and keep it separate from the trustee’s own property.
In actuality, this does not always happen. Advisors (and trustees) often rely on the settlor’s or attorney’s own recordkeeping, which may not be complete. There may be a copy of the trust agreement floating around somewhere, but beyond that trust agreement it is not always the case that copies of other records (Crummey notices, changes in trustees, amendments, trustee resolutions, divisions or consolidations, etc.) are kept together. The trustee should be the one who keeps track of all of these written documents.
Likewise, it is often the case that information on assets held by the trust is not consolidated in one place. Ideally, a trustee should have a balance sheet or inventory reflecting this. In fact, many trusts have a schedule attached on which assets transferred to the trust can (or should) be reflected. But, if you have been in practice long enough, you have probably seen that at least 95% of the time this schedule is left blank, or is not updated beyond the initial creation of the trust. This leaves an advisor checking gift tax returns, assignment documents (that may be found with business entity documents and not actual trust documents), deeds, account statements, insurance policy documents, etc. to reflect what assets are held by a trust. The trustee has the duty, at a bare minimum, to keep this information handy and ideally to consolidate it into a ledger.
Conclusion, and Business Ideas
Individual trustees are perhaps one of the most underserved markets there are. For an enterprising attorney or advisor, there is a ton of potential in assisting trustees. In a world where significant wealth will be transferred in trust, this will perhaps be where most business is to be gleaned on the wealth management side in the future. Yet, nobody is doing this – creating an awesome opportunity to carve out this niche as an early entrant.
However, if you immediate gut reaction is that “this is not as easy as it looks,” you are right. That is why this series of articles exists. While serving trustees does not require you to become a trustee yourself, you may be towing the line up to being a “trust advisor” – which carries its own fiduciary duties in some states – meaning that you must be very intentional about what services you will and will not provide. I know I am a voice of one, but I think it is a matter of “when” and not “if” the weight of private wealth services shift from being significantly focused on individuals to having a significant focus on trustees and beneficiaries. So, if this model interests you at all, or if you simply want to keep tabs on what the future planning environment may look like, please stay tuned for more.
Which brings us to the ultimate conclusion – a trustee cannot accept trusteeship if they do not actually know they have been nominated as a trustee and, in the worst case, this can mean there is not a valid trust. As seen above, timelines and duties depend on this knowledge. Further, it is rare that an individual trustee (especially one who is not a beneficiary) is willing to work for free. Reasonable compensation is, and should be, expected. This compensation aspect will be covered in future articles as well.