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Successor Trustee Handbook
Ronald P. Adams
The purpose of this handbook is to assist you, as a successor trustee in
Arizona, in carrying out your duties in the administration of a trust.
Some of the
topics and concepts mentioned here are also discussed elsewhere on our website,
such as in "Guidelines for the Individual
Trustee." Please use the Search feature at top-right to explore related
See also: Personal Representative Handbook, a valuable resource for personal
representatives (or "executors") of estates that are subject to the
Seminar: See the video highlights from Ron Adams' October
2013 seminar for trustmakers and successor trustees.
While our Successor Trustee Handbook addresses many of the issues commonly
encountered by a trustee of an Arizona trust, it should not be relied on as a
If, after reviewing this information, you have a
question that can be answered in a brief conversation, please call Ron Adams or
Ryan Scharber at 480-345-8845.
A trustee is what the law calls a fiduciary: a person who is responsible for
taking care of something that belongs to someone else. Under the law,
fiduciaries owe legally enforceable duties to the people on whose behalf they
handle property. Any time you act in your capacity as trustee, your fiduciary
duties come first.
What Is “Property”?
We use the term
property here in its broadest possible
sense. Property includes land and buildings, which are called real property;
physical objects such as household goods and personal effects, which are called
tangible personal property; and things that you cannot really see or touch but
nevertheless have value (such as contract rights), as well as things that
represent something else that has value (such as stock certificates or cash or
bank accounts), which are called intangible personal property.
What Is a Trust?
In order for you to have a good feel for your duties, you first
need to understand what a trust is and how it works.
A trust is a legal relationship that results when a person (often called a
trustmaker, settlor, trustor or grantor) makes an agreement with a trustee to
handle property for the benefit of the beneficiaries. (A common form of trust
used in estate planning is a “revocable” or “living” trust.) The agreement is
normally set out in a written document which is called the trust instrument or
the trust agreement. Your first and foremost duty as a trustee is to read,
understand and faithfully follow the terms of the trust instrument, which are in
essence the “rules” laid out by the trustmaker.
Once the trust agreement is made, the trustmaker transfers property to the
trustee. The trustee actually becomes the legal owner of the property. However,
the “real” owners of the property are the beneficiaries, who are said to be the
equitable or beneficial owners; they are the ones who are supposed to benefit
from the property.
A trust can have more than one trustee at a time. Each co-trustee
must decide for himself or herself how best to carry out his or her fiduciary
duties. Beware that a co-trustee can be held responsible for another
co-trustee’s breach of a fiduciary duty. Thus, it is important that all
co-trustees pay close attention to everything that is done in the administration
of the trust. If there is any question or problem, that issue should be
communicated to the other co-trustee(s) immediately.
As a general rule, where there are two co-trustees, both have to agree on all
matters of trust administration, and where there are three or more co-trustees,
the majority rules. In order to minimize the chances of being held responsible
for someone else’s poor judgment or breach of duty, a co-trustee should be sure
to make a written record of any points of disagreement about trust business. In
extreme cases, a co-trustee may be required to “blow the whistle” on another
co-trustee’s activities, either by notifying the trustmaker about the issue or
by filing a complaint with a Court in the jurisdiction the trust is being
If you ever have questions about what to do as trustee, you should seek
appropriate advice immediately. You should not hesitate to consult your lawyer,
CPA or other advisors.
What Is a “Successor Trustee”?
A successor trustee is the institution or person
who takes over the management of trust property when the original trustee has
died or become incapacitated.
The fact that you have been named as a successor trustee in someone’s trust
instrument does not obligate you to accept that position. You should consider
very carefully your decision to accept the job of trustee. Once you accept the
position, you accept all that goes with it. It is a position of great honor and
Some Guidelines for You as Trustee
The law does not demand absolute perfection from you. However, it does demand
absolute loyalty, absolute honesty, and complete and accurate disclosure, even
if that disclosure could cast you in an uncomfortably negative light. In the
classic words of Judge Benjamin Cardozo (who went on to become a U.S. Supreme
“Many forms of conduct permissible in a workaday world for those acting at arm’s
length are forbidden to those bound by fiduciary ties. A trustee is held to
something stricter than the morals of the market place. Not honesty alone, but
the punctilio of an honor the most sensitive, is then the standard of behavior.
As to this there has developed a tradition that is unbending and inveterate.
Uncompromising rigidity has been the attitude of courts of equity when
petitioned to undermine the rule of undivided loyalty by the “disintegrating
erosion” of particular exceptions. […] Only thus has the level of conduct for
fiduciaries been kept at a level higher than that trodden by the crowd[.] — Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928).
Section 1. Some Basic Rules
How to Sign Documents
Arizona law (properly known as “Arizona Revised Statutes”
or “A.R.S.”) states that “[u]nless otherwise provided in the contract, a trustee
is personally liable on contracts entered into in the trustee’s fiduciary
capacity in the course of the administration of the trust estate.” In other
words, unless you take pains to document that you are signing a contract as a
trustee and not as an individual, you will be inviting personal liability for
whatever the contract requires. Accordingly, whenever you sign any document on
behalf of the trust, always sign as “Your Name, Trustee.” It must be absolutely
clear that you are obligating the trust and not yourself. If you do this
(assuming you were acting within the scope of your authority as trustee when you
signed a document), you will not be personally liable for any obligation under
Sources of Your Authority as Trustee
Your authority comes first and foremost
from the trust instrument, and your duties and powers as described there are
your primary instructions. You should read the trust instrument with care, and
from time to time read it again. The trust instrument may contain specific
provisions that take precedence over the general rules that apply to trusts,
including those mentioned in this handbook. However, note that there are certain
basic rules relating to trusts that will apply no matter what the trust
instrument says. (For example, a trust instrument cannot allow or encourage
illegal activity on the part of the trustee or the beneficiaries.)
The second source of your authority comes from the Arizona Revised Statutes.
Various provisions of the A.R.S. cover things that are not specifically spelled
out in the trust instrument. The Arizona Trust Code, The Uniform Trustees Powers
Act, the Uniform Prudent Investor Act, the Uniform Principal and Income Act, and
the Uniform Probate Code hold particular relevance to your role as a trustee.
The third source of your authority is found in the court decisions relating to
trusts. This is known as common law or case law. The common law of Arizona is
found primarily in the opinions of the state Supreme Court and Court of Appeals;
those courts may follow decisions from other jurisdictions as well.
You need to keep all three of these sources of authority in mind as you carry
out your duties as trustee. You also need to remember that Treasury Regulations,
the Internal Revenue Code, and court decisions that interpret the Code will
dictate what you can or should do in many circumstances. This should convince
you that you will need to rely on the advice and guidance of your legal counsel,
accountant and other advisors throughout your tenure as trustee.
Section 2. Your Fundamental Duties as Trustee
Trustees are subject to a variety of duties, some of which are summarized below.
Please bear in mind that the penalty for your breaching any of these duties is
that you will have to pay for any resulting damage to the trust, out of your own
pocket. Personal liability – even if you are not paid for your efforts – is one
of the things that go along with being a fiduciary.
Duty of General Prudence
You, as trustee, are duty
bound to deal with the trust property as a “prudent person” would deal with the
property of another. Note that this is a standard of conduct rather than of
performance. Your actions (or times of inaction) will be judged against what a
reasonable person would have done in the same circumstances, given the same
limitations to which you were subject, and armed with the same information that
was at your disposal. If you conduct yourself properly, you will not be faulted
if something bad happens, such as a decline in the value of trust assets. Acting
reasonably in the circumstances is your basic job description; if you do that,
you generally need not worry about being judged in the light of hindsight. Note
that if you have or claim to have special expertise in connection with any facet
of trust administration, you will be duty-bound to exercise that expertise.
Thus, the standard for judging your job performance will take into account your special
abilities (whether actual or claimed).
Duty to Carry Out the Terms of the Trust
One noted authority states that “the
first and most important duty of the trustee is to study and become thoroughly
familiar with the provisions of the trust instrument, and thereafter to follow
them out implicitly.” (Loring, A Trustee’s Handbook [Rounds 2002 ed.] at 12.)
It will be difficult for anyone to find fault with your performance of your
fiduciary duties if everything you do is in accordance with the terms of the
trust instrument. If at any time you are reasonably in doubt as to the correct
interpretation of the trust instrument, you can always petition a court for instructions.
Duty of Loyalty
As a trustee, you must always act to further the interests of
the trust and the beneficiaries. You are serving as trustee for the benefit of
someone other than yourself. You should not enter a transaction that gives you
an opportunity to benefit yourself at all, much less at the expense of the
trust. If any situation should arise in which there is a conflict between your
personal interests and the trust or between the trust and the interests of third
parties, you as trustee should put the interests of the trust first. For
example, you should not sell trust property to yourself or sell your property to
the trust because this creates the appearance that you may have taken advantage
of the trust. Similarly, you should never loan trust funds to yourself. The
rules set forth in this paragraph are strictly applied not only to transactions
in which you deal directly with yourself, but also to transactions in which you
deal with entities (such as partnerships or corporations) in which you are
personally interested. These rules apply even though a particular transaction
may be scrupulously fair, and even if it is advantageous to the trust.
Note that Arizona law allows you to obtain a court’s permission to enter into a
transaction between yourself and the trust. This will require notifying all of
the beneficiaries of the proposed transaction and giving them the opportunity
take positions before the court as to why the transaction should or should not
be allowed to go forward. The fact that the law gives you this opportunity means
that you will be judged very harshly if you ever do enter into a transaction
involving a conflict of interest without prior court permission.
Duty Not to Delegate
Once you have accepted the position of trustee, you are
responsible for the administration of the trust, and you should not turn over
the complete administration of the trust to others. This does not mean that you
must actually perform all of the administrative work yourself. You can delegate
certain administrative details to persons qualified to handle them. For example,
you can employ an agent to collect rents. However, the responsibility for the
administration of the trust always remains with you as trustee.
If you are one of two or more trustees, you cannot rely on the other trustees to
administer the trust. You must participate in the administration. If another
trustee acts improperly with respect to trust matters, you have the obligation
to correct the situation. You have an obligation to be aware of what other
trustees are doing on behalf of the trust. Each trustee is responsible to the
beneficiaries for the misconduct and breaches of duty of the other trustees.
Consider an important part of your job as being the watchman for the
beneficiaries. If something goes wrong, don’t let it go wrong on your watch!
Duty to Report
Under the Arizona Trust Code, adopted in Arizona in 2009, the
trustee of an irrevocable trust (a trust that cannot be modified or amended,
which most all living or revocable trusts become upon the death of the
trustmaker), now has several important, affirmative notification and reporting
Unless the trust expressly states otherwise, a trustee of an irrevocable trust
must keep all “qualified beneficiaries” reasonable informed about the
administration of the trust and of material facts necessary for such qualified
beneficiaries to protect their interests in the trust. A trustee also has an
affirmative obligation to respond to a beneficiary’s request for information
related to that administration. A “qualified beneficiary” is a person to whom
distributions of income or principal may be made from the trust and a person who
would receive distributions of income and principal from the trust if the
primary beneficiary or beneficiaries die(s), i.e., a remainder beneficiary or
Moreover, a trustee of an irrevocable trust must:
promptly furnish a beneficiary with a copy of the portions of the trust
relevant to that beneficiary upon request;
within 60 days of acceptance of the position, notify all qualified
beneficiaries of a trustee’s name, address and telephone number; and
within 60 days of learning of an irrevocable trust’s existence, notify each
qualified beneficiary of the identity of the trustee, of the identity of the
trustmaker and of the beneficiary’s right to request a copy of the portions of
the trust relevant to that beneficiary and of the right to receive a trustee’s
Finally, a trustee must, upon request at least annually, provide to each
beneficiary a report containing a description of the trust’s assets,
liabilities, income and expenses, including the source and amount of a trustee’s
compensation. This report must also, if feasible, provide an estimate of the
fair market value of the trust’s assets.
Duty to Account
As mentioned above, one of your basic duties, which will be
discussed more fully below, is your duty to account or provide “reports” to the
beneficiaries. Beneficiaries are entitled to be kept reasonably informed about
their interests in the trust. Note that different beneficiaries may have
different interests in the trust, and you are duty-bound to account to each
beneficiary only with respect to that beneficiary’s interest.
Duty to Segregate Trust Assets
You must keep the trust property separate and
distinct from your own property. In other words, you should have a separate bank
account or accounts for the trust, and you must not put either trust principal
or income into your personal accounts. Trust assets must always be readily
identifiable as such and must be segregated from your other property.
Duty to Get Help If You Need It
Should any questions arise as to the proper
interpretation of the terms of the trust, you should consult the lawyer for the
trust. “Flying by the seat of your pants” is dangerous because it can expose you
to personal liability if something goes wrong. On the other hand, your reliance
on the advice of a competent and qualified professional can be a defense to a
claim that you breached a fiduciary duty.
Duty to Protect and Preserve Trust Assets
You have the duty to protect and
preserve the trust assets, and to insure them whenever practicable. Be sure to
consult a competent insurance agent regarding proper coverage for the trust
assets. Few things are worse than having a trust asset destroyed through no
fault of yours and then discovering that the asset was not insured. In that
case, your own personal bank account becomes the insurance company.
Avoiding the Appearance of Impropriety
You will find very little sympathy with
a judge or jury if you do something that looks like it may be improper, whether
or not it really is. If someone questions your activities as trustee, you may
find yourself having the burden of proving that you acted properly. You do not
have the advantage of being presumed innocent until you are proven guilty. Most
of the time, you will find the contrary presumption working against you. Wise
trustees do their best to be completely above reproach.
Section 3. Accounting and Reporting
You must set up and keep an accurate set of books. You do not need to be a CPA
to do this, but you might want to engage a CPA or a professional bookkeeper to
assist you. Your records should show all assets you receive, hold and disburse,
with the date, amount and explanation of each. Arizona Revised Statutes require
you to keep the beneficiaries reasonably informed about the trust and its
administration, although no beneficiary of a revocable living trust, other than
the trustmaker, has the right to information about the trust during trustmaker’s
If the persons who receive trust income (also known as "current income
beneficiaries") are different from those who will receive the principal when the
trust terminates (also known as "remaindermen"), your records should classify all
receipts and disbursements as income or principal. In most cases, there will be
no difficulty about this. Things like rent, interest and ordinary dividends are
clearly income. However, although proceeds from the sale of an asset (i.e., a
house or stocks and bonds) may cause taxable income, the sale proceeds are
Many trust instruments contain instructions to guide the trustee in resolving
these and other accounting problems, and you may find all of the guidance you
need from this source. If you do not, you (with the assistance of your lawyer or
CPA) will need to consult the Uniform Principal and Income Act.
If you keep your accounts carefully, it will be a simple matter for your CPA to
find all of the information necessary to prepare trust tax returns, reports to
the beneficiaries or reports to the court, if that becomes necessary.
Remember that the trust you are administering is a separate “person” in the eyes
of the law, and, although it has no physical body, a clear set of books creates
a record of its healthy and independent life.
You are entitled to reimbursement of your reasonable expenses incurred in the
administration of the trust. You are also entitled to a reasonable fee for
services rendered, but you are not required to take a fee. If you do, it should
be added to your other income and reported on your personal income tax return.
As mentioned above, you must be prepared to render a trustee’s report or an
accounting at least once a year. Any beneficiary may demand such an accounting,
and, even if none does, your annual accounting or report should be a permanent
part of your records of your administration of the trust.
The trust beneficiaries are generally entitled to copies of the trust instrument
(at least the portions of the trust instrument that relate to their specific
beneficial interests), and they may also be entitled to examine the books and
records of the trust. This is another good reason for you to maintain your books
in a scrupulous manner.
Your annual accounting should include the following elements:
an inventory of all trust assets, any changes in the status of the assets, and
the approximate fair market value of each asset;
detailed information regarding all trust bank accounts, including bank
the nature of all investments, together with proper backup information;
any and all insurance, of all types, in force for the trust assets or for a
beneficiary, and the dates and amounts of all premium payments;
all debts of the trust and pertinent information about each debt, including
the nature of the debt and the identity of the creditor;
a list of all known claims presented to the trustee and pertinent information
about each claim, such as the identity of the claimant, the nature of the claim,
and what action the trustee took regarding that claim;
all receipts that have come into the trust and how those receipts were
all disbursements made from the trust, to whom each disbursement was made, the
purpose of the disbursement, and whether the disbursement came out of principal or income;
a statement that all tax returns have been filed;
a statement that all taxes and bond premiums (if any) have been paid; and
a statement specifying the trustee’s compensation and how that compensation
You would be wise to have the beneficiaries sign (a) written receipts for all
distributions and (b) written approvals of your annual accountings as they are
rendered. If any beneficiary does not approve them, you have the option of
asking a court to review and approve your accountings.
Section 4. Investments
You must keep the trust assets invested appropriately. It is important for you
to remember that if you are serving as a trustee for someone other than
yourself, you will be held to a higher standard of care than you would be if you
were simply investing your own funds.
Arizona has adopted the Uniform Prudent Investor Act (UPIA). A summary of your
responsibilities under the UPIA follows.
A trust instrument may limit or permit deviations from the following rules, and,
to the extent the trustee acts in reasonable reliance on the terms of the trust
instrument, the trustee cannot be faulted by the beneficiaries. However, where
the trust instrument is silent, or where it specifically adopts the UPIA, the
following rules apply.
Standard of care; portfolio strategy; risk and return objectives:
(a) A trustee shall invest and manage trust assets as a prudent investor would,
by considering the purposes, terms, distribution requirements, and other
circumstances of the trust. In satisfying this standard, the trustee shall
exercise reasonable care, skill, and caution.
(b) A trustee’s investment and management decisions respecting individual assets
must be evaluated not in isolation, but in the context of the trust portfolio as
a whole and as a part of an overall investment strategy having risk and return
objectives reasonably suited to the trust.
(c) Among circumstances that a trustee shall consider in investing and managing
trust assets are such of the following as are relevant to the trust or its
(1) General economic conditions;
(2) The possible effect of inflation or deflation;
(3) The expected tax consequences of investment decisions or strategies;
(4) The role that each investment or course of action plays within the overall
trust portfolio, which may include financial assets, interests in closely held
enterprises, tangible and intangible personal property, and real property;
(5) The expected total return from income and the appreciation of capital;
(6) Other resources of the beneficiaries;
(7) Needs for liquidity, regularity of income, and preservation or appreciation
of capital; and
(8) An asset’s special relationship or special value, if any, to the purposes of
the trust or to one or more of the beneficiaries.
(d) A trustee shall make a reasonable effort to verify facts relevant to the
investment and management of trust assets.
(e) A trustee may invest in any kind of property or type of investment
consistent with the standards of this chapter.
(f) A trustee who has special skills or expertise, or is named trustee in
reliance upon the trustee’s representation that the trustee has special skills
or expertise, has a duty to use those special skills or expertise.
You, as trustee, have the duty to diversify the trust assets. This means that
you should not place all of the trust’s eggs in one basket. If all of the trust
assets were invested in an airline stock, for example, and if there were a
terrorist attack that resulted in huge losses for the airline industry, the
value of the trust assets would take a tremendous hit. Thus, you need to
diversify the trust assets and thereby minimize the risk that the trust could be
impoverished by a downturn in any one stock or any one market segment. Bear in
mind, however, that your duty to diversify is also driven by other
circumstances. If, for example, you had the duty to pay a large trust obligation
or to distribute trust assets to beneficiaries, it might be appropriate for all
or a substantial portion of the trust assets to be in cash and not invested in
other kinds of assets.
Within a “reasonable time” after accepting a trusteeship or receiving trust
assets, you are required to review the trust assets and make and implement
decisions concerning the retention and disposition of assets, in order to bring
the trust portfolio into compliance with the purposes, terms, distribution
requirements, and other circumstances of the trust. What constitutes a
“reasonable time” depends on the circumstances, but it certainly does not pay to
dawdle. If the value of the trust assets declines significantly, and if you
could have avoided the loss through diversification, you may very well have some
unhappy beneficiaries on your hands.
You have the duty to be absolutely loyal to the trust and to be impartial toward
the beneficiaries. Your duty of impartiality is driven by the kinds of interests
held by the various beneficiaries. For example, some beneficiaries may have
current rights to receive trust income, whereas others may have the right to
receive trust property at some point in the future. You need to treat the
beneficiaries in each class the same way, and you must not favor the current
beneficiaries over the future beneficiaries unless the trust instrument allows
you to do that.
Although the general rule is that trustees cannot delegate any of their
responsibilities to others, the Arizona Trust Code (ATC) acknowledges that
delegating some of your responsibilities may very well be in the best interest
of the trust. Thus, you are allowed to delegate investment functions and
management functions to others, if that would be prudent in the circumstances.
If, for example, you are not a Wall Street wiz, it is probably your duty to
consult someone who is when you develop the investment strategy for the trust.
You can even delegate investment decision-making authority to expert asset
managers if that would be appropriate, given the value and kind of trust assets
for which you are responsible. Similarly, if the trust assets include real
estate and you are not an ace real estate manager, there is nothing wrong with
your engaging someone who is. You nevertheless have the duty to monitor the
experts to whom you delegate responsibilities and to make sure that they are
faithfully serving the best interests of the trust.
The above summary is fairly comprehensive, but it is not exhaustive. Always
remember that if ever you have questions about trust administration, you can and
should call on the expertise of your legal counsel and other advisors.
Section 5. Income Taxes
The Internal Revenue Code considers a revocable or
living trust to be a “grantor trust” during the lifetime of the trustmaker. As a
general rule, such a trust is not required to file income tax returns [per Treas. Reg. §1.671-4(b)].
Moreover, the trustmaker’s Social Security number is the initial taxpayer
identification number for the trust, at least for as long as the trustmaker is
The trustees of all other types of trusts may be required to obtain taxpayer
identification numbers (by filing Form SS-4 with the IRS) and file fiduciary
income tax returns (Form 1041) with the IRS and analogous forms with the states
in which the trusts derive income. The obligation to file a Form 1041 arises if
the trust had any taxable income or had gross income of $600 or more, regardless
of the amount of taxable income in any taxable year.
You are advised, particularly if you are a layperson, to seek professional
assistance in the preparation of tax returns, since they do differ substantially
from personal income tax returns. We recommend that you consult, if not retain,
Section 6. Interim Distributions
Of great interest to the beneficiaries is
when and under what circumstances they
The trust instrument should tell you who is to receive benefits from the trust
and when those benefits are to be paid. It may also give you certain
discretionary powers with regard to distributions..
Some of the problems that can arise in exercising your discretionary powers are
illustrated by the following example.
The trust instrument gives you the power, in your sole discretion, to distribute
income or principal or both among your sister’s three children – Sandy, Henry
and Ralph – to provide for their maintenance, support and education. All of them
have a legal guardian. Sandy is a sophomore in college and doing very well.
Henry is “doing his thing” in San Francisco, while Ralph is doing average work
in high school and is something of a sports car nut.
You receive a request from the children’s guardian for $3,000 for Sandy’s
tuition for the coming year (to be spent at a university in Europe); $1,000 for
medical expenses for Henry, who is undernourished and high on drugs; and $2,000
for a car for Ralph. Which of these requests can you honor under the standards
For Sandy: Education is a proper purpose of the trust, but does it have to be in
Europe? Perhaps Sandy will get just as good an education in the U.S. for half
the cost. If you enable Sandy to go to Europe, Henry and Ralph could later claim
that you abused your discretion or even breached your fiduciary duty to the
trust to the extent that $3,000 exceeds the cost of Sandy’s education at a
comparable stateside institution. If you do decide to allow Sandy to go to
Europe for her education, you should make certain to document some very good
reasons for her going there instead of staying here.
For Henry: Support and maintenance are proper purposes, but does this term
include medical expenses or is it intended to be limited to ordinary living
expenses such as room and board? The trust instrument may or may not tell you.
You may also be stuck in the quandary of trying to decide whether spending money
for Henry’s medical care, without also requiring him to undergo some kind of
drug treatment, is prudent.
For Ralph: Do support and maintenance include a car if Ralph has access to a
reliable car now? What if Ralph has a part-time job and needs transportation?
In all three cases, the trust instrument may give you adequate guidance.
However, if it does not, you have your work cut out for you. Your primary
objective should be to carry out the intent of the person who created the trust,
if that can be determined from the trust instrument. You should also consider
the size of the trust, the amount of income the trust generates, the needs and
convenience of the beneficiaries, and various other demands that the trust might
be called upon to meet.
Remember that, when your permissible sphere of action is limited by a standard,
you must observe that standard or risk a lawsuit for breach of trust or breach
of a fiduciary duty. You are personally liable (meaning that your own assets are
at risk) if you lose a lawsuit in which you are accused of violating your
Also remember that, if you are presented with an issue that cannot easily be
resolved, you always have the option of petitioning a court for instructions. If
you pass up the opportunity to petition the court and end up making a wrong
decision, you can be sure that if a beneficiary sues you, the court will not
regard you with great favor.
This short handbook cannot outline all of the problems you may face in
connection with the exercise of your discretionary powers, but the above example
should encourage you to analyze every distribution for possible problems before
taking action. There is never any harm in consulting your legal counsel and
other advisors if issues come up, and doing so can help you stay out of hot
Section 7. Final Distribution
If you are administering a trust at the time it terminates, you should give the
beneficiaries a final accounting. Your final accounting should include the
the property, rents, revenues, and profits received since your last accounting
that was approved all of the beneficiaries or by the court; ;
the disposition of the property, rents, revenues, and profits;
the debts and expenses of the trust that remain unpaid;
the property that remains in the hands of the trustee;
a statement that the trustee has paid all required bond premiums, insurance
premiums, and any other payments that the trustee is required to keep current;
a description of the tax returns filed by the trustee during the term of the
a complete accounting of the taxes that the trustee paid during the term of
a description of all current delinquencies in the filing of tax returns or the
payment of taxes, and the reasons for each delinquency; and
other facts that should be disclosed to convey a full, complete, and definite
understanding of the condition of the trust.
You should ask the beneficiaries to sign a document in which they approve your
accounting, waive any claims against you, and promise to pay any trust expenses
that crop up after they have received the trust assets. Remember that the
beneficiaries’ promise to pay those obligations is only as good as their ability
to hold on to the assets you distribute to them, and it would behoove you to be
very sure that all trust obligations have been paid before you make final
distributions. If any of the beneficiaries declines to approve your final
account, you can petition a court to review and approve your account and
discharge you from all further liability.
Section 8. Title to Trust Assets
Whenever you take title to an asset as trustee, you should pay close attention
to how that title is vested. Generally, title should be vested in one of the
Trustee’s Name, Trustee, or his/her successors in trust, under the Name of
Trust, dated Trust Date, as amended.
Trustee 1’s Name and Trustee 2’s Name, Trustees, or their successors in trust,
under the Name of Trust, dated Trust Date, as amended.
When you sign documents, including checks, you should sign your name “Your Name,
Trustee.” By signing as “Trustee” you will not be held personally liable as long
as the action you are taking is within the scope of your authority as trustee.
This rule does not apply to a trustee who is also the trust creator—it only
applies to successor trustees.
Section 9. Avoiding Potential Liability
A trustee is subject to a variety of duties. The penalties for breaching a duty
include having to pay for any resulting damage to the trust (or estate), out of
your own pocket. Personal liability – even if you are not paid for your efforts
– is one of the things that go along with being a fiduciary.
While you may perceive that there is a low risk of getting sued, you must not
ignore the possibility. When you are acting as a fiduciary and are essentially
in control of someone else’s property or inheritance, you can easily become the
focus of others’ suspicion, frustration or anger.
Two things can help you avoid personal liability in connection with serving in a
First, keep good, well-organized records and thoroughly document all
transactions, including any reasons for making or not making distributions.
Second, understand the instructions contained in the trust, and obey them.
In doing those things, keep beneficiaries well informed of trust business and be
friendly and cooperative. People are relatively unlikely to take legal action
against someone who is considerate and communicates well, and with whom they
have a good relationship.
THE VALUE OF PROPER RECORD-KEEPING
If you are sued, having a carefully
documented file is going to look far better to a judge and jury than having a
file that is in disarray. Similarly, a trustee who seeks advice from experts is
going to look better than one who “wings it.” In other words, from day one you
must prepare for a lawsuit. It has been said that “if one wants peace, one
should prepare for war.” A trustee who is fully prepared for war, but not
deliberately doing anything to start it, is far more likely to avoid becoming a
Consider the dynamics of a lawsuit against a trustee. Judges and juries alike
tend to have more sympathy for the party that appears to be “right.” If you have
sloppy records (or have none), or if you have not sought help when you came up
against something beyond your expertise, or if you have not provided
beneficiaries with information that you should have, you will not be given the
benefit of any doubt.
CARRYING OUT THE INTENT OF THE TRUST
Your second line of defense is your
ability to show how you carried out the intent of the trust. The better you do
that, the more difficult it will be for a beneficiary (or anyone else) to show
that you did something wrong.
It may be tempting to take a shortcut to fix a problem or correct a poorly
worded document. That is not your job. Only a court of proper jurisdiction can
change a trust document, and even a court’s authority to do that is limited. Do
not take it upon yourself to deviate from what is written. The trust instrument
is the best expression of the trustmaker’s intent. That expressed intent may be
your best defense. You may not add to or subtract from the words of the
document. You cannot be selective in carrying out various parts of the document.
Consult your legal counsel if there is ever any question as to the correct
interpretation of the trust instrument.
Remember that, once you accept the job of Trustee, you cannot get out of a
lawsuit merely by resigning. If you ever wish to stop serving as trustee, you
can resign, but your job (and the attendant duties and potential liability) does
not end until a replacement trustee steps into your shoes and all of the trust
assets are transferred to your replacement.
In discussing matters of personal liability, it is not this article’s purpose to
scare you out of acting in a fiduciary capacity. You have been named to serve
because someone close to you has a great deal of respect for you and trusts your
judgment and integrity.
We offer this discussion to help you anticipate problems before they occur and
to give you a few important but relatively simple pointers on how to make the
process go smoothly.
Section 10. Final Thoughts
The following pointers will help make your job easier, and they will help you
avoid conflict with beneficiaries.
Try to understand why the trust was created
Understanding the intent behind
the trust will help you fulfill your role as trustee. There are many reasons for
creating trusts, and there was probably more than one reason for creating this
trust. Getting the drafting attorney to provide you with this information, even
if you must pay for his or her time, can be invaluable to you later.
Examine your motives
You should be extremely careful that everything you do or
refrain from doing as trustee is motivated by your desire to execute your duties
faithfully and to the best of your ability. You cannot allow yourself to be
influenced by your personal feelings about individual beneficiaries or your own
What if you are a beneficiary of the trust
As a beneficiary, you are entitled
to benefit from the trust. However, it is critical that you remain impartial and
faithfully carry out your duties to the other beneficiaries. If anything you do
as trustee smacks of greed or self-interest, you will have a very difficult time
convincing a judge or a jury that you satisfied your obligations as trustee. If
you are ever in doubt as to whether a conflict exists between your personal
interests and those of other beneficiaries, it is better to abstain from acting
until you have consulted your legal and other counsel, or, in appropriate cases,
have received instructions from the court.
Keep well-documented files
What should be in your trust files? In addition to
your accountings, and the backup information upon which your accountings are
based, your files should include:
Keep notes of meetings with beneficiaries
meeting, keep a record of the date, the length of the meeting, and a summary of what was discussed. You
should also keep records of all other communications between you and the
beneficiaries, including such things as copies of all correspondence.
Request beneficiaries’ income tax returns
If the trust
instrument grants you
discretion in making distributions to beneficiaries, their income tax returns
can provide you a great deal of helpful information. Those returns are, after
all, signed under penalty for perjury. Beneficiaries may be reluctant to share
their income tax returns with you, but your request for that kind of information
is not unduly intrusive—no more so than a bank asking for the same documentation
before deciding whether to loan money.
Prepare beneficiaries’ annual budgets
If you have discretionary authority with
respect to distributions, you may even want to help prepare budgets for the
beneficiaries. This shows that you have carefully considered their needs
relative to discretionary distributions.
Verify out-of-pocket expenditures
Since you are entitled to reimbursement of
all reasonable amounts you advance on behalf of the trust, keep copies of proof
of payment, such as canceled checks or receipts.
Preserve communications with advisors
Keep all copies of all correspondence
between yourself and your advisors, and always ask them to at least summarize
any advice they give you in writing.
Preserve information upon which any exercise of discretion is based
include such things as beneficiaries’ bank statements, credit card statements,
pay stubs or other employment information, invoices, proposals, and any other
information they give you to justify a request for a distribution.
Understand your options in using an attorney
It is common for the lawyer who
drafted the trust instrument to represent successor trustees, but there is no
rule that says the successor trustees are stuck with the drafting attorney. You
have a duty to seek competent legal counsel, and you will need to assess whether
that is a role that the drafting attorney can fill. Even if the drafting
attorney is competent and highly regarded, you may not feel at ease
communicating with him or her. When you choose your legal counsel, you should
give some consideration to how comfortable you feel with that person. Your
attorney should inspire trust and confidence and should be someone with whom you
can be completely frank and honest.
Please keep in mind that the guidelines laid out in this handbook are far from
exhaustive. The guidelines are intended to alert you to your duties and to
impress upon you the significance of your responsibilities.
Never shrink from asking for legal or other advice. That advice may cost
something in the short run, but the cost can be far less than it takes to fix a
mistake later on. Remember that the trust will pay the reasonable costs
associated with your obtaining advice, but you could end up paying out of your
own pocket for your failure to secure advice when you needed it.