TRUSTEE OF A TRUST
The trustee is the guy who manages your trust assets. Great care should be taken in your selection of your trustee. The trustee is bound by the trust document (i.e. contract) and he has a duty to protect trust assets for the beneficiaries. The independent trustee manages, holds legal title to trust assets and exercises independent control.
The trustee can be your lawyer (worst person you would ever want to trust), your accountant, best friend, or anyone you trust who’s not a relative by blood or marriage. You may have more than one trustee. I usually recommend two trustees in all cases of $500,000 or more.
ACCOUNTABILITY OF TRUSTEE
The law imposes strict obligations and rules on trustees including a duty to account for any benefits the trustee may have gained directly or indirectly from a trust. This goes beyond fraudulent abuse of position by a trustee.
There is a basic rule that a trustee may not derive any advantage directly or indirectly from a trust unless expressly permitted by the trust; for example, where he is a professional trustee and the trust provides specifically for a right to make reasonable charges for services. However, full disclosure of the basis and amount of charges is required.
TRUSTEE OF AN IRREVOCABLE TRUST
The trustee of an "irrevocable trust" has sole discretion over trust assets. Your selection of your trustee must be a carefully planned decision. The significant item to remember is that an "irrevocable trust" gets the assets completely out of your (the grantor’s) name and in return you get:
- Complete asset protection
- Elimination of probate
- Elimination of estate or inheritance taxes
- In certain cases a tax deduction for the assets contributed to the trust
- And finally, under certain conditions other uncommon tax benefits not otherwise available
Examples of Irrevocable Trusts are:
- Ultra Trust®
- Medallion Trust®
- Vertex Trust®
- Charitable Remainder Trust
- Charitable Lead Trust
DUTY OF TRUSTEE IS TO OBEY TRUST DOCUMENT FOR BENEFIT OF BENEFICIARIES
The most important rule relating to the duties of a trustee is that requiring them to obey the directions in the trust deed both with regard to the interests of the beneficiaries (i.e. who is entitled to what) and with regard to the administration of the trust (managing the trust property). Trustees are also subject to very strict standards as to the way in which their powers and discretions may be exercised.
FIDUCIARY RELATIONSHIP OF TRUSTEE
The courts regard a trust as creating a special relationship which places serious and onerous obligations on the trustees. Thus the law regards the special "fiduciary relationship" of a trust as imposing stringent duties and liabilities on the person in whom confidence is placed - the trustees - in order to prevent possible abuse of that confidence. A trustee is therefore subject to the following rules:
1. No private advantage -
A trustee is not permitted to use or deal with trust property for private direct or indirect advantage. If necessary the court will hold him personally liable to account for any profits made in breach of this obligation.
2. Best interests of beneficiaries -
Trustees must exercise all their powers in the best interests of the beneficiaries of the trust.
3. Act prudently -
Whether or not a trustee is remunerated he must act prudently in the management of trust property and will be liable for breach of trust if, by failing to exercise proper care, the trust fund suffers loss.
In the case of a professional the standard of care which the law imposes is higher. Failure to exercise the requisite level of care will constitute a breach of trust for which the trustee will be liable to compensate the beneficiaries. This duty can extend to supervising the activities of a company in which the trustees hold a controlling interest.
TRUST PROTECTOR
In cases of substantial assets, you may add one other safety measure, "the trust protector." The trust protector’s sole function is to hire and fire trustees, at will and without explanation.
Rocco Beatrice, CPA, MST, MBA, Award-winning trust & estate-planning expert. 71 Commercial Street #150 Boston, MA 02109 toll-free: 888-938-5872
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