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Your role as a trustee: honor… or nightmare?

Investment decisions—even good investments—are subject to criticism.

For most families in the United States, a trustee is a family member called upon during a tumultuous time to handle challenging accounting, financial and other managerial responsibilities. Those responsibilities mean that the “honor” of being named a trustee carries with it a lot of risk—much of it unintended.

The brothers, for example, who always fought over that last piece of cake when they were kids can, and likely will, take things to the next level when it comes time for trust distribution. Here are just a couple of examples from our client files, with names removed to protect the squabblers:

In her role as a trustee for the trust created by her late husband to benefit her and his daughters, one woman we know was conservative in her selection of securities: They had not only held their value, but also yielded very good dividends, producing income for the trust and its income beneficiaries. The residual beneficiaries (the trustee’s stepdaughters) nonetheless complained. They alleged that the trustee had invested for income, benefitting the then-current income beneficiary (herself), when she should have invested for growth or appreciation, to benefit them. The trustee is now defending a $12 million claim, at her own expense, against the claims of her stepdaughters.

Managing a trust that held a great deal of commercial real estate which generated high income and appreciation, even in a difficult market, a trustee was sued by a beneficiary who asserted objections to the trustee’s accounting. The beneficiary contended, for example, that the bookkeeping summaries were too hard to understand and not in accord with Generally Accepted Accounting Principles (GAAP), and hired an expert to support his request for $4 million in damages. Ultimately, all of the claims were denied by the court, but not before the trustee incurred $315,000 in defense costs. The beneficiary now asserts that the trustee should pay these fees from his pocket.

These are not uncommon situations for a trustee to face. A trustee is tasked with making decisions in the best interest of the beneficiaries, in accordance with the trust and in compliance with the law. However, few named trustees possess the experience and sophistication required to adequately perform the role, even if he or she has the best of intentions. The range of trustee responsibilities may include:

  • Safeguarding and distribution of assets
  • Keeping precise records and providing full accounting to beneficiaries
  • Managing investments and liquidity needs
  • Paying expenses, as well as filing and paying taxes
  • Maintaining and selling real estate
  • Overseeing business interests
  • Gathering and preserving artwork, jewelry and other collectibles
  • Resolving beneficiary disputes
  • Communicating with CPAs, attorneys, insurance agents and other professionals

Given the range of responsibilities and possible exposures, trustee liability insurance can often be the best approach to mitigating trustee risk. Purchased by many professional fiduciaries, this type of insurance is also available to the nonprofessional trustee—the family member who was named by Mom and Dad, and who may also qualify for coverage and should definitely be considered for situations when the trustee is also a beneficiary of the trust. Properly drafted into the trustee agreement, payment for trustee liability premium may be made by the trust.

Determining adequate coverage limits for the policy will depend largely upon the size and complexity of the trust, as well as the trustee’s individual needs, but limits of $10 million or more may be available. A policy should always include coverage for unintentional misappropriation or misallocation of trust funds. For high-profile and/or complex trusts, that could result in expensive litigation, so options for covering defense costs outside the policy limits should also be considered.

Given the potential complexities and high emotions, it’s wise to invest some time with your insurance advisor to assess your unique needs as they pertain to your trustee role and to ensure that the liability coverage will meet whatever challenge you may face.

Trust & Estate Planning

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