Serving as a trustee is not to be taken lightly. This is because in the context of trusts and estates, a fiduciary relationship exists between the trustee (a/k/a fiduciary) who holds and keeps a property interest for the benefit of one or more other people (a/k/a the beneficiaries). A fiduciary relationship has both legal and ethical components, and it is generally present whenever one person is responsible for ensuring the well-being of another, whether that means with legal issues (attorney-client), health issues (doctor-patient), or, as discussed below, financial issues.
Fiduciaries are entrusted with enormous power, and with that power comes enormous responsibility. One of those responsibilities is upholding fiduciary duties, which are among the highest duties in the law. This article explores some basic tips for fiduciaries to help avoid problems that may come with the territory.
1. Don’t ignore the problem – fix it!
As a general rule, a successor fiduciary is not liable for a predecessor’s wrongdoing. Indeed, fiduciaries are often too busy discharging their own duties to worry about whether a predecessor adequately discharged theirs.
Even though a successor trustee is not liable for a predecessor’s breach, the successor may be liable for his own breach in failing to redress the breaches of the predecessor. In other words, if X is the first trustee and breaches his duties, then Y becomes the trustee, Y is not liable for X’s breaches; but Y may be liable if she discovers X’s breaches and neglects to take the proper steps to redress them.
In short, if you discover malfeasance, don’t simply resolve to fix it tomorrow; it is imperative that you address the problem immediately.
2. When retaining outside counsel, clearly identify the attorney-client relationship.
In the event that lawyers are called in to settle a dispute, it is important that the trust counsel’s relationship to the parties be clearly defined. Although most states’ laws hold that the attorney-client relationship flows between the trust counsel and the trustee, some states hold that the relationship actually exists between the trust counsel and the beneficiaries. In that scenario, any communications between the trustee and the lawyers would not be subject to privilege. The best practice, therefore, is to carefully tailor a retention letter defining the relationship between the trust counsel and the trustee.
3. Scrupulously avoid conflicts of interest and even the appearance of impropriety
The duty of loyalty may be the most important duty of a fiduciary. It’s largely self-explanatory: the trustee must be loyal to the beneficiaries. This means the trustee must keep the beneficiaries informed of all material developments with respect to the trust property. The trustee must be selfless and must not attempt to personally gain in any way from the trust, apart from the reasonable compensation they earn for their management of the trust property.
If a situation was to arise where the trustee was conflicted, the trustee would have to err on the side of the beneficiaries’ interests in order not to breach the duty of loyalty. But even that situation is unenviable. It is far easier for the trustee to simply avoid having any financial interest—or even the appearance of a financial interest—in the trust.
4. Read the agreement and understand your obligations
The trust agreement is like a roadmap and should be both read and understood. It will set out the fiduciary’s duties—perhaps most importantly, reporting requirements to the beneficiaries—and the fiduciary must understand and comply with those duties. Failure to do so can have serious consequences. For example, legal claims brought by disgruntled beneficiaries against the fiduciary often stem from technicalities like reporting errors. In other words, keep the beneficiaries timely informed and abide by the terms of the trust agreement.
5. Record decisions at the time they are made
Document, document, document; err on the side of over-documenting. When the fiduciary must make a decision of consequence for the trust—for example, the decision to sell a particular piece of property at a particular time— the fiduciary should, throughout the decision-making process, write down the actions taken and the reasons why.
Later on down the road, beneficiaries may bring legal claims that second-guess decisions made by the fiduciary, and those decisions will be scrutinized in court. It is, therefore, very important to have a contemporaneous account explaining why you did what you did at the time that you did it. Include all information relevant to your decision.