A primer for the care of your trust
In most jurisdictions, lawyers rarely, if ever, serve as trustees
of the trusts established by their clients. The fiduciary
obligations of a trustee are broad, and it often makes good sense
to designate a bank or responsible family member to serve as
trustee. Since at least the late 19th century, however, many
clients in Boston and throughout New England have asked their
estate planning lawyers, who know their legal and financial affairs
best, to serve as trustees. Over the years, those responsibilities
have helped sustain the practices of lawyers in small and large
firms alike, many of them with established trust departments. Now,
as the legal profession evolves and lawyers develop new skills,
more practitioners are considering taking on active trusteeships.
This article provides a brief overview of some of the more
significant obligations of a trustee of a private trust, including
making distributions, asset custody and investment management,
record keeping, and legal and tax compliance.
Duties and Distributions
The duties and powers of a trustee are defined by relevant state
and federal law, and by the terms, both expressed and implied, of
the governing trust instrument. The trustee's core obligation is to
administer the trust for the benefit of the beneficiaries in
accordance with the settlor's intent. The trust instrument provides
the "rules of the road" with respect to how it should be
administered, including identifying beneficiaries, establishing
distribution standards, and outlining both reporting obligations
and the scope of permissible investments. Generally, if the trust
instrument contemplates a particular action, it may be undertaken
if the trustee determines it is in the best interest of the
beneficiaries and does not violate public policy.
In addition to the terms of the trust, the parameters of a
trustee's powers are defined by a large body of trust and tax law.
Any potential trustee should familiarize herself with the
Massachusetts Uniform Trust Code (MUTC), which provides the
framework and "default rules" within which Massachusetts trusts
should be administered. See Mass. Gen. L. ch. 203E (2012).
The MUTC also outlines avenues to the court, if and when judicial
intervention is appropriate, and it establishes certain duties that
cannot be avoided. These duties include, but are not limited to:
(1) duties of skill, care, and loyalty (see id. at §§ 802,
804, 806)); (2) duty to furnish information to, and communicate
with, beneficiaries (id. at § 813); (3) duty to avoid
conflicts of interest (id. at § 802); (4) duty to
segregate property (id. at § 810); (5) duty of
impartiality regarding current and future beneficiaries
(id. at § 803); and (6) duty to enforce and defend claims
of the trust (id. at § 811).
In addition to the MUTC, a trustee must understand the
Massachusetts Prudent Investor Act (MPIA), G.L.c. 203C, which
addresses fiduciary investment authority as it concerns the
investment performance of the trust portfolio as a whole. Broadly
stated, the MPIA permits a trustee to invest assets under the
"modern investment portfolio," or "total return" theories, an
important evolution from prior standards. Equally important is the
Massachusetts Principal and Income Act, G.L.c. 203D, which
establishes, in part, duties relating to determining appropriate
distributions of trust property to current beneficiaries. A
successful trustee understands the importance, and interrelation,
of both the MPIA and Principal and Income Act and takes them into
consideration when setting investment policies and making
distribution decisions. Massachusetts case law also provides a rich
source of trust law principles (a discussion beyond the scope of
this article).
Once familiar with the trust document and relevant laws, and upon
acceptance of the trusteeship, the real work of administration
begins. First, and perhaps foremost, a trustee makes distributions
to current beneficiaries while still preserving trust principal for
future beneficiaries. When making distributions, a trustee must
respect the express provisions of the trust, which range from an
"ascertainable standard" to broad discretion. Whatever the case may
be, a trustee making distributions should keep in mind the current
and future financial needs of current beneficiaries, while
remembering the interests of future beneficiaries (involving the
duty of impartiality).
Asset Custody and Investment Management
Ensuring that trust property is preserved for current and future
beneficiaries is a key fiduciary responsibility. Avoidable loss in
asset value may be the most significant liability risk faced by a
trustee. Assets must be invested in a "prudent" manner, so a
cautious trustee will develop a written trust investment policy and
will review that policy at least every year. While a trustee should
not ignore the essential responsibility to determine the basic
asset allocation targets of a trust (i.e., between equity and fixed
income investments), both the MUTC and the MPIA permit trustees to
"delegate" investment responsibilities to other professionals to
make investment decisions. See G.L.c. 203E, § 807; G.L.c.
203C, § 10. If an investment advisor is selected and monitored with
care, delegation of these tasks can greatly reduce the trustee's
personal risk for liabilities associated with losses. Id.
Importantly, a lawyer should not provide specific investment advice
(or advertise investment services) unless she is a Registered
Investment Advisor under applicable federal and state securities
laws. E.g., G.L.c. 110A, § 201.
Record Keeping and Communications
A trustee must maintain complete and accurate records and make
them available for review by "qualified beneficiaries" (as defined
in the MUTC) and government agencies. This includes general record
keeping (written records pertaining to the financial assets of the
trust) and records of trustee actions (meeting minutes, letters,
and memos relating to trust management). With adequate record
keeping, a trustee will be positioned to fulfill her responsibility
of accounting (i.e., providing annual financial reports concerning
trust income and principal) to all interested persons. See
G.L.c. 203E, § 813. A modern trustee should provide regular and
complete reports to beneficiaries, since failure to communicate
adequately may be a violation of duties contained in the trust
instrument (and the MUTC) and may result in feelings of mistrust,
even if unwarranted. Id.
Tax Considerations
A trustee must also ensure compliance with tax reporting and
payment obligations. In general, every irrevocable trust is a
"taxpayer," requiring trustees to file annual federal and state
income tax returns. See Federal Form 1041; Massachusetts
Form 2. The trustee may also be responsible for the payment of
federal and state income taxes. Applicable income tax rules are
complicated and differ in important respects from the rules that
apply to individuals, so a cautious trustee will consult regularly
with his or her tax professional, preferably before the trust is
funded. A trustee must also always understand, and plan for, the
gift, estate and generation skipping transfer tax consequences of
particular trusts.
As this article, which provides only a glimpse into trustee
obligations, demonstrates, serving as a trustee is an area in which
a lawyer should not practice without sufficient research, support
and preparation. Most trusts are established for families, and all
families, at some point, struggle with internal conflict. A trustee
who puts her fiduciary obligations first may not always be popular
with all beneficiaries, but she will fulfill the role expected of
her under the trust and applicable law. Serving as a trustee is a
long-term commitment. With the right lawyer in place, trust
settlors and beneficiaries will have someone objectively dealing
with difficult family scenarios, addressing complex legal and tax
issues, supervising investments wisely, and handling record keeping
for many years to come. It's tricky work, but nothing we can't be
entrusted to do.