Because of the numerous and varied estate planning goals a trust can help achieve, it is very common to see at least one trust agreement in the average estate plan. One thing that all trusts have in common is the need for a Trustee to administer the trust. The Trustee is appointed by the Settlor (the creator of the trust) at the time the trust is established. If you have been appointed the Trustee of a trust, and have never before served as a Trustee, you will soon find that a Trustee has a wide range of duties and responsibilities. The Waukegan trust administration attorneys at Hedeker Law, Ltd., warn first-time Trustees about common pitfalls that can have serious consequences, both for the trust and potentially for the Trustee personally.
Trusts and the Trustee
A trust is a relationship, created by executing a trust agreement, whereby property is held by one party for the benefit of another. A trust is created by a Settlor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. A testamentary trust is one that activates upon the death of the Settlor via a provision in the Settlor’s Last Will and Testament in most cases. A living trust activates as soon as all formalities of creation are in place. The overall job of a Trustee in any trust is to protect, manage and invest the trust assets and to administer the trust using the trust terms created by the Settlor.
Pitfalls a Trustee Must Avoid
Given the numerous duties and responsibilities of a Trustee, there are a seemingly unlimited number of opportunities to make a mistake during the administration of the trust. Some of the most common of those, however, include the following:
- Failing to understand the trust terms. The first thing any Trustee should do is to read through the entire trust agreement several times with a trust administration attorney to make sure that meaning and intent of each and every terms is clear. Ignorance is not an acceptable excuse if you make a mistake as Trustee. Moreover, under some circumstances a Trustee can be held personally liable for a mistake made during the administration of a trust, making it even more important that you have a very clear understanding of the trust terms.
- Violating your fiduciary duty. A Trustee has a fiduciary duty to the beneficiaries of the trust. This means you must make all decisions with the best interest of those beneficiaries in mind. When you invest assets owned by a trust, you must do so using the “prudent investor standard” which essentially means you must avoid risk, guard the trust principal, and be more careful with the assets and income than you would be with your own assets and income.
- Failing to consider future beneficiaries. If the trust has both current and future beneficiaries, all decisions you make must consider the best interest of both classes of beneficiaries. Specifically, you cannot take action that will deplete the trust assets so that only current beneficiaries benefit from the trust.
- Failing to honor the trust purpose. It is very difficult to set aside your own opinions; however, as the Trustee, everything you do must further the Settlor’s intended purpose and must abide by the trust terms unless a term is illegal or unconscionable.
- Failing to avoid a conflict of interest. If the Settlor was a family member or friend, there is a good chance you know at least one beneficiary. This can create a conflict of interest if you allow it. Make sure that any personal relationship you have with a beneficiary does not in any way interfere with your duties as Trustee. You also must make sure that any business dealings you have personally do not create a conflict.
- Failing to seek professional help. Administering a trust requires both legal knowledge and financial acumen. If you lack either – or both – you are expected to consult with an expert, such as a trust administration attorney and/or a financial advisor.
- Failing to pay taxes and accounting errors. A trust must file a trust tax return each year because it is a separate entity and any taxes due must be paid. Detailed records of trust business must also be kept by the Trustee and an accounting provided to beneficiaries.
Contact Waukegan Trust Administration Attorney
Please download our FREE estate planning worksheet. If you have questions or concerns regarding trust administration in the State of Illinois, contact the experienced trust administration lawyers at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.