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Being Trustee Carries Large Liability Level

Question: I have always been close to my uncle and aunt who had no children of their own. Now, as they approach their eighties, they have asked me to become involved in their estate planning. Much to my surprise, these quiet, modest people have assets of more than $3 million, and they have decided to benefit, in different percentages, their 16 nieces and nephews, 12 grandnieces and nephews, and some favorite charities when the last of them dies. They asked that I be both their trustee and the personal representative of their estates. Although I am flattered, I am concerned about the time commitment (I am a physician), the risk of dealing with so many people (many of whom I do not know well), and the length of the commitment (some of the grandnieces are babies). Yet, I don’t want to turn them down. I would like your insight.

Answer: We agree with your concerns. Trustees are fiduciaries who have a duty to act in the best interests of beneficiaries, and today, lawsuits are waiting to happen because the duties and responsibilities of fiduciaries are often poorly understood by both trustees and beneficiaries who, as here, will receive windfall benefits from unexpected sources.

People who establish trusts are called “settlors”. Trusts own and control property under terms established by the settlers. Once property is placed in the trust, the trustee holds legal title for the benefit of the beneficiaries who have equitable interests in that property. In other words, the trust divides property ownership between the trustee -- who has the responsibility to properly administer and distribute the trust property – and the beneficiaries – who receive the benefits, all according to the settlor’s directions. Each trust should specifically state its purpose, the identity and share of each beneficiary, the specific property to be placed in the trust, the duties of the trustee, and the identity of the trustee.

Since a "trust" creates a “fiduciary relationship” between the trustee and each beneficiary, the trustee immediately incurs the risk of potential liability to each beneficiary. One of the greatest risks today is the trustee’s responsibility to invest trust property prudently. This means that the trustee has the duty to 1) diversify the investments appropriately, 2) invest at a suitable risk level, 3) avoid unnecessary expenses, 4) seek professional advice when necessary from appropriate advisors, and 5) monitor the trust activity. Should the investments not perform, the trustee can be sued. The standard, we are afraid, is somewhat hazy as hindsight is always 20-20. This means that if a beneficiary does not believe the trustee is fulfilling his or her duties, the beneficiary can go to court to try to remove the trustee and sue him or her for damages.

Taking the NextStep: Although your aunt and uncle can include language that overrides some of these nebulous duties, we believe that, in this situation, the potential liability to 28 people over a long period of time is too great, the pay is too little, and life is too short to be involved as a trustee. We suggest that your aunt and uncle secure professional trust services.

Question: My wife and I have no close family. When we went to our lawyer to prepare our powers of attorney and wills, he offered to act as our agent and as executor of our estates. Is this OK?

Answer: Although we are not fans of lawyers acting in these capacities for clients, so long as you, your wife, and your lawyer are aware of the potential conflicts of interest that arise, whom you choose to act as fiduciary is up to you.

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