Trust planning raises many questions. Three major questions that arise with trust planning are: 1) Who named in the trust gets what assets? 2) How do you minimize taxes? And 3) Once a trust is established, who is in control?
It is easy for individuals to mismanage a trust, especially when the trust does not appoint a professional or corporate trustee. Below are some tips on how to properly manage a trust.
Keep adequate records. Most states require trustees to provide regular accountings to the beneficiaries. In some states this includes not only the current beneficiaries, but also the remainder beneficiaries. Remainder beneficiaries are the beneficiaries who will receive a distribution when the trust is terminated. Keeping adequate records means keeping comprehensive records of income, assets and distributions. A practical tip is to assemble a reliable professional team with a money manager, an estate planning attorney and a tax accountant.
Diversify the Assets. Trustees may be tempted to sit on a big chunk of stock that has served the trust well over the years. This is not a good idea. A trustee has a legal duty to thoroughly diversify investments. Investment management is the area that probably leads to the most litigation against trustees.
Unbiased Distributions. Some trustees may favor distributions to certain beneficiaries. However, trustees owe a fiduciary duty to the current and remainder beneficiaries. The problem that many individual trustees do not realize is that they have a duty to both current and remainder beneficiaries, and sometimes their interests are in conflict. There needs to be some consideration for current income needs, but also for capital appreciation. If a trustee is a family member, it is hard not to bring personal bias into the relationship. A practical tip is once you have made a distribution decision, set out in writing the reasons for making or denying the distribution. Include supporting documentation so you can show you gave due consideration to all the facts and circumstances.
Although a trustee may be honored when asked to be a trustee, he or she needs to keep in mind that they are taking on a series of legal risks. Trustees could be held liable not just for investment losses, but also for profits that could have resulted from more prudent investing. Trustees often feel their personal relationship with the family will keep them from being sued. However, in the long run the exposure will not be to the person who named you trustee; it will be to the individuals named as beneficiaries. Remember to ask the professionals if you have a question on how to properly manage a trust.