It’s easy for trustees to make mistakes. Use this simple guide to avoid the common pitfalls.
Trust administration often comes down to a few questions: Who gets what? Are there taxes and if so, how do you minimize taxes? Who controls the trust? It is easy for a family to confuse any one of the three, especially if you don’t have a professional trustee. Here are the five most common mistakes and tips on how to avoid them.
Faulty Records – Some trusts require trustees to provide regular accountings to the beneficiaries, not only the income beneficiaries, but also the family members who will receive the principal once the trust has been dissolved in the future. This requires keeping comprehensive records of income, assets and distributions. This is the most troubling task for individual trustees. The price of failure could be a big lawsuit later on by a beneficiary or remainderman.
Tip: Consider using the services of a financial planner, a trust lawyer and tax accountant.
Failure to Diversify – Trustees may be tempted to sit on a big chunk of a stock that has served the trust well over the years. That’s especially true if the shares are in a large corporation. Bad idea. As a trustee, you have a legal duty to thoroughly diversify investments. A concentrated investment portfolio is at risk to challenge if its value declines significantly.
Investment management is the area that probably leads to the most litigation against trustees. A good rule of thumb is that any position more than 10% of a portfolio is too big. For some positions, you might want to stay even lower.
The New Jersey Uniform Prudent Investor Act governs this area of trustees’ work. If you aren’t sufficiently diversified, tell the investment manager to get cracking.
Biased Distributions – Trustees owe a fiduciary duty to the current and future beneficiaries. The problem is that many individual trustees don’t realize that there is a duty to both, and sometimes their interest’s conflict. So when Trophy Wife Two needs more money, investing in higher yielding securities may generate more income, but does it fairly and reasonably weigh the long-term needs of the kids from the first marriage who are the remaindermen. More often than not, there needs to be some consideration for current-income needs, but also for capital appreciation.
Knowingly or not, trustees also may favor distributions to certain beneficiaries. If the trustee is a family member, it is hard not to bring personal bias into the relationship. As a trustee, your job is to act impartially and put aside those biases.
Once you have made a distribution decision, set out in writing the reasons for making or denying it, and include supporting documentation so you can show you gave due consideration to all the facts and circumstances.
Expecting a Payday – Individual trustees tend to assume that they are going to get paid a trustee fee within a reasonable time frame and at a reasonable rate. It can take time and effort to get paid if for no other reason, than the law gives beneficiaries the right to voice objections. Since the payments can reduce the money available to beneficiaries, they may even start litigation.
Tip: Have the fee agreement early on and settle on appropriate payments. Fees for individual trustees, when paid, often run about 1% of assets for small trusts and as low as 0.15% for big ones.
For more information on New Jersey Trust Administration, please contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or email him at firstname.lastname@example.org/
By: Fredrick P. Niemann, Esq., a New Jersey Trust Lawyer