Executive summary
- A trustee has an important responsibility in managing trusts of high-net-worth individuals, ensuring that the estate is administered in conjunction with the trustor’s wishes.
- Trustees have a fiduciary duty to act in the best interests of the estate and uphold the wishes of the trust creator as they manage trust assets and distribute them to beneficiaries.
- Important responsibilities of trustees include paying taxes and fees required for the estate, resolving disputes between beneficiaries, and distributing assets to beneficiaries.
- Some of the risks of serving as a trustee include opening oneself up to personal liability, having to navigate conflicting interests, and having to make difficult decisions.
Introduction
Trusts are important estate planning tools for high-net-worth individuals, and trustees play a central role in ensuring that these estate planning tools are carried out effectively and responsibly. Trustees play an important part in administering the assets of a trust and ensuring that the wishes of a trust’s creator are put into action.
Trustees have several responsibilities throughout the administration of a trust, ranging from inventorying all of the assets in the trust to distributing these assets to beneficiaries in accordance with the terms laid out in the trust instrument. In high-value estates, trustees have the unique challenges of managing a complex and extensive asset portfolio, navigating tense family dynamics, and following a detailed trust instrument.
Understanding the risks and responsibilities of a trustee role is necessary to avoid exposure to risk or disputes, prevent losses to the trust estate, and ensure that the wishes of the trust’s creator are carried out. When a trust estate contains high-value assets and interested parties seek a piece for themselves, these risks are amplified.
Understanding the role of a trustee in high-value estates
Regardless of the size or contents of the trust, a trustee plays an important role as the individual responsible for overseeing the administration of the trust. A trustee has many responsibilities that range from managing the property of an estate to distributing the estate property to beneficiaries identified in a trust.
A trustee is appointed by the creator of a trust and is entrusted with the responsibility of managing all estate assets and distributing them to beneficiaries according to the terms laid out in the trust document. The trust creator, known as the trustor or settlor, often chooses a trustworthy, reliable individual to serve as the trustee—this may be a trusted family member, a close friend, a traditional financial institution, or even a professional individual fiduciary or trust company.
The role of a trustee comes with a fiduciary duty to act in the best interests of an estate and its beneficiaries. In high-value estates, a trustee often serves an even more important and expansive role because of the considerable value of the trust assets and high stakes for the beneficiaries. Trusts are a valuable estate planning tool for high-net-worth individuals, as they provide a way to circumvent the bulk of estate taxes and protect assets for the trust creator’s beneficiaries while preserving the value of the trust.
Trustees must be able to understand how to manage a complex portfolio of assets and property, navigate the high stakes that come with a large number of valuable assets, and work within the difficult dynamics that exist within wealthy families who may expect to preserve their legacy and pass on the generational wealth they accumulate. The trustee must be careful to responsibly manage all assets to protect their value and ensure they follow the trust instrument without the sway of personal bias or influence.
Duties of a trustee in high-value estates
A trustee has a formidable list of responsibilities for managing a trust and distributing its assets to the identified beneficiaries. Those responsibilities are informed and governed by several fiduciary duties that apply to every trust and every trustee. These overarching duties inform the trustee’s decisions and actions, emphasizing that the trustee must always act with the best interests of the trust, the intentions of its creator, and its beneficiaries in mind.
Trustees must adhere to a host of fiduciary duties while exercising their powers and carrying out their responsibilities. The duties of a trustee include:
- Exercise care over trust assets – A trustee should use diligence to collect, protect, and preserve trust property, devoting the same care as if the property were the trustee’s own property, which in high-value trusts may include selecting an appropriate level of insurance over real property, appraising jewelry or art collections, and selecting trustworthy institutions and individuals to help manage the trust assets.
- Loyally administer the trust – Trustees must always place the interests of the trust and its beneficiaries over the trustee’s personal interests and cannot take any profit from the trust, which is especially important in high-value trust estates if the trustee is prone to temptation.
- Act impartially toward multiple beneficiaries – If the trust has multiple beneficiaries, the trustee must treat each of those beneficiaries fairly, which may be difficult when beneficiaries of high-value trusts are family members who have long-standing animosity toward each other.
- Account for trust assets and transactions – Trustees must prepare accountings of trust assets, which detail the source and amount of trust income, expenditures made by the trustee, location of trust property, and other pertinent details, which can be particularly challenging in high-value trusts due to the diversity of trust assets and volume of trust transactions.
- Follow trust terms – Some high-net-worth individuals wish to set specific terms for their trust distribution process, such as waiting to distribute assets to a beneficiary until they reach a certain age or achieve a specific life milestone, and it is up to a trustee to carry this out.
- Communicate with beneficiaries – A trustee should also maintain open lines of communication with beneficiaries of high-value estates in order to ensure that beneficiaries are informed of their trust interests and updated about important developments in trust administration that affect those interests.
Responsibilities of a trustee of a high-value estate
A trustee is integral to the administration of a trust and must act in a variety of ways in order to carry out the terms of the trust while protecting it from legal issues or concerns. These actions boil down to three key responsibilities.
Navigating legal and financial obligations
A trustee is responsible for handling all of the financial matters around the trust and its property and remaining in close compliance with their legal duties as they do. While handling financial matters of the estate, trustees can remain in legal compliance by reporting to beneficiaries, maintaining records of their transactions, and upholding their fiduciary duties along the way.
The financial obligations of a trustee include:
- Paying for any bills or expenses involved with managing and maintaining property in the trust
- Paying taxes on any income generated by the trust through investments
- Selling estate property if necessary or advisible
- Prudentlymanaging stocks, bonds, and investments left by the settlor
- Collecting debts owed to the trust
- Paying out all identified beneficiaries according to trust terms
- Hiring professional appraisers, attorneys, or other professionals who can assist with managing a trust
- Hiring attorneys to bring or defend legal claims involving the trust or its assets
Trusts often serve as a tool that can reduce the value of estate taxes, so trustees may exercise their powers to reduce tax liability for the settlor or the trust beneficiaries. However, it’s always recommended that trustees seek the support of an experienced, designated tax professional to address any potential questions or concerns about how to maximize tax benefits for the estate.
Managing family disputes
Family disputes are a common issue in the estates of high-net-worth individuals because of the high stakes involved, the variety and value of potential inheritable assets, and the natural emotions that come with losing a loved one. As the point person for administering the trust estate, the trustee is the first line of defense for navigating and resolving these disputes.
Trustees should be prepared to resolve conflict through methods like mediation and negotiation. The trustee can act as a mediator to help both sides seek common ground, such as agreeing upon an inheritance amount that will satisfy both parties and comply with laws governing trust modifications. Alternatively, the trustee may wish to hire a professional mediator or conflict resolution specialist to manage the negotiation.
Other disputes may arise surrounding the validity of a trust and its provisions. For example, a beneficiary of a trust may raise a concern that a trust instrument may have been created or altered as the result of fraud or undue influence on the trustor. In these instances, the trustee should engage trust dispute counsel to investigate those claims, assess their validity, and if necessary seek judicial intervention.
Distributing trust assets
Trustees are responsible for distributing trust assets in careful compliance with the trust instrument. This process involves transferring ownership of trust property or transferring finances from a trust account to one or more of the beneficiaries with a present interest in trust distributions, as described in the trust instrument.
However, in cases of high-value estates, a trustee’s role may be even more extensive. In trusts of high-net-worth individuals, trust settlors commonly require that the distribution of trust assets follow certain terms and conditions. For example, a settlor may request that a specific beneficiary’s inheritance be held in the trust fund until they reach age 18 or that their inheritance is disbursed in installments. The settlor may also restrict the beneficiary’s use of trust distributions, for example requiring that distributions will pay for a beneficiary’s education or medical needs. Trustees must ensure that they follow the terms of the trust when making distributions to beneficiaries.
In some types of trusts, known as discretionary trusts, a high-net-worth trustor may also provide a trustee with the final word to determine when and how to distribute assets among the beneficiaries. This type of trust can grant additional protection from creditor claims and protect assets for beneficiaries who may have difficulty managing their own funds.
Ultimately, the extent of a trustee’s duties depends on the powers they are granted in the trust instrument and the authority bestowed on them by statutory and common law. In any case, a trustee is entrusted with considerable authority surrounding trust administration, and this is especially true for the trusts of high-net-worth individuals.
Risks involved in being a trustee of a high-value estate
Just like handling a valuable piece of artwork, being a trustee of a high-value estate requires care and precaution to avoid potential risks and liability. Between interested beneficiaries and the responsibility that comes with handling valuable assets, trustees can open themselves up to considerable risk if they’re not acting responsibly—the following are some of the most substantial risks faced by trustees.
Personal liability
In cases where a trustee fails to fulfill their duties, they may open themselves up to liability. For example, a trustee who mismanages trust assets or makes irresponsible investments that result in financial losses to the trust may be responsible for compensating the trust for these losses.
Typically, taking careful precautions is enough to prevent opening oneself up to potential risk and liability. Accordingly, trustees may benefit from seeking professional support to guide them in the trust administration process, such as a tax advisor, financial advisor, or trust administration attorney.
Trustees are also often protected by an exculpatory clause—such a clause states that a trustee is not responsible for a loss to an estate unless the loss was caused by an act of dishonesty, willful misconduct, or gross negligence. To protect themselves further, trustees may seek trustee liability insurance, which can help protect a trustee from fiduciary lawsuits and personal liability for any financial losses sustained by the trust during the administration process.
Navigating conflicting interests
In trusts of high-net-worth and ultra-high-net-worth individuals, conflicting interests and emotions can often impede trust administration. When the trust holds a large variety and value of assets, family members and beneficiaries often appear to claim a piece of the pie, and the trustee will find themselves in the middle of competing claims—this is especially common when the appointed trustee is a family member of the estate or is also a beneficiary.
A trustee is responsible for navigating these conflicting interests while ensuring that the trust instrument guides their decision-making. A trustee who makes decisions based on their own personal interests, especially when these decisions may contradict the terms set forth in the trust, could open themselves up to breach of fiduciary duty disputes that result in trustee removal, personal liability, and other penalties.
Challenges in decision-making
Families of high-net-worth individuals often experience considerable difficulty after a loss because of the contentious atmosphere involved in the administration of the estate. These difficult dynamics make working with wealthy families a specific challenge for trustees. Still, it’s important that a trustee acts with impartiality and transparency, even when these decisions are difficult to make.
Because a trustee must act “by the book” when making decisions and following the trust instrument, this could lead to disputes between family members and potentially tarnished relationships. Trustees must remain objective and diligently follow the terms of the trust to avoid breaching their fiduciary duties and ensure they uphold the best interests of the estate.
Take Control of Your High-Value Estate Today
Acting as the trustee of a high-value estate is a lofty role with considerable responsibility. Trustees must be able to responsibly manage the financial obligations of an estate, contend with disputes between beneficiaries, and responsibly administer the trust. A skilled trust litigation attorney can be a valuable resource for trustees in assisting them in navigating the trust administration process and disputes that may arise along the way while avoiding exposure to personal liability.
Whether you would like guidance in understanding your duties as a trustee or need support in navigating disputes between beneficiaries, our attorneys at RMO can help. With decades of experience in trust litigation and countless cases of high-value estates under our belts, we will help you develop the best strategy for your situation.
Schedule a consultation with us at RMO Lawyers to learn more about your options.
Glossary
Trustor – The creator of a trust.
Settlor – Another name for the creator of a trust.
Trustee – A trustee is a person who coordinates the administration of the trust, manages the trust’s assets and is responsible for distributing the assets to the trust’s beneficiaries.
Fiduciary duty – The legal obligation that an estate executor or administrator has to an estate and its beneficiaries to act in their best interests.
Exculpatory clause – A contractual clause that may be included in a trust instrument to safeguard a trustee against personal liability for losses to the estate as long as they were acting responsibly and in accordance with their fiduciary duties.