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September 19, 2013 Newsletter Archive

Basic Fiduciary Tips: What Every Lay Trustee Should Know, Part 2

In June we spoke about the very basics of Fiduciary Duties. After a mid-summer hiatus, we are back and we delve a little deeper into some of the essential duties of a fiduciary such as a duty of loyalty, basic accounting functions, investment issues and tax concerns.

Essential Duties

You should follow a standard of conduct under which you handle trust property the way a prudent person would take care of the property of another.

You have a duty to carry out the trust's terms. If you ever have a doubt about the meaning of a provision you may petition the court for instruction.

You also have a duty of loyalty. You must always act to further the interests of the trust and its beneficiaries.

When you accept your role as trustee you also accept all of the attendant responsibilities. Although, depending on the trust, you may not delegate your specific trustee duties to another, you do not have to complete all administrative functions alone. You may hire qualified individuals to help you with specific tasks. For example, you may hire a property manager to collect rents and provide daily oversight to real property.

If you serve as a co-trustee, in some cases you may relinquish your role to others, but you must continue to be involved in the trust administration and be watchful for the actions of other trustees. That does not mean that you presume wrong doing, but that each of you are fully participating in your roles, unless there is a specific provision in which a trustee is allowed to delegate his or her duties to another trustee.

Generally, the trust will distribute for the benefit of family members, although often there are gifts to friends and non-profits. A trustee will most likely be obligated to pay the trust's debts and taxes prior to making distributions.

Additionally, in Vermont and New Hampshire, a trustee must provide to qualified beneficiaries a report at least once a year describing the trust's assets, liabilities, income and expenses. Qualified beneficiaries are entitled to be kept reasonably informed about their interest in the trust. If you are a trustee of a trust with multiple qualified beneficiaries you only have to report to each beneficiary on his or her beneficiary interest. It is essential to keep accurate records of the trust's expenses and revenues. It may be most helpful to engage a certified public accountant or even a bookkeeper to assist you in this type of bookkeeping. Like you would in your own check register, you should notate the date of disbursements or receipts, the amount and the explanation for each.

An annual accounting should include at the very minimum:

While a trustee may be able to take compensation (the trust will dictate the terms of such compensation) often trustees who are family members and therefore most likely beneficiaries forego compensation because the trustee must report these payments as income to the IRS.

Another important aspect of being trustee is ensuring that you keep trust assets segregated from your own personal assets. You also have a duty to protect trust assets. In any event, trust property must be insured whenever practicable.

Even the perception of doing something improper can be problematic for a trustee. The idea is that you take measures that put you beyond reproach of being seen as having the appearance of impropriety in the event that there is a contest over the trust.


A trustee has a duty to invest trust assets appropriately and you will need to take an even more cautious approach than investing in your own funds. Vermont and New Hampshire both have adopted versions of the uniform prudent investor act (UPIA) (14 VSA §3321 et. seq. and NHRSA 5564-c: 1-101 et. seq.). Some trusts may qualify investment matters within the document itself. For example, you may be allowed to maintain unproductive assets, particularly if there is family heirloom real estate involved. You also may not be required to diversify assets. However, where a trust instrument is silent, the UPIA will control. Clearly many individual trustees are not investment wizzes. Accordingly, the most prudent action in many cases is for the trustee to assign investment and financial management duties of the trust to others. This does not mean you no longer have duties to report and account. You will also want to continue to take an active role, working together with the investment advisor that you have engaged to ensure that you are both working in the trust's best interest.

Income Taxes

Revocable trusts generally are not required to file income tax returns. Their tax identification is the same as the grantor's during the grantor's lifetime. However, after the grantor of a revocable trust dies, or for other kinds of trusts, generally, a trust taxpayer identification number is required and generally these trusts will be required to file fiduciary income tax returns. Tax returns will also have to be filed in the states in which the trusts derive income. We recommend seeking professional assistance about filing a trust tax return.

Interim Distributions

A trustee must pay attention to the distribution provisions, whether the trustee has discretion over the distribution to beneficiaries or whether these are mandatory benefits. This is certainly of great interest to the beneficiary of the trust, but not all distributions are equal. With discretionary spending it is often a challenge for the trustee to know exactly what an appropriate expenditure is and what may later be challenged by other beneficiaries. If a court finds that you abused your discretion you may be held personally liable. The language in the trust instrument is always the first guide, but if a trustee really struggles he or she may petition the court for instructions. The bottom line is you cannot anticipate every scenario that comes up but if you are really challenged by beneficiary requests or how to make trust distributions, consulting legal counsel is recommended.

Additional Considerations

Other issues that trustees face include producing a final distribution and accounting if you are administering a trust that terminates; how to take title to trust assets; and how to avoid potential liabilities. All in all, trust administration is fraught with peril and is not a job to take lightly.

Overall you will want to understand why the grantor created the trust. Knowing the grantor's intent can go a long way to help you understand how to administer the trust keeping the grantor's wishes in mind. You also have to be mindful of keeping any particular emotions you have about beneficiaries at bay. These should not come into play even if you are also a trust beneficiary. Keep careful records including the information you will need to create your annual report, documents and notes about beneficiary meetings and communications with legal and financial advisors, your own out-of-pocket expenses, information which may help you exercise or support your discretionary distributions. You will want to have copies of the grantor's past tax returns which may help you see patterns of distributions and may also want to help beneficiaries create annual budgets to help identify their needs.

Finally, the information in these articles is meant to be a very cursory survey into a trustee's general role and not a substitute for legal counsel. Seeking advice from an attorney and other professional advisors may have some initial costs but in the long run may save you much grief, time and money. Additionally, you do not have to seek legal or financial or accounting advice from the grantor's professionals. You are free to select your own professional advisors with whom you feel comfortable.

If you have any question about serving as a trustee call us at
(603) 643-6072 or (802) 457-9492

This newsletter is made available by the lawyer or law firm publisher for educational purposes only, to give you general information and a general understanding of the law, but not to provide specific legal advice. No representation is made about the accuracy of the information. Discussed topics may or may not be updated subsequent to their initial posting for changes in applicable laws. Please note that information in this newsletter may change from time to time. In reading this newsletter you understand that this information is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice. This site should not be used as a substitute for competent legal advice from a licensed attorney in your state.

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Melendy Moritz PLLC is a client centered boutique firm. We focus on your unique needs by providing the individualized legal counseling and advising tailored to your specific situation.

We concentrate on the planning that matters to you.
Call us at 603.643.6072 or 802.457.9492


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