While using a living trust can help your loved ones avoid the nasty business of probate proceedings, trust administration is not without its obstacles and it’s usually up to the named Trustee to make sure to sidestep those obstacles. Just like when naming an Executor for a Will, it’s critical to name someone as your Successor Trustee who is financially responsible, detail oriented, a people person, and reliable. Here are some of the most common pitfalls that can be encountered during the administration of a trust estate and some tips on how to avoid them:
Pitfall No. 1: Misunderstanding and/or Miscommunication
It’s not uncommon for a Trustee to misunderstand their role and duties, as well as to fail to communicate properly with beneficiaries and other relevant parties. While misunderstanding can be easily resolved by associated legal counsel and/or the assistance of a financial advisor, miscommunication can be more detrimental. Beneficiaries, not surprisingly, are going to be concerned about the welfare of the assets that are set to inherit, so transparency between the Trustee and the beneficiaries will make for smooth sailing during the entirety of the administration process.
Trustees should, ideally, familiarize themselves with all relevant estate planning documents (not just the actual trust) before the Grantor(s) even pass away. That way, if they have any clarifying questions, they can get firm and accurate answers prior to their being any issues. Additionally, trustees should maintain open and constant communication with any professionals assisting in the administration process, with beneficiaries and with any co-trustees.
Pitfall No. 2: Not Following Legal and/or Fiduciary Duties
It should go without saying that if you’re operating without all the information and if you’re not being as openly communicative as you need to be, you’re likely going to run afoul of the law and/or your fiduciary duties, so following the advice in the above section will help you avoid any snares here. Trustees are legally and ethically obligated to act in the best interests of the beneficiaries and to comply with all applicable laws and regulations. Failure to do so can be costly in the way of time and money.
First, trustees should be very conscientious when it comes to the mismanagement of trust funds. Engaging in risky investments, paying oneself, mingling monies and/or failing to keep good records can jeopardize the trust’s financial stability.
Second, trustees need to prioritize the beneficiaries’ interest over their own, which means strictly avoiding any self-dealing or showing signs of favoritisms.
Third, trustees must comply with all legal obligations, such as filing tax returns on behalf of the estate, distributing assets within any specified timeframes, etc. If unsure about any one of these things, the trustee should seek the advice of a professional as soon as possible.
Pitfall No. 3: Failing to Keep Good Records and Accounting
As we’ve already mentioned in previous sections, part of being a good trustee and ensuring a smooth administration process is the keeping of good records. This includes recording income, expenses, distributions, and communications with beneficiaries and other relevant parties. Regularly reconciling bank accounts and maintaining originals and copies of important documents is a great way to stay on top of things.
Neglecting Regular Reviews and Updates
While many trusts are designed to make immediate distributions and end swiftly, many others are designed to extend the time in which distributions are to be made to beneficiaries. Bearing this in mind, trustees should understand that they may be undertaking this responsibility for years to come and neglecting to review and update the trust periodically can lead to problems.
Additionally, trustees who are going to be engaged in trust administration for years following the death of the grantor should stay in good and steady communication with the trust beneficiaries as they may move, circumstances regarding their distribution needs may change, etc.
For more information on trusts, trust administration, and/or trustee duties, call our office today to schedule an appointment with one of our licensed attorneys. (251) 621-1555