Living Trusts have been the estate planning technique of choice for the moderate sized estate plan for many years. However, as trusts have gained in popularity, laws have evolved to provide increased protection to owners and their heirs. Accordingly, responsibilities of trustees have become increasingly complicated. Similarly, due in part to turbulent financial markets, trustees have become subject to a much greater risk of personal liability for failure to understand and document their responsibilities. In fact, trust litigation has evolved over the last decade into a significant area of potential liability for the unwary trustee.
Typically the grantor/owner is the initial trustee, with a spouse, family member or professional fiduciary, such as bank or brokerage trust company, as the successor trustee. Typically individuals named as trustees have relatively limited experience in investment management, estate and income tax planning, trustee responsibilities and principal and income accounting. To complicate matters further, trustees must be aware of their ongoing responsibilities under the continually changing Florida trust laws and the IRS tax code and regulations. In fact, the Florida Legislature recently included a special requirement that new trust documents include a reminder to trustees that they are assuming a role with “special duties and responsibilities and that they may wish to consult with an attorney if they have any questions regarding that role”.
Duty to Account
Florida law requires trustees to maintain accurate records of all trust related activity and to account to all trust beneficiaries. Trustees are required to account for principal and income transactions in a format that typically cannot be met by simply placing assets in an investment account and sending out statements to beneficiaries. Furthermore, discretionary activity, such as the use of principal assets to meet a beneficiary’s needs for support or health care, must be fully disclosed in the accountings. In fact, many trustees neglect their duty to account altogether.
Providing full and adequate disclosure provides trustees with liability protections by limiting the time during which their actions may be challenged. However, the accountings must meet statutory full disclosure requirements and include language advising the trust beneficiary that they have a limited timeframe for objecting to anything disclosed in the accounting.
Duty to Invest Prudently
During the 1990’s, everyone was an investment “expert”, and many clients believed that their children or spouses could handle investment decisions after death. In fact, many qualified investment experts do not fully understand the special responsibilities placed on trustees in managing investments for both the income (current) and principal (future) beneficiaries. Additionally, Florida law has changed significantly over the last few years to the extent that trustees have a significantly greater responsibility in analyzing their investment decisions as they relate to asset allocations and beneficiary distributions. The trustee and their investment advisor need to make sure that appropriate analysis is performed and documented in the ongoing investment allocation process. Trustees are typically not held responsible for actual investment results, absent negligence. However, failure to document the decision making process in investment selection and asset allocation may lead to a presumption of negligence. Generally trustees are granted a significant degree of discretion so long as their decisions are documented to be reasonable at the time they were made, and so long as a process of review and oversight are established. Documentation of investment reviews should include, among other issues, analysis of the investment time horizon, income and liquidity needs, investment risk, and trustee responsibility to both current (income) and future (principal/growth) beneficiaries.
Failure of a trustee to understand their duties and responsibilities may result in both personal liability to the trustee, as well as risk to the underlying estate plan. It is critical to the planning of the estate to analyze the capabilities of the selected trustee to manage these responsibilities. Alternately, the selected trustee should work closely with a team of tax, investment and legal professionals familiar with those duties who can guide the trustee to meet these responsibilities and to fulfill the estate plan.