Jean Carter: Hello. I’m Jean Carter, an ACTEC Fellow from Raleigh, North Carolina. With me is Kerri Mast, an ACTEC Fellow from Charlotte, North Carolina. And our topic today is serving as trustee. Kerri, a friend of mine has asked me to serve as a trustee for her little girl. What does that mean?
Kerri Mast: A trustee is a person who holds assets for the benefit of another person. So, in your example, your friend would give you assets to hold for the benefit of her minor child.
Jean Carter: If I serve as trustee, what will my responsibilities be?
Responsibilities of a Trustee
Kerri Mast: Jean, a trustee has a lot of responsibilities. Most trusts are established by a written legal document, and that document is your instruction manual in terms of how to administer the trust. It tells you what kind of investments you can make, and when and how you can make distributions for the benefit of her minor child.
But you also have other responsibilities as a trustee:
- You have a duty of loyalty to the beneficiaries. That means you can’t put your own interest or anybody else’s interest above the beneficiary’s interest with respect to the trust.
- You have a duty of impartiality. That means if your friend has two children who are beneficiaries of the trust and you're really close with one of them, you cannot administer the trust in way that prefers the one you have a close relationship with. You have to be impartial.
- You have a duty of prudence. That means you have to make good decisions with respect to the trust and with respect to the management investment decisions within the trust.
- You have a duty of confidentiality. That means you can’t talk about the trust or the trust beneficiaries to people that you know.
And there may be other duties that are imposed by state law as well.
Jean Carter: That's a lot of responsibility. Can I hire someone to help me with this?
Help with Trust Administration
Kerri Mast: Absolutely. You can and you should. Administering a trust is very complex. You have to understand the legal language around what you're supposed to be doing to administer the trust. You have to understand the tax implications. You have to file appropriate tax returns. You have to keep records regarding decisions that you made with regard to the trust. There are a lot of different components in how to administer a trust, and you can hire professional advisors to help you do that. And those fees are an appropriate expense of the trust.
Jean Carter: So, Kerri, if I act as trustee, what happens if I make a mistake?
Liability of a Trustee
Kerri Mast: It really depends on the mistake. It depends on the nature of the mistake, whether the trust or its beneficiaries were harmed, and whether you acted appropriately as trustee.
Let me give you an example. Let’s say that your friend gives you money, and you invest that money so it can grow for the benefit of the beneficiaries. Let’s say you hire a reputable investment advisor, and they invest the money in an appropriate asset allocation, some of which includes a U.S. large-cap strategy. Well, if the market goes down and that strategy loses value, are you liable for that? Probably not, as far as you made an appropriate decision in hiring that manager and their actions were appropriate.
But let’s say that you made an investment decision that was much riskier. Let’s say you put all the money into a sports betting program and decided to bet on various sporting activities across the U.S. That likely would not be deemed a prudent investment for the trust, and you could be in trouble.
Jean Carter: Well, I promise I won’t do sports betting. I wouldn't be very good at that. But can I be liable if I make a mistake? Can I be personally liable?
Kerri Mast: Yes, you can. Jean, we discussed some of the responsibilities that trustees have. They are held by courts to the highest legal standard. If you fail to fulfill your duties, you can be subject to lawsuits and can be held personally liable for those mistakes.
Jean Carter: Look, Kerri. You’ve given me a lot to think about. I’m going to ask you the real question. Should I serve as trustee for my friend’s child?
Kerri Mast: Possibly, yes. But it’s not a role you should take lightly. Serving as trustee, especially for family members or for friends, as you describe, can be really rewarding for you and can be helpful to them. But understanding the full scope of the role and the responsibilities and obligations that come along with that is important for you to avoid unnecessary difficulty. So, the important thing is you can serve as trustee. Just know what you're getting into and hire people who can help you.
Jean Carter: Kerri, this has been very, very helpful. Thank you for your time today. And I want to let folks know that on the ACTEC website, there are some other videos that discuss further the duties of a trustee and related topics. Thank you.
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