Trust Administration and Litigation
A trust is a legal arrangement which allows the trustor, the individual who established the trust, to manage, hold and allocate their assets. The trust also allows the beneficiaries of the trust to avoid probate either after the trustor becomes incapacitated or dies. Although there are many types of trusts, living trusts are the most popular and are increasingly used as substitutes for a will.
Trusts must be administered and managed according to the requirements, not only of the trust document, but also the trust laws of the state. Laws vary by state and each state will have their own codes.
The courts generally do not need to supervise the administration of the trust, although the trustee or the beneficiary have the legal right to consult the court if they need guidance interpreting the trust or the beneficiary and the trustee have a disagreement about how or when the trust’s assets should be distributed.
The trust is not difficult to administer while the trustor is alive, but the administration of the trust can be complicated after the trustor’s death. Trustees have very specific duties they are required to perform under the law and failure to perform their duties can be considered a breach of their fiduciary duty.
What are the duties of the trustee? First and foremost, trustees must safeguard the assets of the trust for the trustor, if they are living, and their spouse and other beneficiaries, if the trustor has died. The trustee must also perform the following duties:
- Notice to the Beneficiaries
At the time of the trustor’s death, the trustee must notify the heirs of the deceased as well as any other party that has an interest in the trust. State laws determine the notice language and outline the amount of time the beneficiaries have to contest the trust in court. All parties have the legal right to request a copy of the trust and corresponding amendments. Failure to notify all concerned parties is considered a breach of fiduciary duty and may have legal ramifications for the trustee.
- Administer the trust according to its provisions
The trustee must administer the trust for the benefit of the beneficiaries, showing no partiality toward any beneficiary over another. The trustee may not use the assets for their own benefit, unless authorized by the trust. The trustee must insure that the assets of the trust remain separate from their own personal assets.The trustee should follow the requirements outlined in the trust which dictate how and when to distribute income and principal to the beneficiaries and what reporting is required.
- Administer the trust according to proper accounting procedures
The trustee must keep accurate accounting records (tracking income, distribution and expenditures), report to the beneficiaries as needed (generally on an annual basis), follow the appropriate state trust code and file the proper tax returns (decedent income tax returns, fiduciary income tax returns and estate tax return (as needed)). Trustees may need to hire a lawyer or a tax accountant, although this will vary based on the trust’s assets and the expertise of the trustee.
- Avoid becoming the trustee of another trust if there is a conflict of interest in administering each trust.
This obligation is directly related to ensuring the trust’s assets are safeguarded. Trustees should not engage in any activities which could cause a conflict of interests in their primary responsibilities to the trust.
- Protect and preserve the trust’s assets through an accurate inventory and appraisal process.
The trustee should take a full inventory of the trust’s assets, safeguard the assets and determine the value of the assets at the time of the trustor’s death. The beneficiaries of the trust should know where the trust certificates, titles, account statements and inventory are kept.
- Ensure that all the assets of the trust are invested in a conservative manner.
Investments should produce reasonable growth with minimal investment risk. It may be possible for the trustee to hire an investment manager, at the expense of the trust, to help them invest the monies, although the trustee may continue to have legal liability for the investment of the trust.Keep in mind, the trustee must balance the current and future needs and interests of each beneficiary as well as their additional sources of income. For example, is the beneficiary going to need the money to purchase a home or attend school? Decisions must be made after making all necessary considerations, and often, the trustee may have to establish limits to protect the trust’s assets for future beneficiary needs.
- Delegate necessary trust responsibilities as allowed
Although trustees have the primary responsibility to administer the trust, it is possible for them to delegate certain responsibilities that they cannot effectively perform on their own. For example, financial advisors may be hired to assist with financial decisions, tax accountants or attorneys may be consulted to evaluate booking and tax issues and trust lawyers may provide assistance with legal interpretations of the trust.
- Collect reasonable fees for trustee services
Some trustees, especially non-family members, will charge for their services. If a bank, law firm or trust company has been hired it is not unusual for them to charge a percentage of the funds value. Other trustees may be paid by the hour. The amount paid may vary based on the expertise of the trustee or whether the trustee has to hire a professional for help.
Trust litigation is possible when a dispute arises between beneficiaries or the trustee and beneficiaries. As with all types of litigation, there are statutes of limitations for filing legal challenges for trust disputes. Failure to file claims within the specified time will make it impossible for claimants to legally challenge the trust.
If a trustee fails to administer the trust properly, a trust litigation lawyer can help. Breach of duty can include misappropriation or mismanagement of trust assets, accounting breaches, and failure to allocate beneficiary claims according to the guidelines of the trusts.
Trusts may also be challenged if beneficiaries can prove the trustor had insufficient capacity or created the trust under duress, coercion, undue influence or failed to follow the law. If you have concerns, it is important to contact a trust litigation attorney as soon as possible.
Estate planning, trust management, estate taxes and trust litigation can be complicated legal matters. Contact a trust litigation lawyer if you need assistance.
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