By Nancy Burner, ESQ.
If you have been named as a trustee of someone’s trust, you may be wondering what you are supposed to do. It is important that the trustee understand his or her duties and responsibilities. The most important thing to remember as a trustee is that the trust assets are not your assets. You are safeguarding them for the settlor and/or beneficiaries, who will receive them after the settlor dies.
As a trustee, you stand in a “fiduciary” role with respect to the beneficiaries of the trust. As a fiduciary, you will be held to a very high standard. The trustee must read the trust document carefully, upon acting initially and when any questions arise. The trust is the road map and the trustee must follow its directions in administering the trust. A trustee should be aware that failing to abide by the terms of the trust document and mismanaging the assets can have serious financial repercussions for the trustee personally such as forfeiture of commissions and surcharge.
This very issue came up in the recent Suffolk County Surrogate’s Court case of Accounting Proceeding the Schweiger Family 2013 Irrevocable Trust decided on Sept. 7, 2017.
The subject trust stated that during the lifetime of the settlor, the trustees in their sole discretion may pay the net income to or for the benefit of the settlor’s beneficiaries or accumulate such income. With respect to principal, the trustees were given the discretion to pay so much of the principal to or for the benefit of the settlor’s beneficiaries. The trust did not require equal principal distributions and same may be made to any or all of the settlor’s beneficiaries.
Distributions made to any beneficiaries during the settlor’s lifetime shall be considered as advancements in determining the beneficiary’s respective share, unless waived by the remaining nonrecipient beneficiaries in writing. The trustees had no authority to pay principal to the settlor.
Despite the language in the trust document, the trustees made distributions to themselves and to individuals that were not beneficiaries, namely the settlor, their children/grandchildren and the spouse of one of the trustees.
In addition, the trustees indicated in their accounting that several of the distributions that were made to themselves as “per settlor’s request.”
After a review of the facts and the language of the trust document, the court held that even if the distributions to the trustees were at the settlor’s suggestion, those distributions were either impermissible gifts of trust assets by the settlor or distributions that the trustees should have assessed against their respective shares as advancements.
With respect to commissions, the court held that intentionally making distributions to individuals who were not beneficiaries of the trust is, in and of itself, a basis to deny commissions. Further, with respect to their self-dealing, either the trustees were in fact aware of the language regarding offsetting advance distributions and chose to disregard it or they were grossly negligent in their failure to seek professional advice to assist them in understanding the duties and responsibilities associated with being trustees. In the end, the trustees were surcharged approximately $230,000 for their self-dealing and failure to abide by the terms of the trust document.
The take away from all of this is that a trustee must follow the terms of the trust instrument and put the interests of the trust beneficiaries before their own. If this is not done the trustee is at risk of personal liability for any breach of duty in the form of denial of commissions or surcharge.
In addition, if you are the trustee of a Medicaid-qualifying irrevocable trust and fail to abide by the terms of the trust, not only do you run the risk of denial of commissions or surcharge, but you can also nullify any protections that the trust provides to the assets held by the trust. This would make all of the assets in the trust be considered an available resource when determining Medicaid eligibility for the settlor and could result in a denial of Medicaid benefits.
With a trustee’s personal liability at stake, it is advisable to retain an attorney to provide advice regarding the trustee’s fiduciary duties and obligations in administering a trust.
Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.