Trustees have the important responsibility of protecting property for beneficiaries. However, the position carries a great deal of responsibility and potential legal liability for trustees who don’t understand the rules. That’s because trustees are fiduciaries, which means they are held to a very high standard of care in exercising their duties and acting in the best interests of the beneficiaries. In order to avoid liability, they must understand their role and potential problem areas.
The trustee’s role
A trustee is someone appointed or nominated to hold property in a trust on behalf of one or more beneficiaries. Trusts function as separate legal entities in a similar manner as corporations and limited liability companies. For example, a trust can have its own income and expenses and usually (but not always) files separate tax returns in its own name. However, unlike corporations, trusts themselves do not own assets. Although trusts are casually referred to as owning assets, it is actually the trustee (or trustees) that own(s) the asset in his or her capacity “as trustee.” This means the individual trustee is the legal owner, but owns the property on behalf of someone else (i.e. the beneficiaries of the trust).
Most grantors (creators) of trusts have a similar goal of protecting and growing assets in the present so that these assets are available for the beneficiaries in the future. Trusts allow assets to be controlled by one or two trusted and competent individuals, the trustees. Control of a property can entail how trust property is invested and whether it is spent (for example, if a trust permits discretionary distributions of assets to the beneficiary); and if it is real property, how it is maintained and whether it is sold.
Although beneficiaries lack control over trust property, they are the “beneficial” owners because they receive the benefits of ownership. For example, they are entitled to the income of a rental property owned in trust for them.
As for the trustees, with great control comes great responsibility. Trustees have to invest the assets wisely. They have a duty of loyalty and impartiality with respect to beneficiaries. They have to promote the interest of the beneficiaries and treat beneficiaries more or less the same, to the extent provided for in the trust document. These duties may seem straightforward, but in fact, there is great potential for liability.
In our next post, we will discuss some of the biggest risks to trustees.
Read more about how we help trustees with trust administration or contact us for a consultation.
This post does not constitute legal advice or establish an attorney-client relationship.