Acting a trustee is a big responsibility, and one needs to be careful not to do the wrong thing. Here is a summary of what a trustee cannot do:
- Steal from the trust
- Fail to follow the terms of the trust
- Mismanage trust assets including bank accounts, stock, bonds, retirement accounts, pensions
- Fail to take inventory of assets, including personal and real property
- Be negligent or careless in investing assets
- Sell personal and real property below market price
- Fail or refuse to distribute assets
- Fail to pay creditors
- Fail to pay funeral expenses
- Fail to file an estate tax return if required, fail to pay estate taxes and back income taxes
- Mismanage a testator’s business or sell it below market value, whether to himself or to someone else
- Take over the testator’s business for the trustee’s own gain
- Commingle trust funds with his own funds
- Keep trust funds in a personal account (you need a trust account)
- Ignore beneficiaries
- Fail to communicate with beneficiaries
- Keep beneficiaries misinformed about trust and financial matters
- Favor one beneficiary over another
- Fail to wind up and settle a trust
- Refuse to distribute assets to the beneficiaries
A trustee is named by a settlor (the person who made the trust) at the time a trust is made. The trustee cannot fail to carry out the wishes and intent of the settlor and cannot act in bad faith, fail to represent the best interests of the beneficiaries at all times during the existence of the trust and fail to follow the terms of the trust. A trustee cannot fail to carry out their duties. And most importantly, the trustee cannot steal from the trust.
There are all sorts of other contractual or legal matters that may require a trustee’s attention. For instance, if the testator owned commercial property and had tenants, the trustee may have to collect rents, work with a property management company or hire one depending on the size of the building and the number of tenants. What a trustee cannot do is fail to work with attorneys and accountants in order to make sure assets are properly valued and contractual obligations are completed.
Stealing from the trust. There are significant penalties for stealing from a trust. The court can discharge the trustee and replace them with someone else, force them to return the money and take away their commissions. There can also be criminal a penalty, but most trust theft allegations do not escalate to criminal prosecution.
Taking more funds than the trustee is entitled to. It can be tempting for a trustee to take some extra cookies from the cookie jar. You have access to trust funds and the power to take some funds out. You don’t see anyone looking over your shoulder. But that sense of safety is false. Banks and courts have systems in place to detect fraud. Beneficiaries can get suspicious and hire a trust attorney or report the suspect to the police and hire a trust attorney to get the inheritance that they are entitled to.
Self-dealing. The trustee cannot transfer trust property to himself because the property belongs to someone else unless he pays the full price for it. As explained above, doing so can be interpreted as stealing and can lead to an array of legal woes. A smart trustee would want to avoid transferring trust assets to himself, even if paying fair and market value. If beneficiaries are getting more money than they would have, if not for the trustee buying them out, the trustee should explain it to the beneficiaries. For example, the trustee can explain the savings on transaction costs, such as not having to pay a broker. There must be a feeling that the trustee fulfilled his responsibilities to the beneficiaries.
Failure to Communicate with the beneficiaries. The trustee should communicate with the beneficiaries, be transparent about the money he is taking from the trust, explain the reasoning behind it and try to get on the same page with the beneficiaries. The trustee cannot fail to communicate.
Commingling funds. The trustee should place all trust funds into a trust account and not into his personal account. New York Consolidated Laws, Estates, Powers and Trusts Law – EPT § 11-1.6 states that “Every fiduciary shall keep property received as fiduciary separate from his individual property. He cannot invest or deposit such property with any corporation or other person doing business under the banking law, or with any other person or institution, in his own name, but all transactions by him affecting such property shall be in his name as fiduciary.” Surrogate’s Court Procedure Act – SCP § 719 states that the court can take away a person’s power to manage the trust “where he mingles the funds of the estate with his own or deposits them with any person, association or corporation authorized to do business under the banking law in an account other than as fiduciary.”
Using trust funds for personal expenses. The trustee can only use trust funds to pay the legitimate expenses of the trust, taxes and legal fees.
Distributing property without getting signed releases from beneficiaries. Once the trustee collects the assets of the trust and pays out its debts, it’s time for the trustee or administrator of a New York trust to disburse the funds to the beneficiaries. But before the trustee does that, it is important to get a written release from the beneficiaries. The release states that the beneficiaries are satisfied with what they are getting and are never going to sue the trustee. The best release comes with an informal accounting, which provides a summary of what property went into the trust, what the expenses were, and what is the share of inheritance for each beneficiary.
A trustee is entitled to receive compensation for his or her services in accordance with the law. When a spouse or a family member acts as trustee, many times they do not take compensation for their services, especially when they are also a beneficiary receiving a distribution of assets under the will. A trustee cannot take compensation that is in excess of what they are allowed to take by law.
A trustee is held a higher standard of behavior and is expected to act in an honest, fair and ethical manner. A trustee cannot breach their fiduciary duty. They could be held legally liable for any losses suffered by the trust or beneficiaries. A trustee can be removed by the beneficiaries for breach of fiduciary duty and could be subject to restitution of any financial losses to the trust and beneficiaries, as well as face criminal charges if the trustee committed any crimes such as embezzlement of trust assets.
Because there are many things that a trustee cannot do, some family members decide they do not want to take on the job and end up resigning and hiring an attorney or another personal representative to replace them and administer the trust.