Bite-Sized Bits of Knowledge

Hi, welcome back to Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Now, we just recently discussed trust administration and the four parts of what goes into that, so watch that video to catch up. 

This video we’re going to talk about today is what can go wrong with trust administration. I would say that if you go back to my video that talked about a fiduciary standard, that’s where it starts. You’re a trustee. This is for trustees, mostly, but also beneficiaries. 

The trustee has a fiduciary obligation to administer the estate pursuant to the terms of the trust, which is typically the best interest of the beneficiaries to make distributions of their HEMS, standard health, education, maintenance, and support, and of course, all those other things I talked such as accountings, tax reporting, trustee compensation, distributions, et cetera. 

As I alluded to in my prior video, a trust estate could have a lot of different assets. Sometimes there’s a combination of bank, brokerage, stocks, bonds, real estate, businesses, et cetera. 

Being that this video is talking about what can go wrong, I think that the major thing that I want to talk about today is the fiduciary duty and how it works. If you have land, as a trustee, you have an obligation to get the land appraised as of the date of death, for the minimum of basis purposes for income tax planning and reporting. 

But you also want to have the property evaluated by professionals to see whether or not it makes sense to keep it, sell it, rent it, develop it, whatever. You need to make sure you have professionals to give you advice so you can make decisions that are informed. 

You want to be able to produce to beneficiaries upon request: here’s what I did and here’s why I did it. Say it’s not real estate, say it’s a brokerage account: you need to have financial professionals that are giving you the advice as to what they’re doing and why they’re doing it. You need to be interviewing different professionals so you’re picking the right one. 

I would say in the case of a business, if you’re not a business person who has experience in this particular business, then you need to hire people who are and get counsel from people who can give you advice on how to run the business, how to manage the business, whether to continue the business, or whether to sell the business.

These are things that are on you as a trustee to do well and do right, or you will be held accountable. Unless there’s an exculpation provision in the trust, which means you’re not liable except for fraud, gross negligence or willful action or neglect. 

So that’s a big thing, in my opinion, of where we go wrong, is the management of the trust, making sure we have the right qualified professionals to give advice on how to do things and what to do, when to do it. It applies to real estate, stocks, bonds, businesses, et cetera. 

Your job as a trustee is to make sure that these assets are managed, grown while making distributions, and of course, in compliance with the terms of the trust, and what they save the beneficiary. 

So obviously, as an example, say the trust says the beneficiary has to receive X dollars a month. You have to make sure you have X dollars a month. You’re making sure you’re acting in conformity to those provisions. 

If the trust is supposed to last a certain amount of time, then you have to make decisions that are in conformity to that particular instruction. So it is a job, and that’s why, as I said in my prior video, trustees are entitled to reasonable compensation. There’s nothing wrong with that. 

It is a point of contention because beneficiaries and trustees get unhappy with the amount of that compensation, and it’s a source of conflict. We see a lot on both sides. But at the end of the day, reasonable is subject to interpretation, and there’s law on the subject, so it’s not something that needs to be litigated, in my opinion. 

I would say another source of issue of what can go wrong in a trust is a lack of communication and a lack of transparency. Now, you have a duty to account to the beneficiaries. There’s a whole set of rules on what that means, but generally speaking, it says you have to reasonably account for the transactions that occurred. 

In my opinion, you want to be transparent. You want to be communicative. This is a dance, and it’s a balance of both sides working together to make it more amicable, because if it gets litigious, nobody benefits from that at all. 

So communicating what the needs are of the beneficiaries, what they’re going to get, how they’re going to get it, when they’re going to get it, what’s going on in the trust transactionally. Waiting for the end of the year leaves a lot of people in suspense and creates anxiety, which creates more requests for updates and so forth.

I think communication is a key area to improve upon in my experience, and avoid conflict by doing so. Being transparent with the transactions that are going on, I think is necessary. 

If you’re a good trustee, you’re doing your job, you have nothing to hide, you’re not engaging in self-dealing, you’re not doing things that are inappropriate, like investing in Bitcoin, you’re hiring professionals, and that all should be disclosed, willingly and regularly. 

So I think that those three things of understanding your fiduciary duty, proper communication, and being transparent with your beneficiaries, I think, is a way to minimize conflict, and court, and costs, and chaos when it comes to trust administration, which is high-level stuff. 

Thank you for tuning in, and stay tuned for more.