It can be a great honor to be named trustee of your family’s or another person’s trust. You may also have named yourself trustee for a trust you funded for the benefit of your heirs because you want to maintain control of the account until the assets are distributed. But did you know that as trustee of another’s assets, you are considered a fiduciary? Basically, a fiduciary is someone who must put the interests of the beneficiaries first and who is held to a high standard of loyalty. When you accept appointment to the role of trustee, you incur a personal liability.
A Case Study
Consider the case of a very wealthy businessman who funds some trusts for his grandchildren. As there are still many years left before the grandchildren can take out funds from their trusts, the businessman stays in control of the accounts as trustee. He is very busy and has only limited investment experience, and he tries not to think about the recent turmoil going on within his own family. It just seems like family members are not all on the same page. But it’s a good thing he can focus on his business.
The businessman calls a broker, buys a few mutual funds, and sets the trusts on autopilot. He casually glances at the statements once a year or so but never quite makes that second call to the broker to see if he’s on the right track. He forgets to read over the trust language his attorney drafted and assumes he knows what it says. Several years and a child’s divorce or two later, it’s time to distribute the assets. The now estranged adult grandchildren discover that the money has not kept pace with the market and they sue…
The above story probably wouldn’t happen in your family, but in such a situation the courts might hold the trustee liable for failing to manage the assets diligently or to ensure that the assets were invested appropriately for the grandchildren’s needs. A fiduciary is generally held to a “prudent investor” standard, which according to Investopedia means “The managing investor should consider the needs of the trust’s beneficiaries, the provision of regular income, and the preservation of trust assets and should avoid investments that are excessively risky.” Beyond the investment responsibilities, a trustee likely also has to satisfy all the terms of the trust according to how it was written. Still want to be a trustee?
The Good News
The good news is that you are not alone to carry out your duties. Courts have recognized that to follow a structured process for investing the assets can demonstrate that you discharged your duty, and a CFA Institute publication called “A Primer for Investment Trustees” lays out the steps that trustees can use to invest appropriately. Although this book was written for trustees of very large funds, the principles hold for smaller portfolios. The book recommends drafting an investment policy statement (IPS) to formalize the goals for the trust, the needs of the beneficiaries, and the asset mix to be used to address them.
Trusts and Goals
Trusts can have more than one goal, and often there is a split between the income beneficiaries (those receiving payments now) and the “remainder beneficiaries,” who get the trust’s assets when the trust is dissolved. A trustee in charge of the investments must include both these goals in the IPS. The goals will also dictate the asset mix in many cases. So for this example, the trustee must be careful to include assets which create income and assets which can grow in value over time. If a trustee buys a portfolio of government bonds, he will get no flak from the income beneficiaries (unless rates are extremely low, like today), but the remainder beneficiaries will become upset at not seeing any capital gains. If the trustee chooses small company stocks, there could be significant growth but very little income.
The funds chosen for a trust’s investment policy should reflect some knowledge on the part of the trustee. You should know, for example, that government bonds can help diversify a portfolio of stocks; or that a high-risk investment category such as emerging markets can be included in a portfolio that is otherwise diversified because it may add value within the total mix. And finally, to avoid charges of carelessness, you should ensure that you aren’t paying excessive fees on the funds or transaction costs. You can’t simply trust a broker to give you the whole story here but need to do a little digging.
Proactivity is Key
Lastly, it would be hard to argue that you have fully done your job if you did not regularly gauge the trust portfolio’s performance against some relevant benchmark as well as the goals of the beneficiaries. This could end up being a mix of stocks and bonds, or it could be some desired growth goal. If the goals are being met, congratulations, you have bought yourself more time. But if the portfolio is falling behind, you need to take action or at least to investigate why this is happening. You may need to rework the asset mix, make some fund manager changes, or even revisit the reasonableness of your goals.
You should check your trust to ensure that it allows you to hire financial professionals and includes some kind of protection clause for the trustee. As financial consultants, we would not generally recommend that someone unfamiliar with investing accept a trustee responsibility where hiring professional financial managers was prohibited or where there were no protections. Providing you can use third parties, it is also possible to find a reputable fee-based asset manager who can develop your IPS, build an appropriate asset allocation, report on and monitor performance, and make changes so you have satisfied these process recommendations. In addition, you can also hire a third-party corporate trustee to ensure that all trust terms are followed. This greatly reduces the burden on you and may also demonstrate greater prudence than if you had decided to go it alone.
Alpha Fiduciary: Financial Consultants Who Want to Work With You
Alpha Fiduciary in Scottsdale specializes in providing professional financial planning and asset management services, and we are happy to work together with trustees and attorneys as needed. In addition, we have a relationship with a nationally chartered trust company that can perform all required trust administration services if you prefer to have less involvement with trust management. It comes down to how complex your situation is and what you would most like to do with your time. If you want a second opinion on your current portfolio, we encourage you to give us a call. We offer a free second opinion service to help you see the strengths of your financial situation and where you might need improvement.