Fiduciaries and governance
Key takeaway
In Minnesota, for example, trust terms generally govern trustee duties, powers, relationships and beneficiary rights, subject to mandatory statutory limits, including good faith, the trust's terms and purposes, and beneficiary interests. Other states differ.
For a trust holding a business, real estate or private investments, start with the people and documents. Gather the trust instrument, amendments, appointment documents, advisor agreements and administration records for review.
Start with the trust terms and applicable duties
Upon accepting office, a Minnesota trustee must administer in good faith, following the trust's terms and purposes, beneficiary interests and applicable law.
For your review, identify each office, its holder and the document describing its powers. Include any investment trust advisor, distribution trust advisor or protector.
Compare people, skills and availability
In Minnesota, for example, prudent administration requires reasonable care, skill and caution, considering the trust's purposes, terms, distribution requirements and relevant circumstances. Other states differ.
In investing and managing assets, a Minnesota trustee must use special skills or expertise actually possessed, or represented when the appointment relied on that representation.
When comparing family and professional candidates, ask about availability, investment support, tax support, legal support, compensation and succession. Record what each candidate offers and what work would involve outside advisors.
Review delegated work and oversight
In Minnesota, for example, a trustee may delegate duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances, including to an associated person. Other states differ.
The trustee must use reasonable care, skill and caution in selecting the agent, establishing scope and terms consistent with the trust's purposes and terms, and periodically reviewing performance and compliance.
The agent owes the trustee reasonable care in complying with the delegation, and the trustee must enforce that duty. Protection from liability for the agent's actions requires compliance with both these obligations and the selection, scope and review requirements.
Accepting delegated powers or duties from a Minnesota law trust submits the agent to Minnesota court jurisdiction.
For a review meeting, bring the delegation agreement and records of performance reviews. Ask which tasks are assigned, who evaluates the work and how concerns are documented.
Gather administration records
In Minnesota, for example, trustees must keep adequate administration records and keep trust property separate from their own. Other states differ.
A Minnesota trustee may invest property of separate trusts together if records clearly identify their respective interests.
Gather asset lists, account statements, receipts, disbursements, compensation records and beneficiary correspondence. Include questions about personal use of trust property or proposed purchases and rentals involving family members.
Two related terms
Duty of loyalty
In Minnesota, for example, a trustee's duty of loyalty prohibits placing personal interests above beneficiary interests. Other states differ.
Duty of impartiality
In Pennsylvania, a trustee with two or more beneficiaries must invest, manage and distribute impartially, giving due regard to their respective interests in light of the trust's purposes. This means equitable treatment rather than equal treatment, and other states differ.
Four resources for your next review
- Family trustees versus professional trustees
Open this guide before interviewing candidates. Use its comparison topics to prepare questions about availability, support, compensation and a future successor.
- How directed trusts divide authority and accountability
Read this next if your documents name an advisor or protector alongside the trustee. Bring the provisions describing each person's powers to your discussion.
- How trust records and beneficiary reporting work
Use this guide when preparing questions about administration records and beneficiary information. Keep the trust's reporting provisions and recent correspondence beside you as you read.
- Fiduciary governance records and questions checklist
Turn the topics on this page into a meeting packet. Use the checklist to organize documents and questions about authority, delegated work, compensation and succession.
An Investor Advantage perspective on working relationships
This observation about working with investment operators offers a useful prompt for discussing how people will communicate when disagreements arise.
"It's like any other relationship, right? Whether you're dating somebody and things are rosy and great, something will go wrong at some point in time and things will get rocky."
Frequently asked questions
Does an investment loss automatically make a trustee liable?
No, in Minnesota, for example, a trustee is not liable for lost value or failure to make a profit absent a breach of trust. Other states differ.
Investment conduct is evaluated using circumstances at the time, within the overall portfolio and a strategy whose risk and return objectives reasonably suit the trust.
The trustee must consider trust purposes, terms, distribution requirements and other circumstances, exercising reasonable care, skill and caution. Diversification is required unless special circumstances reasonably support a determination that trust purposes are better served without it.
Within a reasonable time after accepting office or receiving assets, the trustee must review them and implement retention or disposition decisions to bring the portfolio into compliance with those requirements.
Retaining property does not eliminate the duty to reconsider retention or disposition at reasonable intervals. Compliance tests conduct rather than resulting performance.
The instrument may alter the default prudent investor rule, and reasonable reliance on it has statutory protection, subject to mandatory good faith limits.
Can a trustee report affect the time to bring a claim?
Yes, in Minnesota, for example, a beneficiary generally has three years to commence a judicial proceeding against the trustee after a report adequately disclosing a potential claim is sent to the beneficiary or representative. Other states differ.
The report must be sent to the beneficiary or representative and provide enough information for that person to know of the potential claim or have reason to inquire into it.
If that report rule does not apply, the period is six years after the first of these events: trustee removal, resignation or death, termination of the beneficiary's interest, or trust termination.
When does a beneficiary's release protect a trustee?
In Minnesota, for example, a beneficiary's release concerning trustee conduct binds that beneficiary unless trustee improper conduct induced it, or the beneficiary lacked knowledge of rights or material facts when the trustee knew the material facts. Other states differ.
For review, identify the beneficiary signing, the conduct covered and the proposed scope. Include any question about authority to represent another person.
Who is owed trustee duties while a trust is revocable?
In Minnesota, for example, while a trust is revocable, trustee duties are owed exclusively to the settlor, and beneficiary rights are subject to the settlor's control. Other states differ.
When multiple people create or contribute property, each is settlor of their contributed portion, except to the extent another person can revoke or withdraw that portion.
A conservator may exercise the settlor's revocation, amendment or distribution powers only with approval from the court supervising the conservatorship.
Sources
- Minnesota Statutes §501C.0105: trust terms and mandatory rules.
- Minnesota Statutes §501C.0801: administration after acceptance.
- Minnesota Statutes §501C.0804: prudent administration.
- Minnesota Statutes §501C.0807: delegation, oversight, agent duties and jurisdiction.
- Minnesota Statutes §501C.0810: records and separate trust property.
- Minnesota Statutes §501C.0802: duty of loyalty.
- Pennsylvania Consolidated Statutes, Title 20, Chapter 77, §7773: impartiality and equitable treatment.
- Minnesota Statutes §501C.0901: investment conduct, expertise, diversification, review and trust instrument qualifications.
- Minnesota Statutes §501C.1003: losses absent breach.
- Minnesota Statutes §501C.1005: claim periods and adequate disclosure.
- Minnesota Statutes §501C.1009: beneficiary consent, release and ratification exceptions.
- Minnesota Statutes §501C.0604: duties while revocable.
- Minnesota Statutes §501C.0103: settlor definition and contributed portions.
- Minnesota Statutes §501C.0602: conservator exercise of settlor powers.
- Investor Advantage transcript: 01M5FC4NXM6S5X9217C0R0SC14.txt. Excerpt concerning working relationships with operators.