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The Risks of Being a Trustee & How to Avoid Common Pitfalls

Although a person might feel as if they “won” because they got named to serve as the trustee of a relative’s trust, they often feel differently when they realize the massive amount of work involved. Also, they seldom understand the potential liability they face in that position. Just because you got named as the trustee does not mean that you have to do all the work yourself. 

Many people hire a Texas estate planning attorney to handle much of the trustee’s work. Often, a trust contains language that specifically permits this arrangement and authorizes the payment of the professional by the trust, but if the trust is silent on that issue, you can probably engage help. Let’s talk about the risks of being a trustee and how to avoid common pitfalls.

Not Knowing What to Do

We have all heard the saying, ignorance of the law is no excuse. If you get named as someone’s trustee, you suddenly have many obligations, including to educate yourself on the duties of a trustee. Trust documents do not include information about everything the trustee is required to do. 

Some people mistakenly think that because a trust usually does not have to go through probate court, they can simply pay the funeral home and burial costs and then distribute the assets among the beneficiaries. The trustee has many more duties, including:

  • Notifying the known creditors, like the doctors, hospital, and others who provided healthcare services during the final illness. 
  • Publishing a notice to creditors of the person’s death in the appropriate legal newspaper.
  • Marshaling all the assets of the decedent.
  • Managing the assets of the trust.
  • Preparing and filing the income tax return for the final year of the deceased person’s life.
  • Preparing an estate tax return for every tax year that the state remains open.
  • Notifying all beneficiaries of the trust and giving them a copy of the document. 
  • Paying all valid debts of the decedent and estate expenses out of the estate assets.
  • Distributing the remaining assets according to the terms of the trust document.

The trustee could face personal liability if there are negative financial repercussions to the estate assets because of failure to carry out these duties. For example:

  • The decedent’s estate could face back taxes, penalties, and interest if the trustee fails to file the required tax returns.
  • The trust could lose economic value if the trustee mismanages assets, like making high-risk investments using the estate assets or failing to take care of assets like rental property that can degrade from lack of routine maintenance. 

The beneficiaries could seek a court order that makes the trustee pay these losses out of their own pocket and possibly removes the trustee. The best way to avoid these pitfalls is to call in the professionals from the beginning.

Failing to Communicate with the Beneficiaries

Some trustees actually think that because the trust document does not usually have to get filed in court, they can keep the terms of the trust secret from everyone, including the beneficiaries. The trustee then keeps most or all of the assets for themselves and refuses to let anyone see the trust papers.

Also, if the grantor of the trust gave the trustee broad discretionary powers, for example, allowing the trustee to distribute assets among siblings as the trustee sees fit, often, those siblings receive very little or nothing. 

Trustees have fiduciary duties to act in a fair and ethical manner toward all the beneficiaries. The trustee should exercise great transparency toward the beneficiaries. Particularly when money is at issue, people tend to get suspicious and think the worst when there is secrecy. There are many additional risks and potential pitfalls involved in serving as a trustee. To protect yourself from personal financial liability, civil lawsuits, and even criminal charges, you will want to work with a Texas estate planning attorney. Contact our office today for a free consultation.