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Dear Quentin,
Can you help me understand the risks involved in being a trustee? My elderly father wrote a will, with the help of a lawyer, which divides up his substantial assets equally among his children. However, one sibling is a problem child, a spendthrift, and can’t be trusted.
She is a grifter, unmarried, unemployed, broke, drifting, on Social Security Disability, has unpaid IRS debts, and has many issues. The “problem child” is currently living with our father in a very nice home in an upscale neighborhood, supported by him and enjoying the finer things in life.
Her lifestyle will decline dramatically when my father’s home is eventually sold. The will says her inheritance will go into a trust, with me as a trustee, to ensure she has something to live on in retirement, and does not blow it all at once. The size of the trust might be $500,000 or so.
“‘Frankly, I don’t want to be involved in any of this, but also don’t want to disappoint my father.’”
I’m worried I will get caught in the middle, between the IRS and the problem child. I envision a situation where I dole out a monthly amount from the trust, and carefully pay everything owed to the IRS in taxes, but the problem child becomes unhappy with what she is getting.
I believe she will be unhappy with her reduced circumstances, unhappy that so much is going to pay for taxes, legal and accounting expenses paid from the trust, etc. She will likely blame me for her problems and might find a lawyer to sue me, for mismanaging her trust and estate.
On the other hand, if I seek to minimize payments to the IRS, and arrange things to preserve Social Security Disability, etc. the IRS or Social Security might accuse me of being complicit in an illegal scheme to hide assets. How much risk am I facing, realistically? And how can it be mitigated?
Frankly, I don’t want to be involved in any of this, but I also don’t want to disappoint my father. What’s more, I am also named executor of his will. What do you think I should do? Your comments and advice are much appreciated.
Reluctant Trustee
Dear Reluctant,
Let’s focus on you instead of your sister.
A good trustee should be trustworthy, have good judgment, be fair and objective, and above all be committed to the job. Just like a power of attorney, it’s not for the faint of heart. You may be some of these things, but it’s clear that you are too embedded in the family drama to take on this job.
You are already reluctant and upset — rightly or not — that this task has landed on your doorstep, and you have anxiety and frustration at being responsible for your sister, who you regard as a source of chaos and instability in your family’s life. For that reason, don’t do it.
Talk to your father. Tell him that in order for the trust to operate successfully, it will need a professional — an accountant, banker or lawyer — who can operate it with steely judgment and a clear understanding of the task ahead, and who will not become emotionally involved in the job.
The trustee is a fiduciary, meaning they have a legal and ethical obligation to act in the best interests of the trust. If you fail in that task, or you are deemed to have failed in that task, you could indeed find yourself in legal jeopardy. Either way, it sounds this trustee could have a rocky road ahead.
Any trustee should ask about the remuneration for their time and energy, the intention of the trust, whether it is designed to provide an income, if there are conditions the beneficiary must meet before receiving certain funds, and how long the trusteeship will last. Ten years? Twenty? A lifetime?
“‘The trustee is a fiduciary, meaning they have a legal and ethical obligation to act in the best interests of the trust.’”
This is a stressful role. Your own interests seem to conflict with that of the trust, which is another reason why you may wish to say so now. You need to act impartially and have some understanding of finances to operate it in a smooth manner. On the former, you seem like a bad choice.
James L. Cunningham, a trust and estates lawyer in California, says potential trustees should proceed with caution. It’s an honor to be asked, perhaps, but that’s no reason to agree. “When asked, shouldn’t you always say yes?” Cunningham writes on his website. “Frankly, no!”
He has a warning for anyone out there in your position: “A ‘fiduciary duty’ is the highest standard of care you can legally owe someone, and it’s the standard by which you would be judged in a court of law, regardless of your expertise in financial and legal matters.”
“Trustees often inadvertently, well, step in it and create disasters,” Cunningham adds. “Usually, these disasters occur simply because a newbie trustee thinks everything will sort of happen automatically, as in: ‘I’ll just follow the terms of the trust!’” He outlines 12 traps trustees fall into here.
Your father has set up a trust for his adult daughter. That is a compassionate and rational decision. Trusts are designed to manage assets, distribute income, prevent beneficiaries from getting too much money at one time, avoid probate, and plan for any incapacity of the beneficiary.
Talk to your father and outline your concerns.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
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