General and Specific Powers of the Trustee
A trustee has both duties and powers. Duties are obligations or prohibitions imposed by the trust document or by the law and that are not subject to the discretion of the trustee. A power differs from a duty in that the trustee has discretion to exercise the power.
Historically, the settlor often specified the general and specific powers of the trustee in the trust document. However, the modern trend has been to have the trust document refer to a statutory list that is incorporated by reference. The trust document can also cite UTC §815, which lists the general powers of the trustee, including all powers over the trust property which an unmarried competent owner has over individually owned property; and any other powers necessary to invest, manage, and distribute trust property.
UTC §816 lists specific powers, which can be modified by the terms of the trust, but these specific powers simply give the trustee just about any power needed to administer the property for the beneficiaries, including the following:
- Trust Property
- Collect trust property or abandon property of little worth;
- buy, sell, exchange, or partition property;
- Trust Administration
- Pay trust expenses and taxes;
- insure the trustee, its agents and beneficiaries against liability arising from trust administration;
- take any actions to save taxes;
- handle claims either by or against the trust;
- manage any judicial proceeding necessary to protect trust property and or to defend the trustee's actions;
- resolve any disputes concerning the trust through mediation, arbitration, or other alternative dispute resolution.
- appoint a trustee to serve in another jurisdiction to handle trust property located there.
- Trust Termination
- Terminate the trust and distribute all remaining trust property to the beneficiaries.
- Money and Securities
- Money and securities are generally held in a financial institution for safekeeping.
- The trustee can exercise all rights accorded to the ownership of securities, including the right to vote;
- If the trust has an interest in a business, the trustee can continue the business as a shareholder, partner, or business owner.
- The trustee can borrow money securitized by trust property and the term of the loans can extend beyond the life of the trust. The trustee can also securitize loans with trust property made by 3rd parties to a beneficiary, and make arms-length loans of trust property to beneficiaries, secured by future distributions.
- Real Property
- Disabled Beneficiaries
- If one or more of the beneficiaries are legally disabled, then the trustee can pay distributions to their conservator or guardian or anyone else who is taking care of the beneficiary.
The trustee no longer needs to petition a court of equity for authorization to take action not expressly or implicitly authorized under the terms of the trust, since the modern trend has been to give the trustee all the powers necessary to accomplish the objectives of the trust that is not forbidden by the trust document, by law, or by public policy.
Delegation of Decisions Requiring Discretion
Historically, a trustee could delegate administrative activities or duties, such as making repairs, or maintaining and cleaning the property, but could not delegate any decisions that required discretion, such as investments or disbursements to beneficiaries based on their needs.
However, because many trustees do not have the financial acumen to make wise investments, the modern trend, as exemplified by Uniform Prudent Investor Act §9 and UTC §807, has been to allow the trustee to delegate investment responsibilities to those with more expertise.
To delegate, however, the trustee must select an agent with prudence, establish the scope and terms of the delegation, which must comport with the terms of the trust, and the trustee must periodically review the agent's performance and its compliance with the terms of the delegation. Upon accepting the delegation, the agent has a duty to comply with the delegation terms.
Delegated and Directed Trusts, Trust Directors and Protectors
If a trust is revocable, then the trustee must follow the direction of the settlor even if it is contrary to the terms of the trust. UTC §808
Sometimes delegation is more explicit, in the form of delegated and directed trusts. A delegated trust is where the responsibilities of trusteeship are divided by the trustee and delegated to other parties. A directed trust is where the trust instrument provides that the trustee must follow the direction of a 3rd party. In a directed trust, the 3rd party is usually given the power to direct distributions or make investments and the trustee is generally said to be a directed trustee and the person holding the power may be called a trust director or trust advisor — sometimes the term trust protector is also used. However, the term trust protector usually refers to someone who can modify or terminate the trust, remove or replace the trustee, or change the trust situs.
Trust protectors are often used for off-shore trusts as a way to protect it from creditors or to reduce taxes. In these off-shore trusts, the trustee has legal title to the trust property and absolute discretion to distribute it to the beneficiary, who is often the settlor. This arrangement protects the trust assets from creditors and tax collectors, but the settlor maintains control as the trust protector.
Trust advisors and protectors have the same fiduciary obligation to the beneficiaries as the trustee.
If the trust document grants someone the power to direct the trustee, then the trustee shall act according to the direction unless it is manifestly contrary to the trust document.
Delegated and directed trusts are generally more difficult to enforce, since relationships are more complex and it is difficult to pinpoint who is responsible for any breach of trust.
Do You Want to Be a Trustee?
Being offered to serve as trustee can be an honor, since it requires considerable trust (no pun intended), but you do need to consider what exactly is required of the trustee:
- Read and understand the trust document, for that will determine what you must do, and it may also indicate potential problems. Read the trust document before agreeing to serve as trustee, to ensure that you understand everything in it, because you will be a fiduciary who will be held liable for any mismanagement of the trust.
- Get to know the beneficiaries and meet with them periodically. Discretionary trusts, in particular, give the trustee discretion as to how disperse funds, but usually in a way that will best serve the beneficiaries. Therefore, understanding their needs and desires will allow you to make better decisions in that regard. Some beneficiaries may be difficult, so you'll have to learn how to deal with them.
- You may have to manage the investments or hire someone to do it. Write an investment policy and present it to the beneficiaries for some feedback, but the policy must conform to the trust document.
- Detailed records must be kept, since it may be necessary for you to go to court to prove what had been done and the purpose for doing it. Additionally, reports must be issued periodically to the beneficiaries, as that is their only way of knowing if the trust is being managed well.
- As separate taxable entities, trusts must file a tax return annually.