Trust Funds And Assets
Keep Trust Funds Segregated
Keep trust funds and assets separate and segregated from your own personal funds. Don’t commingle your personal assets with trust assets. Don’t put trust funds, dividend checks, matured CDs, etc. into your checking account.
Even if you use interest or dividends or sale proceeds to pay trust expenses or your compensation, deposit those funds in a trust account and then pay expenses and pay yourself by a separate check or distribution which clearly identifies its purpose.
Trust assets should be clearly identified and in unique, separate and distinct accounts. Any time your name appears on a statement, on an invoice, or any type of property record, it should be followed by the words “as trustee” in the title, followed by the title of the trust, or description of the trust.
Protect Trust Property
You must always protect the trust property. You cannot “leave be” the trust assets. You must collect and reinvest them, protect them from loss, and act in a manner necessary to preserve and hopefully grow the trust balance.
One spouse dies. She created two trusts, a marital trust and a family trust, and names her surviving spouse as the sole trustee of both trusts. The terms of both trusts state that the surviving spouse may not receive funds from the family trust until the entire marital trust has been depleted.
Issue: The surviving spouse, in good faith, withdraws money from the family trust when the marital trust has $500,000 in it. Was the withdrawal from the family trust acceptable?
Answer: No. A trustee does not have discretion to deviate from very clear trust language. Don’t ignore the document’s plain language. After all, the language in the trust document is not a suggestion. It was an instruction. And when you agreed to serve as trustee, you promised to follow instructions.
Was This Real Estate Deal The Best Way To Get Exposure To The Real Estate Market?
Chapter 8 deals with a trustee’s duty to invest prudently, but the pre-construction real estate example used earlier in this chapter is a good one to start thinking about how to invest as a trustee. Perfection is not expected. Failure to plan is not justified.
In our example, the trustee wanted to invest his nephews’’ trust in pre-construction units. If real estate was an appropriate investment, you need to convince me that that specific development was better than other real estate investments.
- Did you research your real estate options?
- Are there other developments?
- Did you employ a broker?
- Why not invest in a handful of the highest quality publicly traded REITs?
- Or a REIT mutual fund with an outstanding manager?
- Or a low-cost, low fee REIT index fund?
To justify investing in this one particular preconstruction project, you would need to specifically understand why this project, with this developer, in this geography, at this time, is worth the risk of investing trust assets – and then be able to justify why this project is a better investment than the alternatives. Can you explain how the risk of investing in this project is less than the alternatives, and why the expectation of return is higher? Can you say that the trust investment will be less risky and likely to produce greater returns?
Can you picture Dana Carvey impersonating President George H. W. Bush and saying: “Wouldn’t be prudent”?