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Trust Asset Distribution


If you have distributed funds my mistake, it is your job to get it back.


The Trust document requires that 20% of the trust assets shall be distributed to a beneficiary upon a certain happening, or as of a certain date. Through a simple, innocent arithmetic error, you distribute too much to the beneficiary: you distribute 23% instead of 20%. Go get it: send written notice to the beneficiary explaining that too much money was distributed, and requesting, or demanding, that it be returned.

Using Refunding Agreements And Receipts

Good news: most states’ laws anticipate this. Some states have very specific statutes which require the beneficiary to return to the trust the excess distribution. However, a good practice for a trustee is, prior to distribution, the beneficiary signs a receipt and re-funding agreement. The beneficiary agrees to return any amount incorrectly distributed, upon notice. It’s simple, straightforward, and merely reflects basic law: you can’t keep what is not yours, even if the distribution was a mistake.

The question for you, the trustee, is who is responsible for any loss in value? Or, what if the beneficiary has already spent the money or doesn’t have it? Who makes the trust whole?

Reliance On Experts May Exonerate You

If you reasonably rely on certain, limited, experts, then, depending on the governing law of your trust, a trustee may be exonerated from certain losses or acts. This is because in certain limited situations, a trustee may only be responsible if he or she was personally at fault. Relying on advice of counsel, or an investment agent, or other expert, may or may not exonerate you, depending on the governing law and the facts. But the point of this is important.

Hiring competent advisors, investment agents, accountants, and attorneys, is the best way to assist you in the performance of your job as trustee and, selfishly, the best way to insulate you from potential liability. Your failure to retain experts, may, itself, be a breach of your fiduciary duty. So, start with a competent and experienced trust counsel and consider adding members to your team, such as a CPA, and an investment agent, with trust experience. Disclose your hiring of them to the beneficiaries, and, if the beneficiaries object to your hiring experts, it’s better that this issue be resolved now, rather than years, and thousands and thousands of dollars, down the line.

Trust Language And Consents Don’t Always Remove Liability: Even If It Seems Clear On Its Face

Previously, we discussed trust language which may appear to exonerate a trustee from retaining an asset concentration indefinitely. Be mindful of exoneration clauses. Overly broad, trustee-serving language which purports to exonerate a trustee from “all liability” or which simply states that a trustee shall never be liable for damages, would probably be dismissed by a court of law as invalid. That language will not save you from acts of self-dealing, conflicts of interest, intentional torts, such as fraud, or civil theft, and probably not save you from simple negligence, or breaches of your fiduciary duty.

A consent by a beneficiary may or may not exonerate a trustee from breaching their fiduciary duty. At the risk of sounding overly broad, it really depends on what the beneficiary knew, and when they knew it. Remember, you always have the duty of exercising good judgment and sound discretion. You can’t delegate your discretion or judgment to beneficiaries. If you get all the beneficiaries to consent to something stupid, or harmful, this consent may not exonerate you at a later date, or in the future or from another beneficiary, or from a judge. Bottom line: don’t stick a piece of paper in front of the beneficiary asking them to hold you harmless. While consents may be valid in certain circumstances, they also may not be worth the paper they are printed on.

Staying On As Trustee

The decision of whether to be or remain a trustee is a tough one. You may view compensation as a reason to serve, but you must realize the risks involved. If you are an honest, prudent individual with management and investment skills, this may be the perfect role for you. However, if you are a control freak and cannot separate your personal interests from those of the trust and its beneficiaries, you may find yourself in a heap of trouble. If a dispute comes to litigation, the court will review all of your duties and compare the risks and your actions which you took to those of a reasonable trustee with like skills and knowledge.

One of your duties as trustee is a duty of confidentiality. Avoid providing information to ones other than those you are legally required to provide it to. “Family friends” or “advisors” or a divorced parent’s boyfriend or girlfriend are nothing more than strangers to the trust. Don’t post on social media.

In the end, I advise you to evaluate, sincerely, and honestly, why you want to be trustee. Do you have the skill-set, time, and experience? Are you serving for the right reasons? Will your personal feelings cloud your good judgment and objectivity? My advice to you is to leave the role of trustee for the experts: the banks and trust companies. If you insist on serving as trustee, retain trust counsel, and a trust company.

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