Serving As A Trustee: What You Should Know

Being appointed to administer a trust can be quite an honor. This appointment indicates that the other person has a lot of respect and trust in you. However, it can also be an enormous responsibility with a lot to understand. Because you can be held personally liable for any mistakes made, even if they are unintentional, it is important to understand what the role of trustee is, what duties and responsibilities you may have, and what may happen if you fail to fulfill those duties and responsibilities. Additionally, you also should understand what to do if you do not wish to take on or continue the role.

What Is a Trustee?

In its simplest definition, a trustee is the person named to manage a trust’s assets. A trustee is the person who acts as caretaker for the assets held within a trust, and this is generally a big responsibility as these assets are often very valuable. Often, the person who created the trust acts as trustee until they become incapacitated or die, at which point a successor trustee takes over. Almost anyone can be a trustee, as long as they meet minimal requirements.

The trustee is responsible for managing and administering the finances of the trust according to the instructions provided by the trust. Before accepting the role, individuals should carefully read the terms of the trust to ensure they understand how they would be expected to manage and administer it. If they have questions, they should seek legal counsel and ensure they get clarity before accepting the role.

What Are the Two Mandatory Duties of a Trustee in Arizona?

Trustees have many duties, but there are two that are a priority and are mandatory in the state of Arizona. These are a fiduciary duty and a duty of loyalty.

Fiduciary Duty

A fiduciary duty means that the trustee must act in the best interests of the trust’s beneficiaries at all times. They must manage the trust’s assets prudently and avoid conflicts of interest. Additionally, A.R.S. §14-7402 requires trustees to act impartially toward all beneficiaries, which means they must make decisions based on what is best for all beneficiaries, rather than what is best for only one or some beneficiaries.

Other duties under fiduciary duty include acting in good faith, keeping trust matters confidential to only those who need to know, transparent disclosure about the trust to beneficiaries, and taking prudent actions. Prudent means acting reasonably, with wisdom and judiciousness. In other words, the trustee must make careful, well-thought-out decisions that consider the future of the trust and its beneficiaries.

Duty of Loyalty

A duty of loyalty is both a separate duty and also part of the fiduciary duty. Duty of loyalty means that the trustee must administer the trust solely for the benefit of the trust’s beneficiaries. The trustee must prioritize the beneficiaries’ interests above all others when making trust-related decisions. This duty prohibits the trustee from self-dealing or personally benefiting from trust transactions.

What are a Trustee’s Duties and Responsibilities?

A trustee has several duties and responsibilities in administering an Arizona trust. Understanding these duties and responsibilities is crucial, as failing to fulfill them can result in significant consequences for the trustee.

Protecting the Trust’s Assets

The trustee is expected to manage and safeguard the trust’s property with care and prudence. Protecting trust property means they must carefully consider each decision and the potential positive and negative consequences before moving forward. For example, they should not invest cash from the trust in uncertain or unwise investments, but instead seek out investments that are reliable and show generally consistent growth. They should also not sell assets or convert them into other forms unnecessarily.

Accounting and Reporting

Beneficiaries are entitled to regular reports regarding the trust’s income, assets, and expenses. Trustees are expected to provide these reports with accurate information annually. If a beneficiary requests a report, a trustee must provide one unless they determine that it is unreasonable to do so.

Legal and Tax Compliance

Trusts must comply with Arizona Trust Laws, as well as file tax returns and pay appropriate taxes. The trustee is responsible for ensuring this legal and tax compliance. If necessary, trustees can seek legal counsel or tax advice from the appropriate professionals to ensure that the trust remains in compliance.

Conflict Management

When there is a conflict between beneficiaries, the trustee is expected to resolve them. The trustee is also expected to make impartial decisions among the beneficiaries. This means that trustees cannot favor one beneficiary over another for any reason, unless the trust terms specifically state otherwise.

Investment Management

Often, trusts include cash that is intended to be investments so that the profits from such investments can be income for the trust. Trustees are expected to manage these investments with the prudent investor rule in mind. This simply means that the trustee must make these investments as any prudent (or reasonable) person would.

Administration of the Trust

The trustee must administer the trust in general. This means fulfilling all of the administrative requirements and following the terms of the trust document. If a trustee is uncertain about what a trust term means or how to execute it, they should consider seeking legal counsel from Harrison Law, PLLC. One of our knowledgeable trust attorneys may be able to assist in clarifying the term or offer guidance regarding how to execute the term or answer questions about trust administration in general.

3 Things a Trustee Can Do and 3 Things They Cannot Do

While there are a number of duties and responsibilities trustees must fulfill, there are three things that they are expressly allowed to do and three things they are expressly forbidden from doing. While the things they can do may not always be required or necessary, the things they cannot do are always unacceptable and have the potential to have the trustee removed from their role.

3 Things the Trustee Can Do

A trustee can manage and invest trust assets to create income for the trust. They can distribute this income and also distribute the principal to beneficiaries according to the trust’s terms. Finally, they can hire professionals such as attorneys or accountants at a reasonable cost to assist them with administering the trust. While the trust’s terms may require investing trusts and distributing income or principal, trusts usually do not require hiring professionals. This decision is typically left to the trustee to determine whether they feel they need the assistance.

3 Things the Trustee Cannot Do

Trustees cannot use the trust assets for their own personal gain. They also cannot act in a manner that conflicts with the interests of the beneficiaries. They must always prioritize the beneficiaries’ best interests over anyone else’s. Finally, trustees cannot fail to provide accurate accounting or reports to the beneficiaries. If a trustee is not sure whether an action may be considering as acting for their personal gain or conflicting with the beneficiaries’ interests, they should consider seeking legal counsel to ensure that they do not make a costly mistake.

Can a Trustee Be Compensated?

Sometimes, the trust’s terms will indicate whether the trustee is to be compensated, and if so, how much compensation they will receive. A.R.S. § 14-10708 provides that if the trust’s terms do not indicate compensation, the trustee is entitled to reasonable compensation under the circumstances. Additionally, trustees are entitled to reimbursement for expenses incurred to administer the trust. These may include expenses for travel, insurance, taxes, storage, or other properly incurred expenses.

Can a Trustee Step Down or Be Removed From Their Role?

Someone who has been asked to be a trustee can decline to take on the role if they do not feel qualified to handle it or simply do not want the responsibility. If the individual does accept the role of trustee, they can opt to step down later if they wish. They can also be removed from the role for certain behaviors.

Trustee Chooses to Step Down

If the trustee steps down from their role for reasons other than death or incapacitation, they must provide at least 30 days notice to the beneficiaries, settlor, and any cotrustees. This notice must also be recorded in the county recorder’s office in any Arizona county in which the trust holds property.

The trustee can also seek court approval to step down. In either case, the trustee must continue to act as trustee until such time as their replacement takes over.

Trustee Is Removed

A trustee can be removed from the role if a court deems them unfit or unwilling to hold the role. They can also be removed for failing to fulfill the responsibilities of the role, or if all of the beneficiaries request their removal and a court decides that it is in the beneficiaries’ interest to grant the request.

Trustees can also be removed from the role if they breach their fiduciary duties. Trustees do not want to risk this reason for removal. If the trustee is removed for breaching their fiduciary duties, they may also face a lawsuit from the trust’s beneficiaries to recover any losses suffered as a result of the breach. Trustees are personally liable for these losses, which means that the trustee’s personal assets may have liens placed against them to recover the losses.

Conclusion

Trustees are given a lot of responsibility, and it can be overwhelming for some. Understanding what you are agreeing to, the terms of the specific trust and the Arizona law regarding trusts, is crucial to ensuring that you carry out those responsibilities properly and do not find yourself in legal trouble.