Fiduciary – in general this term is used for investment professionals. But if you have been appointed a trustee by a family member or friend, you need to know your duty.
Personal liability for losses or unrealized gains is even possible when allegations of risky investments or commingling of funds are raised. In this post, we will look at the “prudent investor rule” and how to make decisions regarding distributions.
Income versus long-term growth
The Colorado Bar Association has published guidance for trustees. Part of the role is diversifying investments. A variety of mutual funds offer his sort of benefit, but the costs must be analyzed.
Balancing the need for regular income against the long term is another consideration. A vacation property may have annual costs that need to be paid from the trust. In this case, it is important to ensure money is available to pay these expenses and not tied up in a term-type savings account or investment. On the other hand, a trust set up to provide for a special need’s individual will need to focus on long-term stability/growth to make sure support is available over a lifetime.
Both these concepts tie in with the “prudent investor rule” which basically requires that you do what another reasonable and prudent person would do in the same situation. Re-evaluating a financial portfolio on a routine basis is a part of this as well.
The trust agreement itself should provide clear guidance on when to make distributions.
Expenses for the beneficiary’s health care may be mandatory. But another trust may allow the trustee latitude to determine whether a distribution request is necessary. These types of clauses may lead to conflict if a trustee and beneficiary have different ideas of what constitutes a “need.”
When issues start to crop up in administering a trust, it is a good idea to bring on a professional.
You are entitled to pay yourself a reasonable amount for the time you spend administrating the trust and you can also seek reimbursement for out-of-pocket costs. The cost to hire professionals such as an attorney or accountant can also be paid through the trust, but these fees must be disclosed in an annual accounting.