Family trusts, also referred to as revocable or living trusts, are popular estate planning tools because they avoid probate court proceedings. A trustee bears a fiduciary duty to carry out the stated purposes of a trust for the benefit of its beneficiaries. A family trust may state very specific purposes, such as paying for a named grandchild's medical degree at a specific university. A family trust may also state broad purposes, such as distributing all assets equally to beneficiaries when the trust's maker dies. A fiduciary relationship is based on a high degree of loyalty. Each state has its own laws governing the creation and administration of trusts. However, all states recognize general fiduciary duties of loyalty, care and prudence. Most state trust laws reflect the principles embodied in the Uniform Trust Code. Therefore, although state law nuances exist, certain trust principles are common nationwide.
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Care and Loyalty
A trustee must use reasonable care and oversight when administering a trust. He must always apply his skills in furtherance of the trust's best interests. For example, if the trustee is a tax attorney, she must apply her legal skills in a way that reaps maximum tax benefits for the trust. A trustee may also retain other experts to fulfill a trust's purpose. For example, if a family trust's purpose is to care for a home-bound, special needs child, it would be proper for its trustee to hire licensed home-care nurses to tend to the child.
Prudent Investment Duty
A trustee must prudently invest and manage a family trust's assets. The duty to prudently invest, sometimes called the prudent man rule, specifically targets managing trust investments. Trustees must generally make sound investments to further the preservation, protection and safe growth of trust assets. Trustees must consider criteria such as inflation, tax ramifications, need for liquidity and income, and capital return. The rule does not make a trustee a guarantor of investment outcomes, but it does require a trustee to act carefully when handling trust finances.
Duty of Loyalty
Loyalty is the most fundamental responsibility of a trustee. A trustee administering a family trust must constantly act in the best interests of the beneficiaries and trust. A trustee must deal fairly and honestly when performing trust tasks. She must maintain reasonable communication with the beneficiaries and administer the trust in an open manner. A trustee should avoid business dealings that would create conflicts of interest between herself and the family trust.
Consequences for Breaches
Trustees who breach their fiduciary duties face several penalties. A trustee may be ordered to amend his behavior or be suspended or replaced. A trustee may be denied payment for services rendered and, if a breach of duty causes damages, ordered to personally pay to make the trust whole again. Trust penalties are generally civil in nature, meaning a probate judge not a criminal court handles grievances.
References & Resources
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