Trustees can have significant discretion in how they manage assets depending on the language of the trust instrument. However, as fiduciaries, they owe a duty of loyalty to beneficiaries and can be charged with breach of fiduciary duty for acting or failing to act in the interests of the beneficiaries as required by the trust. This risk of liability means that it is advisable for trustees to follow certain best practices so that they act appropriately in fulfilling their role as fiduciaries while also protecting themselves from challenges by beneficiaries.
Disclosure of Information to Beneficiaries
Generally, it is beneficial for trustees to disclose information to beneficiaries even if it is not required. However, what should be disclosed and when can vary based on certain factors. The main reasons to disclose are:
- Documentary requirements. The terms of the trust instrument might require or prohibit certain disclosures by the trustee.
- Compliance with state law. Some state statutes mandate specific disclosures by trustees. Often, trustees are obligated to disclose the existence of the trust to beneficiaries and provide an account of trust assets and liabilities periodically or upon the occurrence of certain events (i.e. change in trustee).
- Protection from personal liability. Beyond compliance with statutory or trust requirements, trustees should consider disclosure to beneficiaries because it may forestall claims of mismanagement and/or breach of fiduciary duty. It can also benefit the trustee-beneficiary relationship. When beneficiaries feel informed, it can lessen the likelihood of claims of breach of fiduciary duty and allow for better administration and communication regarding distributions.
Recommendations for Trustees
Trustees must understand and comply with the documentary and statutory requirements for disclosure that apply to the specific trust. However, they should also consider taking extra steps to minimize potential conflicts and liability. These include:
- Proactive disclosure to trust beneficiaries. Many legal challenges arise due to a lack of information. As a result, trustees should consider providing an annual or periodic accounting to all qualified beneficiaries and obtaining a signed release from the beneficiaries ratifying the accounting and the trustee’s actions and releasing the trustee from liability. This creates a clean slate for liability purposes since any future claims can only be made for actions that were made subsequent to the release.
Importantly, the accounting need not be formal. An informal accounting that is relatively inexpensive to prepare may be sufficient. However, trustees should use good judgment. If the situation with the beneficiaries is contentious or there are special circumstances such as a change in trustees or minor beneficiaries that are not adequately represented by adult beneficiaries releasing the trustee, it may be best to provide a formal accounting to minimize the risk of liability. Trustees should also consider providing some standardized reporting short of an accounting to beneficiaries on a periodic basis to keep them apprised of the trust administration and the assets.
- Legal advice. When in doubt, trustees should contact legal counsel about their responsibilities. Services rendered to the benefit of the trust should be considered a proper trust administration expense.
If you are a trustee or beneficiary, our attorneys have extensive experience with trust administration and can advise you regarding how to properly fulfill your obligations as a fiduciary. Contact us for a consultation.