By: Rod Waterbury
Taking over mom’s or dad’s trust as their successor trustee involves a fair amount of responsibility. The same is true for a professional fiduciary, attorney, tax advisor or anyone else that is trustee for a trust.
California law requires a trustee invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. Sounds simple enough, right?
Like a lot of things in life, and as the saying goes, “fail to plan, plan to fail”. The duty of prudence is not simple by any standard; while there may be room for some art, planning and the use of some science are a large part of this. Avoiding the pitfalls that may put you in the position of having to answer to the courts or a trust beneficiary with an axe to grind is worthwhile. Here are a few things to consider while developing your plan:
- How much a beneficiary can depend on a Trust for distributions depends on a number of things including: the value of the Trust’s assets, how long they will need distributions, whether there is a plan for someone else to receive anything after the beneficiary no longer needs to receive distributions, inflation, taxes, and reasonable rates of return expectations on investments.
- The risk you take with Trust assets can be complicated. Assets like stocks, bonds and mutual funds have quantifiable risk in the form of calculations based on the variation of historical price performance. Easy enough to measure and understand risk there. Assets like real estate, on the other hand, may be more difficult to assess because of an attached loan, or other limitations on marketability such as location, the nature of the property itself, or an easement.
- The law in California favors taking a total return approach to investing including income and appreciation of capital, i.e. not just one or the other. The law also requires a trustee take into consideration the degree to which a beneficiary needs liquidity or access to assets to satisfy their needs. It would probably be prudent to have a portion of trust assets in investments that are going to maintain their value and be available to support distributions when the economy is contracting.
- Diversification is required unless circumstances demand otherwise. Perhaps the taxes owed for selling assets with a low cost basis would materially reduce the size of a trust, for example, which would make it more prudent to not diversify.
At GBB we appreciate the responsibility that comes hand-in-hand with being a trustee. Like you, we are fiduciaries tasked with the duty to do what is in our clients’ best interest always. Give us a call or send us an email, we would be glad to learn about you and show you what we do to help clients like you fulfill your duties.