As a trustee of a trust (i.e., the individual who manages and administers the assets of the trust), the law imposes certain duties that you must adhere to. In a previous blog post, we spoke about one of these duties: the duty of loyalty. Another duty imposed on a trustee is the duty of impartiality.
Michigan defines the duty of impartiality as follows:
The trustee shall act as would a prudent person in dealing with the property of another, including following the standards of the Michigan prudent investor rule. If the trustee has special skills or is named trustee on the basis of representation of special skills or expertise, the trustee is under a duty to use those skills. MCL 700.7803.
The Michigan prudent investor rule is defined as follows:
A fiduciary shall invest and manage assets held in a fiduciary capacity as a prudent investor would, taking into account the purposes, terms, distribution requirements expressed in the governing instrument, and other circumstances of the fiduciary estate. To satisfy this standard, the fiduciary must exercise reasonable care, skill, and caution. MCL 700.1502(1).
The statute goes on to state that this default rule may be expanded, restricted, eliminated, or otherwise altered by the provisions of the trust instrument. MCL 700.1502(2).
So what does this mean in practical terms? Imagine you’re in a second marriage and you and your spouse each have children from your prior relationships. Perhaps your trust is structured so that if you pass away, your current spouse would receive income from your trust until he or she passes away (i.e., spouse is an income beneficiary), while the remaining assets in the trust would go to your children when your spouse passes away (i.e., your children are the remainder beneficiaries). How should the trustee balance the interests of these two classes of beneficiaries? In this example, the spouse may desire higher risk investments because they have the potential to generate more income. In contrast, the children may want a more conservative portfolio to preserve the principal that will ultimately be left to them.
Another example is if the trust assets are comprised of business, land, or rental property. What if the beneficiaries are at odds on what to do with these assets? What if some of the beneficiaries want to liquidate the assets and feel they are being slighted by the other beneficiaries who may be receiving a greater benefit from these trust assets in their current form?
As you can see from both of these examples, a trustee can oftentimes be put in a very difficult situation. To alleviate this difficulty, a trustee should adhere to the following set of guidelines to stay in compliance with the duty of impartiality:
- Look to the language of the trust and treat each beneficiary as directed;
- Invest trust assets to produce a reasonable income for income beneficiaries and preserve the principal for remainder beneficiaries;
- Use the same process for all beneficiaries when making discretionary distributions. This is not to say that each beneficiary will receive the same distribution. Rather, that their interest shall be considered equally;
- Document the process used for making discretionary distributions;
- Consider the size and anticipated duration of the trust when dealing with different classes of beneficiaries;
- If the trust has tangible assets (e.g., a vacation home), grant beneficiaries equal access to those assets.
The attorneys of La Grasso, Abdo & Silveri, PLLC encourage their clients to set up a “Successor Trustee” meeting shortly after they’ve signed their estate plan. This allows our attorneys the chance to meet with the client and the successor trustees they’ve appointed so they can explain the role and its inherent duties. This will hopefully alleviate some of the burdens and concerns the future trustee may have. Building the relationship between attorney and successor trustee early provides a level of comfort so that if challenges or questions arise after the client’s death, the successor trustee has a familiar face to which they can turn