Fiduciary roles: should you serve as a trustee?

Your father asks you to serve as trustee for the trust he’s creating to hold the shares of the family business. Most of us are honored to be invited to serve in a fiduciary role, to be asked to take on an important position of responsibility. But particularly in a family situation, consider the potential downsides of a fiduciary role. Before you sign the documents, think about the responsibilities you’re taking on, and whether you’ve got the time, energy and expertise necessary to do the job right.

Serving as a trustee is a fiduciary role, which requires you to act in the best interests of another – in the case of the trust, in the best interests of the beneficiaries. At great risk of oversimplification, the core notion of fiduciary duty is: never can you put your own interests first, or act for your own personal gain.

Under the common law, a fiduciary owes three primary duties to the beneficiaries: the duty of care, the duty of loyalty, and the duty of impartiality. The trustee must carry out the express terms of the trust, must act prudently, must treat the current and future beneficiaries impartially. The trustee must protect and secure the trust property, ensuring that it is not commingled with other assets. He or she must invest the trust property to produce a reasonable income. Fiduciary duty is the highest legal standard under US law, a particularly daunting hurdle if you are someday sued for negligence.

If you’re asked to serve as trustee of a family trust, find out who the beneficiaries will be. Will you be asked to exercise discretion over distributions? What will it do to your relationship with your siblings if you turn down a request for a distribution? Your fiduciary duty to act in the best interests of the beneficiaries may conflict with the desires of your father, the grantor of the trust – for example, your father may envision that all profits will be reinvested in the company, while a sibling beneficiary may have a compelling need for distribution, and your fiduciary duty obligates you to invest the trust property to achieve a reasonable income. How will you resolve those conflicts within the scope of the law and the scope of the family relationship? Are you also in the senior management team of the company? You may agree that the company desperately needs to retain cash – but remember, your duty as trustee is to the beneficiaries, not to the business.

Adding further fuel to the fire, what about the duty to diversify trust property, a fiduciary obligation recognized under the law of some states? Are you at risk for being sued by a beneficiary who believes that the capital would be more productive if invested in a diversified portfolio rather than a single, privately-held stock? Does the trust instrument direct you to retain the company stock? Permit you to retain it? Does your state law permit the grantor’s intent to trump the duty to diversify?

If these questions make you feel a bit queasy, good. Serving as a trustee can be a tough job, at times requiring you to resolve layers of familial and legal conflicts. Don't undertake the role without giving it considerable thought. Talk with experienced legal counsel and at least one other person who has taken on a similar role.

Next post, we’ll talk about strategies for reducing trustee liability.