OCEAN CITY – Martinsdale, Mont. (population 1,001) sits miles off Highway 12. Situated in almost the dead center of the state, this small ranching town has also recently been at the center of a headline-making court case that highlights some critical issues about trusts and fiduciary duty.
The case involves a family museum in the town, named for early oil and mining entrepreneur. It’s located in the former home of his daughter, who during her lifetime amassed a significant collection of Native American artifacts and works of art from all over the world. Before her death in 1993, the daughter established a trust to honor her father with a museum bearing his name. The story is all pretty straightforward so far.
However, the board of advisors later decided the museum’s attendance and costs did not merit keeping it open, so between 2002 and 2005 it was shuttered. The trust agreement provided for a board of advisors, the majority of which was controlled by the trustee. During that period, the value of the art collection, which was included in the trust, rose by an estimated 40 percent. In April of this year, Montana’s Supreme Court determined that in failing to protect, maintain and improve the museum with the trust’s principal and income, the museum’s board of advisors had breached its fiduciary duty. In a dramatic move, the court dismissed the entire board.
As beneficial as trusts can be, the responsibilities and obligations they entail can also be substantial, a point that often escapes the parties typically involved — the grantor, beneficiaries and trustees. It’s important to see to it that trustees with good intentions do not become tangled in investing, tax and administrative issues that prove to be more complex than first anticipated. To avoid problems of this sort, it’s essential that the trustees share or, as appropriate, delegate fiduciary responsibility.
A trustee is fundamentally obligated to carry out the terms of the trust agreement, administer the trust in the best interest of the beneficiaries, avoid conflicts of interest, invest its funds prudently and — perhaps the greatest challenge — act with impartiality among the beneficiaries. These legal obligations can complicate administrative decisions, especially if the appointed trustee is unfamiliar with the responsibilities associated with trust administration. In addition to these obligations, the trustee must be familiar with federal and state regulations and law, as they could affect the trust and its beneficiaries.
One common error trustees make is failing to balance the needs of all involved parties. This is particularly a problem when trustees are also beneficiaries. Moreover, as the case of the Montana museum illustrates, being too “conservative” with a trust’s funds can be just as inappropriate as an overly aggressive approach.
Regulations and laws can vary substantially from one state to another. Trustees must also be able to distinguish the trust’s income from its principal for accounting purposes — a task that’s not as intuitive as it might seem. This is particularly important where mandatory income distributions determine the taxability and treatment of the trust.
Given the complexities of trust administration, many trustees find it helpful to engage assistance with these concerns. While trustees are obligated to personally execute their duties, they may delegate certain responsibilities to a trust company, lawyer or accountant. However, the trustee will still ultimately be held responsible for the decisions made, as well as ongoing supervision.
Additional outside perspectives —those of a financial advisor, lawyer or accountant — make it easier to sort through options as a trustee, beneficiary or grantor. In particular, your financial advisor, who is already familiar with your circumstances and financial approach, can help you identify the areas of greatest concern and assist with solutions.
Perhaps you want to create a trust that will benefit your spouse and children, but also want to ensure that your appointed trustee can manage your family’s dynamics — seeking agreement among siblings who are at odds with one another, or balancing the current needs of a spouse from a recent marriage with a desire to provide for children from a former marriage. Or you may be concerned that as a trustee-beneficiary, you’ve inherited a concentrated position as part of the trust’s assets and need help diversifying the risk associated with that position. It’s also common for a beneficiary who is concerned about a trust’s ability to provide adequate income to initiate a review of the way his or her trust is handled.
One of the solutions your financial advisor might propose is working with a trust company. Sharing the responsibility of trust management may provide a trustee with the freedom to truly carry out the intent of a trust — and to keep the honor of a grantor’s faith from becoming a tangle of liability and paperwork.
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)