You have decided to create an estate plan. You have thought about the loved ones and charities you want to provide for and the disposition of your assets. You have decided to set up a trust and now must select a trustee to carry out your intentions. You don't know whether you should select a bank or an individual to act as trustee. Cost is certainly a factor, but there are other considerations as well. With great power, comes great responsibility – and liability as well. Knowing the obligations imposed upon trustees can help you in the selection process. The following are things you should consider when selecting a trustee.

Make Distributions to Beneficiaries in Accordance with the Trust Most trusts provide the trustee with guidance on the purposes for which distributions can be made to beneficiaries: for example, the beneficiary's "health, education, support and maintenance." A trustee must review a beneficiary's circumstances and determine what is an appropriate distribution in light of the distribution standard. Most banks serving as trustee have distribution committees which review a beneficiary's request, and often request the beneficiary's current financial statement and/or income tax return to determine objectively the need for a distribution. Individual trustees must make such determinations themselves. Although an individual trustee may consult with a professional regarding distributions, the ultimate decision is that of the trustee.

Once a distribution decision is made, the trustee should set out in writing the reasons for making or denying the requested distribution and include supporting documentation, such as the beneficiary's financial statement and information regarding the beneficiary's circumstances, to substantiate the decision in the event a beneficiary decides to sue. Invest Trust Assets Carefully Trustees have a duty to invest trust assets as a prudent investor would, considering the purposes, terms, distribution requirements and other circumstances of the trust. Investments need to be made in the context of the entire trust portfolio in light of overall investment strategy, incorporating both risk and return factors. A trustee may delegate investment functions to an investment agent, but the trustee must continue to review the agent's actions and monitor overall performance.

Diversify Trustees must diversify investments unless the trustee reasonably determines that the trust purposes will be better served by retaining a particular asset. There has been an increase recently in lawsuits by beneficiaries claiming that trustees failed to diversify portfolios by keeping large blocks of stock for too long. Such cases have arisen even when the trust document itself directed retention of the stock regardless of lack of diversification, and even when the beneficiaries had signed an investment direction agreement acknowledging that the entire trust would consist of particular stock and directed the trustee to continue to retain the investment.

Account to the Beneficiaries. A common complaint of beneficiaries is that the trustee fails to keep them informed. Although a trustee is not required to consult with beneficiaries with respect to any particular action, the trustee must, by law, maintain detailed records and make a full and accurate accounting to the beneficiaries on at least an annual basis. Providing accountings actually protects the trustee and the trust because if the beneficiaries do not raise questions or objections within three years from the date the account is provided to them, they will be barred from suing the trustee by the statutes of limitation. If a trustee does not provide accountings, then the statute of limitations period will never run and the trustee will continue to be exposed to potential litigation by a beneficiary who objects to the trustee's actions.

Avoid Conflicts of Interest and Self-Dealing. A trustee has the duty to administer the trust solely in the interest of the beneficiaries, and cannot favor one beneficiary over another. For example, a trustee cannot favor the income beneficiary over those beneficiaries who will ultimately receive the trust assets at the income beneficiary's death. If there is a dispute between beneficiaries, the trustee must remain strictly impartial, never taking sides, and seek court guidance if necessary. That could be difficult for an individual trustee if he or she is related to a beneficiary. Lawsuits are often filed by beneficiaries who believed the trustee was favoring another beneficiary. Examples of self-dealing by a trustee include sale or lease of property to the trust by the trustee, purchase of trust property by the trustee, or voting by the trustee of trust securities in order to elect the trustee as an officer or director of the company. In some cases, these forms of self-dealing and conflicts of interest can be waived by the express terms of the trust or with the consent of the beneficiary, but only after full disclosure to the beneficiaries by the trustee or with court approval.

General Duty Not to Delegate. In general, except for the ability to delegate investment responsibilities to a qualified investment advisor, a trustee may not delegate responsibilities to others, particularly decisions requiring the exercise of personal judgment and discretion, such as decisions on distributions to the beneficiaries. While certain minor administrative matters may be delegated to an agent, the trustee still must supervise the agent. The same rule applies if the trustee delegates his or her authority to a co-trustee.

Do Not Commingle Trust Assets. A trustee must keep all trust assets separate and distinct from his or her own holdings and maintain sufficient records. Commingling trust assets with other assets or property is a violation of the trustee's duties and a common ground for assessment of damages against the trustee. Likewise, a trustee cannot use trust assets for his or her own personal use or enjoyment. Liability of a Trustee If a trustee fails to comply with any of the duties discussed above, a beneficiary can sue for monetary damages. If the court agrees with the beneficiary, the damages, and in some cases the costs of the lawsuit (including attorneys' fees), will be assessed against the trustee. These amounts are paid out of the trustee's own resources, not from the trust. Conversely, a trustee will not be required to defend his or her actions with personal resources for lawsuits relating to actions taken in accordance with the terms of the trust and applicable law. Those defense costs are borne by the trust.

Whether a bank or an individual is selected to act as trustee, it is important to make certain that the trustee is not only aware of his or her legal obligations, but has the ability to satisfy them.

This article was written by Karen MacKay and Gerry Ring, who provide counsel and litigation services to banks and individual trustees regarding these issues. Ms. MacKay can be reached at (312) 840-7009 / kmackay@burkelaw.com and Mr. Ring can be reached at (312) 8407014 / gring@burkelaw.com.