So you've been appointed trustee. Now what do you do?
Of course, there are your administrative functions in terms of investments, bookkeeping, and paying taxes. But how do you decide how much to give each of the beneficiaries? When? For what purposes?
Some trusts are quite simple—you're directed to distribute the income, invest the principal and distribute what's left when the life beneficiaries pass away.
But many trusts leave the question of distribution to the discretion of the trustee with little or no guidance. Most lawyers urge trusts to eschew strict guidelines for two reasons: First, we can't predict the future, so putting too many restrictions in a trust could hamper its ability to help the beneficiaries when needed. Second, the more you say, the more that can be litigated. If decisions are left to the trustee's discretion, they can rarely be challenged (just in the event of malfeasance). But if the trustee must follow specific guidelines, beneficiaries can embroil the trust in litigation by alleging that the the trustee has not adhered to those rules.
As a result, in most cases, the trustee simply substitutes her judgment and values for those of the grantor. This can be fine, since the grantor may have chosen the trustee because of his faith in her judgment and the fact that they share values in common. But what happens when a new trustee comes along or an institutional trustee does not know the grantor well? Or the trustee simply has different values from the grantor?
Statement of Wishes
It would help most trustees to receive some instructions from the grantor, not in the trust itself for the reasons stated above, but in a side letter or memorandum of instructions or wishes. Such a letter could answer the following questions:
- Should the trust support the beneficiaries or simply enhance their lives, forcing them to provide their own support?
- Should spending be limited so that the trust lasts the beneficiary's lifetime?
- How should the trustee balance the needs of the lifetime beneficiary with those of the people who will inherit the trust property upon the current beneficiary's death? After all, the trustee has a fiduciary duty to both types of beneficiary.
- If the trust is to help support the beneficiaries, how lavish should that support be? Basic living needs, or fancy digs and a luxury car?
- Should the trustee favor certain uses of trust funds over others, for instance educational expenses, health care, or the downpayment on a house?
- How should the trustee balance distributions among beneficiaries? Should they all receive the same amount, or should payments be made based on each beneficiary's perceived needs?
If trust grantors wrote down their answers to these questions, their trusts would be more likely to serve the purposes for which they were created. Such statements of wishes would not be binding on the trustees, but would provide them with the guidance they sorely lack in most instances.