It is quite fitting that the word “trust” features prominently in the word trustee. This is because when you name someone as a trustee, you are literally placing your unlimited trust in them because you will be feeling the effects of their actions that you cannot always control. In other words, they control assets that belong to you in some way, but over which you have given them the power to make decisions. This is one of the trade-offs of naming someone as a trustee. You receive some protection and safeguarding over your assets at the same time that you have to give up control.
In order to understand this, it is helpful to discuss what the trustee actually does. For whatever reason, you have decided to place the trustee in control. It could be that you have worked with an asset protection attorney in order to secure your assets and one solution was a trust. You may have decided to move your assets into an irrevocable trust to keep them from having to be used on long-term care. Either way, legal control over your assets has passed to someone else.
One key to grasping how much discretion a trustee has comes from thinking about exactly what a trust does and how it protects you. When you move assets into a trust, the main reason why they are safe is because they are effectively no longer yours. The power to decide what to do with something is the biggest way to control it. If you are still able to choose how you will treat something and what you will do with it, then the trust that you have created is a fiction. At least that is how a court will look at it. So therefore, in order to fully separate yourself from your asset, you have to give someone else decision-making power over it. If you still control what happens, the asset is effectively yours.
So now that we have talked about why the trustee has discretionary power, let us discuss exactly what this power is. One of the main things to understand is that a trustee, despite their powers, cannot simply do whatever they want when they want it. This is because there are limits on the trustee’s discretionary power. The main concept here is that the trustee has fiduciary responsibilities that they must uphold at all times. What this means is that the trustee must act in the best interests of the trust. They cannot breach this responsibility. If they do, they can be held personally responsible. They must generally be honest, and they have a duty to disclose and report what they are doing.
Once we understand how the trustee must act, we can now understand exactly what their discretionary power is. This generally means that the trustee has the full power to decide how to manage the assets of the trust. This discretion extends to how they invest the assets of the trust. They can decide to buy and sell assets so long as they act as a fiduciary would and report the transactions.
Before you panic, remember that the trustee cannot simply help themselves to your assets or even mix their assets with those of the trust. They have to be conservative with their investments, and they cannot swing for the fences with your money. But they are still able to choose where and how to invest the trust’s money.
However, you should also not think that an amateur trustee is going to be making random decisions with your assets. Many trustees will seek out professional help when it comes to managing the trust. Most trustees will feel that they have little incentive and upside by making too many decisions of their own. Many times, a trustee can hire a corporate trustee who will help them in managing the trust. However, you should not be complacent and assume that the trustee will act this way. The responsibility to protect yourself is yours and there are things that you can do to make sure that the trustee acts with your wishes in mind.
Don’t forget that you can set some limitations on the trustee’s discretion. The instrument that creates the trust can include some provisions that can operate as a limit on what the trustee can do with the investments. In other words, you can prevent some headaches down the road when you set the terms of the trust. However, if the trust is irrevocable, these terms cannot be changed once the trust is established. This means that you must have the proper advice ahead of time when you are setting up the trust because you do not get do overs for irrevocable trusts. If you have certain wishes that are important to you and you want to trustee to act a certain way, put this into play at the beginning.
When you begin to consider the scope of the trustee’s discretion, you will realize how important it is to have legal help when you are setting up a trust. An estate planning attorney is able to use their experience to think about things at the outset that you may not realize. While this may be the first time that you establish a trust, this is what we do on a daily basis. Let us put our knowledge to work on your behalf so you can have peace of mind when starting a trust.