Since 2013 I have been engaged to testify as an expert witness in the California Courts to opine upon the Trustee’s Standard of Care. Through these engagements I have compiled a list of the “governance practices” that a successor trustee is encouraged to adopt. Following is a summary of these practices as well as a link to a more comprehensive treatment of each of these risk mitigation strategies.
1) Compliance Library – CPC §16040: A prudent trustee will create a series of policies and procedures that demonstrate the trustee has fulfilled their duties with excellence. These policies and procedures should be calibrated to the size and complexity of the trust, where a large trust with complex assets will have a more robust governance process than a trust that is more modestly funded.
2) Annual Account – CPC §16062: A prudent trustee will provide an Annual Account to the beneficiaries of the trust. Unfortunately, few trustees fulfill their duty to provide this report. Complicating this problem is that few tax professionals provide this service for their clients who are trustees. Providing this simple report cuts off the beneficiary’s ability to sue for activities beyond the 3 years statute of limitations.
3) Trustee Compensation – CPC §15601: A prudent trustee will document how they determined the fee they have paid themselves. Few trust documents provide any guidance on how much the trustee is to be paid other than to note that the trustee’s compensation shall be “reasonable”. The California Rules of Court 7.776 identifies the 9 factors the trustee should consider when establishing their level of compensation.
4) Manager Selection, Delegation and Monitoring – CPC §16052(a): A prudent trustee will document (a) why a particular investment manager was selected, (b) what return objective and risk expectations have been communicated to the manager and (c) the ongoing oversight of the manager’s activities toward the written objectives.
5) Trust Stress Test – CPC §16047(b): A prudent trustee will expect that the performance of the trust assets will not always be as they hope and will develop a written contingency plan for those periods where the performance is below the return objective. This will include a consideration of the income produced by the trust, the projected distributions and disbursements from the trust and a sufficient reserve of cash or bonds to be used during these inevitable periods of suboptimal performance.
6) Notice of Proposed Action – CPC §16050 & §16053: When making a particularly significant change in the trust allocation a prudent trustee will communicate their intention through a Notice of Proposed Action to the trust beneficiaries. If the beneficiaries approve the proposed action, or fail to object, they are cut off from filling a suit on the trustee’s decision.
7) Don’t Delay the Post-Death Administration: A prudent trustee will not delay the post death administration because doing so is inconsistent with their duties to the residuary beneficiaries. An unreasonable delay in settling a trust/estate impedes the beneficiary’s equitable interest in their anticipated inheritance.
Link to comprehensive document around these 7 Risk Mitigation Strategies for the Successor Trustee.
Josh Yager, Esq., CFP®, ChFC®
Anodos helps individual trustees save time, reduce their personal risk, and fulfill their fiduciary duties. We do this by helping trustees develop and maintain a series of governance documents which demonstrates they have fulfilled each of their duties of care. We also will act as an expert witness to defend our clients’ findings in court. What makes us unique is that trustee governance support is all we do. We do not manage money, sell insurance, or accept referral fees. We don't have a horse in the race.
We help trustees save time, reduce risk, and fulfill their fiduciary duties. What makes us unique is that trustee governance support is all we do.