Trustee’s duty to develop an administrative plan or “If you don’t know where you are going you might end up somewhere else.”

Duty to Develop a Plan: Section 2(a) of the UPIA directs, “In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.” In response to this duty, a prudent trustee will develop an administrative plan that projects the income and growth needed by the trust assets to accomplish its purposes, including the expected distributions from the trust. As Yogi Berra once famously said, “If you don’t know where you are going you might end up somewhere else.”  A prudent trustee will chart the course for the trust to define the outcomes that are being pursued. Following are the components of this plan:

  • Trust Value: The current value of the trust assets.  
  • Trust Term: How long the trustee expects the trust to be in existence. In most cases the term of the trust is the life of a particular person or persons.  A prudent trustee would then estimate the trust term by the life expectancy of the youngest beneficiary. (See IRS 590-B Page 44).  In the abundance of caution a trustee might increase the projected term of the trust by a number of years beyond the youngest beneficiary’s life expectancy.
  • Trust Distribution: Most trusts are established to provide a stream of distributions to the beneficiary(ies). In most cases the dollar amount of these distributions is left to the discretion of the trustee. A prudent trustee will go through a budgeting exercise which defines (1) the total cost of providing that benefit the trust was designed to produce and (2) other income sources or assets available to the beneficiary, resulting in (3) the projected distributions from the trust to meet its purposes, terms and distribution requirements. If the beneficiary is relatively young and the distributions to the beneficiary are likely to continue for decades, a prudent trustee will consider in this analysis the erosive effect of inflation. A distribution of $100,000 in 2040 is unlikely to purchase the same market basket of products and services as it did in 2020.
  • Trust Return: A trustee has a duty to define a return objective for the trust.  If a trustee has no basis for estimating the future return of the existing trust assets they are encouraged to have a licensed professional offer their opinion in writing for the trustee’s records.
  • Trust Terminal Value:  A trustee who has discretion to invade the principal of a trust may choose one of several objectives for the preservation or depletion of trust capital. The trustee could, given perfect foresight, distribute the last dollar in the trust on the beneficiary’s last day of life. Or they could seek to preserve ALL of the trust capital for the residual beneficiary(ies). Or they could target a distribution plan that anticipates half of the trust capital is invaded to meet the trust purposes, but the other half is retained in the event of a longer than projected trust term (beneficiary life) or expenses that were higher than anticipated. In any case, the trustee must exercise their discretion to define the targeted trust capital at the trust termination.

Sample Administrative Plan Language: “I am the trustee of the XYZ Trust. The trust currently holds approximately $1.5m of capital. The term of the trust is projected to be 15 years, which is the life expectancy for the current beneficiary plus 5 years. The distribution that I have estimated will accomplish the trust purposes and terms is $100,000 per year. This distribution is projected to be increased each year with the rate of inflation. The long-term expected return from this trust capital is 6.0% per year. I expect that approximately 50% of the trust capital will be eroded if these projections are accurate, which would leave $750,000 in the trust in 15 years at the beneficiary’s age 94.”

Compliance Library: A prudent trustee will develop a record that demonstrates they have established a distribution plan that is based upon (1) the purposes, terms and distribution requirements of the trust, (2) the current size of the trust capital, (3) the term of the trust which is typically the life expectancy of the current beneficiary, and (4) the projected long-term return from the trust assets.

Give me a call: If you or your clients serve as a trustee and a further discussion would be helpful regarding this duty to act prudently when establishing an administrative plan, I am available for a phone call to discuss the facts. Simply click here to book a 20-minute consultation.

Onward,

Josh Yager, Esq., CFP®, ChFC®
805-899-1245
jyager@anodosadvisors.com

 

Anodos helps trustees (ERISA, individual, and endowment) save time, reduce their personal risk, and fulfill their fiduciary duties.  We do this by helping the trustee conduct audits of the money managers to whom investment duties have been delegated.  Fiduciaries have an affirmative duty to provide ongoing and independent oversight of the money managers.  What makes us unique is that we do not manage money or sell insurance.  Doing fiduciary audits, benchmarking studies, and performance attribution is all we do. 

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