COUNSELOR’S CORNER WHEN FIDUCIARIES FAIL What CPAs Need to Know About Trustee Mismanagement BY MINJA HERIAN & KACI CLABORN, KOLEY JESSEN TRUSTS ARE ESSENTIAL TOOLS IN ESTATE PLANNING, HELPING people manage and pass on assets while avoiding probate. But even the best plans can fall apart if the trustee does not do their job properly. Poor trust management can reduce the value of a trust, create family conflict, and lead to expensive legal battles. As a CPA, understanding a trustee’s duties, recognizing warning signs, and advising clients proactively can help prevent these issues. WHAT IS A TRUSTEE? A trustee is the individual or entity appointed to manage trust assets for the benefit of the beneficiaries. Trustees hold legal title to the assets but must act solely in the beneficiaries’ best interests. This fiduciary role carries significant legal and financial responsibilities, and failure to meet them can result in personal liability. WHAT ARE THE DUTIES OF A TRUSTEE? Trustees must follow these core duties: 1. Loyalty – The trustee must always act in the best interest of the beneficiaries and avoid personal gain. 2. Impartiality – The trustee must treat all beneficiaries equally, especially when the beneficiaries’ interests may differ. 3. Prudence – The trustee must administer the trust with care, skill, and caution. 4. Inform and Report – Trustees must keep beneficiaries reasonably informed about the administration of the trust and provide regular, accurate annual reports. These reports should include a clear summary of trust assets, liabilities, income, and expenses. WHAT IS TRUSTEE MISMANAGEMENT? Trustee mismanagement occurs when the foregoing duties are breached. Common examples include: 1. Self-dealing – This can occur when a trustee sells property to themselves or their business at below-market prices, uses trust funds to pay personal expenses, or otherwise personally gains at the trust’s expense. 2. Lack of Communication – This can occur when a trustee withholds accountings, delays distribution decisions, or fails to consult beneficiaries about significant actions. Missing or incomplete accountings can mask improper withdrawals or unexplained expenses. When involved with the accountings, CPAs should verify that all financial reports are timely, accurate, and reconciled with the trust bank statements. 3. Improper Investment of Trust Assets – This occurs if a trustee invests heavily in speculative ventures, fails to diversify, or holds illiquid assets without justification. Poor investment choices often lead to diminished principal or liquidity issues. CPAs should review investment allocations for compliance with the Prudent Investor Rule and confirm that risk levels align with the trust’s objectives. 4. Excessive Fees – This can occur when a trustee charges unreasonable trustee commissions, hires overpriced advisors, or bills for unnecessary services. Inflated fees erode trust value and may indicate self-dealing. CPAs should compare trustee and advisor fees against industry standards and ensure they match the trust agreement’s terms. These actions can lead to legal consequences, including removal of the trustee and surcharge actions. 14 Nebraska CPA
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