A trustee is the person or institution responsible for managing and administering a trust. The trustee must follow the trustmaker’s instructions and comply with applicable state law.
A trustee may have broad authority over the trust’s accounts and property. That authority can include investing assets, selling property, creating cash for expenses, and making distributions to beneficiaries.
However, the trustee does not own the trust property for personal use. Every decision must comply with the trust agreement and the trustee’s fiduciary duties.
What Are the Duties of a Trustee?
A trustee is a fiduciary. This means the trustee is held to a high standard of care and must act for the benefit of the trust’s beneficiaries.
Depending on the trust and applicable law, the duties of a trustee may include:
- Following the trust agreement
- Protecting and managing trust property
- Acting in the beneficiaries’ interests
- Avoiding improper conflicts of interest
- Treating multiple beneficiaries impartially
- Investing trust property prudently
- Paying appropriate expenses and taxes
- Maintaining accurate accounting records
- Filing tax returns and related forms
- Providing required information to beneficiaries
- Making distributions according to the trust’s terms
- Keeping trust property separate from personal property
The trustee’s precise duties depend on the trust agreement, the type of trust, and the state law governing it.
Can a Trustee Sell Property Held in a Trust?
A trustee can generally sell property held in a trust when the trust agreement and applicable law give the trustee that authority.
The trustee may need to convert property into cash to:
- Pay trust expenses
- Satisfy taxes or debts
- Make required distributions
- Change the trust’s investment strategy
- Reduce financial risk
- Divide property among beneficiaries
- Prepare to terminate the trust
The trustee’s decision must be consistent with the trust’s purposes and the beneficiaries’ interests.
A trustee does not always need the beneficiaries’ approval before selling trust property. However, the trust agreement may impose specific requirements. In some situations, the trustee may also seek beneficiary consent or court approval to reduce the risk of a later dispute.
Does a Trustee Have Unlimited Authority to Sell Assets?
No. A trustee’s authority is not unlimited.
The trustee must consider:
- The terms of the trust
- The purpose of the trust
- The needs of current and future beneficiaries
- The value and condition of the property
- Tax consequences
- Investment risks
- Administrative expenses
- Applicable fiduciary standards
A trustee must not sell trust property for an improper personal benefit.
The fact that a trustee is also a beneficiary does not automatically permit self-dealing. A trustee-beneficiary may be allowed to receive distributions under the trust’s terms, but transactions involving the trustee’s personal interests require careful review.
Why Might a Trustee Need to Create Liquidity?
Liquidity means having cash or assets that can be converted to cash relatively quickly.
A trust may contain real estate, business interests, stocks, bonds, valuable personal property, or other investments. These assets can be valuable without providing enough cash to meet the trust’s immediate obligations.
The trustee may need to sell or liquidate some assets for several reasons.
Paying Financial Obligations
The trust may have ongoing expenses such as:
- Taxes
- Mortgage payments
- Insurance premiums
- Property maintenance
- Utilities
- Debts
- Other required payments
Creating liquidity allows the trustee to meet these obligations without disrupting the rest of the trust administration.
Covering Administrative Costs
Administering a trust may require legal, accounting, appraisal, investment, property-management, and tax-preparation services.
The trustee may also be entitled to reasonable compensation.
Maryland law provides that a trustee may incur only costs that are reasonable in relation to the trust property, its purposes, and the trustee’s skills. See Maryland Estates and Trusts §14.5-805.
The trustee may need cash to pay these expenses promptly.
Making Distributions to Beneficiaries
A trust may require periodic or one-time distributions to beneficiaries.
For example, the trust may direct the trustee to distribute:
- A fixed amount each year
- Income generated by the trust
- Money for health care or education
- A percentage of the trust at a certain age
- The remaining property when the trust ends
If the trust does not have enough cash, the trustee may need to sell property to make the required distribution.
Responding to Opportunities or Challenges
Market opportunities and unexpected financial problems may require quick access to cash.
The trustee may decide to sell an asset to:
- Purchase a more appropriate investment
- Address an urgent property repair
- Pay an unexpected tax obligation
- Protect the trust from a loss
- Meet a beneficiary’s immediate need
The decision must still satisfy the trustee’s fiduciary duties.
How Must a Trustee Manage Investments?
A trustee must manage investments in a way that reflects the trust’s purposes, terms, distribution requirements, and financial circumstances.
The trustee should not evaluate each asset in isolation. Investments should be considered as part of the trust’s complete portfolio and overall strategy.
Maryland’s prudent-investor standard requires a fiduciary to use reasonable care, skill, and caution and to consider appropriate risk and return objectives. It also generally requires diversification unless the trustee reasonably determines that not diversifying better serves the beneficiaries or the trust’s purposes. See Maryland Estates and Trusts §15-114.
Several considerations may lead a trustee to change the trust’s investments.
Economic Conditions
The trustee should monitor economic conditions, market trends, and the performance of the trust’s investments.
If the existing strategy no longer serves the trust’s goals, the trustee may need to sell, retain, or purchase assets.
Risk Management
The trustee may need to rebalance the portfolio to maintain an appropriate level of risk and potential return.
This could involve:
- Diversifying investments
- Reducing exposure to one company or industry
- Selling a volatile asset
- Reallocating money among asset classes
- Increasing cash reserves
The appropriate strategy depends on the trust’s purpose and the beneficiaries’ needs.
Changes in Beneficiary Needs
A beneficiary’s circumstances may change.
Increased education expenses, health care costs, housing needs, or other support requirements may call for a different investment strategy. The trustee may need to generate more income or preserve additional cash.
Growth Versus Income
Some trusts are designed to provide income to a current beneficiary while preserving principal for future beneficiaries.
The trustee may need to balance:
- Current income
- Long-term growth
- Protection of principal
- Inflation
- The duration of the trust
- The interests of different beneficiaries
A strategy that benefits one beneficiary in the short term may negatively affect another beneficiary later. The trustee must account for both interests.
Can the Trustmaker Restrict the Sale of Trust Property?
The person creating the trust can include instructions about the retention or sale of particular assets.
For example, the trustmaker may want to preserve:
- A family home
- A vacation property
- A family business
- An heirloom
- Land with historical or emotional significance
- A particular long-term investment
These instructions can help preserve important property for future generations.
However, restrictions should be drafted carefully. Rules that are too rigid can make it difficult for the trustee to administer the trust.
What Problems Can Overly Restrictive Provisions Cause?
A restriction on selling property may become a problem if:
- The trust needs cash
- The property becomes expensive to maintain
- The asset declines in value
- A business is no longer profitable
- The trust must pay taxes or debts
- A distribution becomes due
- The investment creates too much risk
- Tax laws or economic conditions change
- Family circumstances change
For example, requiring a trustee to retain a house indefinitely may create difficulties if the trust cannot afford the taxes, insurance, maintenance, or repairs.
The trustmaker should balance the desire to preserve important property with the trustee’s need for enough flexibility to manage the trust successfully.
Must a Trustee Follow the Trust’s Distribution Instructions?
Yes. A trustee must follow the valid distribution instructions in the trust agreement.
The trust may require the trustee to distribute money or property:
- At a particular age
- On a specific date
- After the beneficiary reaches a milestone
- For health, education, maintenance, or support
- At the trustee’s discretion
- When the trust terminates
If the trust establishes a valid condition, the trustee generally must follow it.
That is why the trustmaker should carefully decide when and how beneficiaries will receive property.
How Much Discretion Can a Trustee Have?
Some trusts require specific distributions. Other trusts give the trustee discretion to decide whether, when, and how much to distribute.
A discretionary trust may instruct the trustee to consider:
- The beneficiary’s health
- Education expenses
- Housing
- Other financial resources
- Employment
- Public benefits
- The needs of other beneficiaries
- The trust’s long-term sustainability
Discretion does not mean the trustee can act arbitrarily. The trustee must exercise judgment in good faith and within the authority provided by the trust.
Must a Trustee Communicate With Beneficiaries?
Communication between the trustee and beneficiaries is critical, especially when the trustee sells significant property, changes the investment strategy, or makes decisions that may affect future distributions.
Transparency can answer questions, explain delays, and help manage expectations.
Maryland law requires trustees to provide certain notices and information to qualified beneficiaries. On request, a trustee may also need to provide reports addressing the trust’s property, liabilities, receipts, disbursements, compensation, and asset values. See Maryland Estates and Trusts §14.5-813.
The exact reporting obligations depend on the trust and applicable law.
What Records Should a Trustee Keep?
Accurate and thorough records help demonstrate that the trustee complied with the trust agreement and fiduciary duties.
Records may include:
- Bank and investment statements
- Receipts
- Bills
- Tax returns
- Appraisals
- Property sale documents
- Distribution requests
- Records of distributions
- Investment reports
- Communications with beneficiaries
- Notes explaining major decisions
- Trustee compensation records
These records can help beneficiaries understand the trustee’s decisions and protect the trustee if questions or disputes arise.
What Should a Trustee Do Before Selling an Important Asset?
Before selling a significant trust asset, a trustee should generally:
- Review the trust agreement.
- Confirm the trustee’s authority.
- Determine why the sale is necessary or appropriate.
- Consider the interests of all beneficiaries.
- Obtain an appraisal or professional valuation when appropriate.
- Evaluate tax consequences.
- Document the reasoning behind the decision.
- Communicate with co-trustees and beneficiaries when required or advisable.
- Seek legal, tax, or investment advice when needed.
The appropriate steps depend on the asset and the trust’s terms.
When Should a Trustee Speak With an Attorney?
A trustee should consider legal advice when:
- The trust’s instructions are unclear
- A proposed sale may conflict with the trust
- A trustee wants to purchase trust property
- Beneficiaries disagree about a decision
- The trust owns real estate or a business
- A beneficiary threatens legal action
- The trustee is also a beneficiary
- The trust requires complicated tax filings
- The trustee is unsure about reporting obligations
- The trust is ready to terminate
If you are a trustee and have questions about managing or selling trust property, McDonald Law Firm can work with you and your financial professionals.
If you are creating an estate plan, we can help memorialize your intentions and balance the preservation of important property with the trustee’s need for flexibility.
Call Andre O. McDonald, a Howard County, Montgomery County, and District of Columbia estate planning, special needs planning, and trust administration attorney, at 443-741-1088, 301-941-7809, or 202-640-2133 to schedule an appointment.
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
