Patricia M. Annino
What to consider if you’re asked to serve as a trustee

The dual responsibility of the trusted adviser/trustee can blur the parameters of both those roles.

October 21, 2013
by Patricia M. Annino, J.D.

Clients rely on CPAs to provide sound financial advice on family and business matters, knowing that the accountant understands their views and perspectives. Thanks to the relationships CPAs build as trusted advisers, clients sometimes name their accountant as a trustee in an estate plan. 

CPAs should think long and hard before agreeing to such an arrangement. The dual responsibility of the adviser/trustee can blur the parameters of both roles and may have legal, financial, and psychological ramifications. When the client becomes disabled or dies, the accountant as trustee has fiduciary responsibilities to the trust and its beneficiaries. Even though the adviser/trustee understands the founder’s intent, the adviser must now switch his or her loyalty from the founder to the trust—where the standard for decision-making is significantly different from that of trusted adviser.

The founder can do anything he or she wants with his or her assets, business, and money. If his or her net worth or income declines, he or she deals with the consequences. For example, the founder may not operate his or her business based solely on profitability. He or she may operate a division of the company for fun, regardless of profits. Or he or she might employ friends, family, or loyal employees who are no longer productive. When the trusted adviser takes over as fiduciary, the CPA cannot take those same risks—even if one of the nonproductive employees is a family member who may also become a beneficiary of the trust.

CPAs who are considering becoming a trustee should start by focusing on the practical provisions within the trust document. Here are some of the main issues to consider.

Right to resign and method for appointing a successor trustee
While it initially may be a good idea to serve as trustee, changing circumstances may cause you to reconsider your decision. You may end up in conflict with a beneficiary, face illness, endure a major life-changing event, or switch jobs. At some point, serving as trustee just may not be right for you.

The trust document should include language about resigning as trustee and detail what your obligations will be if that occurs. Are you responsible for appointing your successor? Who has to approve it? Do all the beneficiaries need to agree? Discuss these issues with your client while he or she is drafting the trust. Consider asking him or her to provide you with a list of people or institutions that he or she would consider suitable trustee replacements. He or she may have specific thoughts about it and should include those parameters in the document—such as whether it should be an independent trustee, a trustee with a certain level of experience, or a trustee with a certain amount of assets under management.

Indemnification clause
CPAs should carefully review the duty to defend and indemnification clause; most trusts contain a standard one. State law provides default protection. If there are risky assets in the trust or obvious issues with difficult beneficiaries, the trust document should be clear about how the trustee will be indemnified and defended. For example, a clause that limits the trustee to gross negligence only may make sense.

No-contest clauses
CPAs should determine whether there is a no-contest clause. These clauses can impair a beneficiary’s rights if the beneficiary challenges the terms of the trust or how it is operated. A trust document that includes this type of clause can signal that stormy waters lie ahead.

Distribution language 
Review the language that specifies the standards by which the trustee may distribute income and/or principal to the beneficiaries. The trustee should be clear as to what those distribution standards are and how to implement them. If possible, ask for clarification as to the donor’s intention, and have a mission statement prepared that sets forth the goals and objectives. These guidelines, although nonbinding, can be useful to all involved when the trustee is exercising discretion.

Actions of trustee: Unanimous or mandatory
If there are co-trustees, the CPA should determine whether decisions are to be made by unanimous or majority action. If not specified, state law has a default provision that should be reviewed. This can be particularly important if difficulties lie ahead. It is also important to understand how transactions (once the underlying action has been determined) are to be accomplished. In other words, how many signatures are necessary? Review the document for provisions concerning the power to delegate administrative or ministerial tasks.

Authority to hire advisers and experts
CPAs need to know what authority they have, as trustee, to hire attorneys, accountants, and investment professionals. If there are unusual circumstances, such as a beneficiary with special needs or substance abuse issues, it may be important to know if the trustee will have authority to hire mental health professionals and caregivers. It is also advisable to have broad authority to hire others, such as private investigators.

Investment language 
As fiduciary, a CPA is obligated to invest the trust assets prudently. Determine if the trustee is to make allocations between income and principal. If the trust holds risky assets, such as a closely held business or real estate, be sure the trustee is authorized to hold on to that asset even if it is not productive or profitable. Unless there is specific language in the trust document, the authority to invest those assets does not transfer to the trustee. It’s also not prudent to own a significant concentration of one stock, unless the trust document authorizes the trust to continue holding it even if it loses value. If the trust holds loans, those should be secured unless the trust specifically authorizes loans to be unsecured—it is prudent, however, to secure loans even if they are made to a beneficiary. If, as trustee, you hire investment advisers, make sure that you check their references and background, determine how they are compensated, and how those fees are charged to the trust.

Accountings and reporting
A successful trustee/beneficiary relationship includes open communication about finances and distributions. Determine what reports are required and who should receive them, and decide the procedure for approving the accounting—especially if a beneficiary does not acknowledge or approve it. Schedule regular in-person or telephone meetings with the beneficiaries to answer any questions and ascertain their needs.

Determine how your compensation will be established and what expenses are reimbursable. If you also serve as the trust’s accountant, be clear on whether that is part of your trustee fee, and if not, how compensation is otherwise billed. Because, as trustee, you are paying yourself as accountant, there must be a clear understanding of when you are acting as trustee (and how you are compensated for that) and when you are acting as accountant (and how you are compensated for that). If this results in a potential conflict of interest, the AICPA Code of Professional Conduct would apply, and full and clear disclosure of the potential conflict of interest is required to be made to the client in writing.

Serving as a trustee for your client can be an honor and a privilege—but it is important to understand the difference between your role as trusted adviser and your role as trustee and to review the trust document objectively with an eye to the future.

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Patricia M. Annino, J.D., LL.M., a nationally recognized authority on estate planning and taxation, chairs the Estate Planning practice at Prince Lobel Tye LLP. She has been voted by her peers as one of the Best Lawyers in America (trust and estates), a Super Lawyer, and a Top 50 Massachusetts Super Lawyer. She is a Fellow of the American College of Trust and Estates Counsel.

The AICPA’s PFP Section provides information, tools, advocacy, and guidance to CPAs who specialize in providing tax, retirement, estate, risk management, and investment advice to individuals and their closely held entities. The PFP Practice Center provides information on the professional responsibilities of CPAs with their clients, and Prudent Practice for Investment Stewards might be helpful for CPA trustees. All members of the AICPA are eligible to join the PFP section. CPAs who want to demonstrate their expertise in this subject matter may apply to become a PFS cedential holder.