The question of whether a trustee of a bypass trust—also known as a credit shelter trust or a family trust—can delegate investment authority is a common one for estate planning attorneys like Steve Bliss in San Diego. The answer isn’t a simple yes or no; it depends on the trust document itself, state law, and the specific circumstances. Generally, trustees *can* delegate investment responsibilities, but only within the parameters set forth in these guidelines. A bypass trust is created upon the death of the first spouse to utilize the federal estate tax exemption, sheltering assets from estate taxes and providing for the surviving spouse while preserving those tax benefits. The trustee, often the surviving spouse, manages these assets for the benefit of the beneficiaries, usually the children or other family members.
What are the limitations on a trustee’s delegation power?
The Uniform Prudent Investor Act (UPIA), adopted in many states, including California, governs how trustees manage trust assets. UPIA allows trustees to delegate investment functions, but with crucial caveats. The trustee must act prudently in selecting, instructing, and supervising the delegate. Delegation is permissible if a reasonable trustee, with similar skills and knowledge, would delegate those functions. A trustee *cannot* delegate so much authority that they effectively abdicate their responsibility to oversee the investments. Approximately 65% of trusts are managed by non-professional trustees who may benefit from delegating certain investment tasks (Source: American Bankers Association). This delegation must be reasonable and align with the trust’s objectives and beneficiary needs. Delegation doesn’t relieve the trustee of ultimate responsibility; they are still accountable for the delegate’s actions.
Does the trust document restrict delegation?
The trust document is paramount. Many bypass trusts specifically address the delegation of investment authority. Some may grant broad delegation powers, while others may limit or prohibit it entirely. For instance, the document might require the trustee to obtain the beneficiaries’ consent before delegating, or it may specify the types of investments the delegate is authorized to make. I recently encountered a situation where a trust document explicitly stated that no investment delegation was allowed without unanimous consent from all beneficiaries, which was a challenge for a family with differing views. Understanding these restrictions is crucial before proceeding with any delegation.
What happens if a trustee delegates improperly?
Improper delegation can expose the trustee to liability. If the delegate makes imprudent investment decisions, the trustee could be held accountable for losses if they failed to adequately oversee the delegate’s actions. “A trustee must exercise reasonable care, skill, and caution when delegating investment functions,” as emphasized in legal precedent. This means conducting thorough due diligence on potential delegates, clearly outlining investment guidelines, and regularly monitoring their performance. Failure to do so could result in legal action from beneficiaries. A trustee’s responsibility extends beyond simply choosing a delegate; they must actively participate in the oversight process.
What kind of professional is best suited to receive delegated authority?
Typically, trustees delegate investment authority to qualified professionals such as registered investment advisors (RIAs), bank trust departments, or brokerage firms with trust capabilities. These professionals have the expertise and resources to manage investments prudently. It’s essential to choose a delegate with a proven track record, appropriate credentials, and a clear understanding of the trust’s objectives. The delegate should also be willing to communicate regularly with the trustee and provide detailed reports on investment performance. I had a client who delegated to a local RIA specializing in estate planning, and it proved to be a seamless transition, with clear communication and regular updates.
What about situations where the trustee lacks investment expertise?
Many trustees, particularly surviving spouses, may lack the investment expertise to manage trust assets effectively. In these situations, delegation is often the most prudent course of action. It allows the trustee to fulfill their fiduciary duties without having to become an investment expert. However, even when delegating, the trustee must still exercise reasonable care in overseeing the delegate’s work. They should review performance reports, ask questions, and ensure that the delegate is adhering to the trust’s investment policy. Approximately 40% of trustees admit they feel unprepared to manage trust investments (Source: National Association of Estate Planners Council).
I had a client, Margaret, who unfortunately learned the hard way about improper delegation.
Margaret’s husband passed away, and she became the trustee of their bypass trust. Overwhelmed by the responsibility, she simply handed over all investment decisions to a friend who claimed to be a “stock picker.” She didn’t bother to check his credentials, review his investment strategy, or monitor his performance. Unsurprisingly, her friend made a series of disastrous investments, resulting in significant losses for the trust. Margaret faced a potential lawsuit from her children, who rightly questioned her handling of the trust assets. She had delegated the authority, but failed to exercise proper oversight and had exposed herself to significant liability.
Fortunately, we were able to mitigate the damage.
After a thorough review of the trust document and Margaret’s actions, we recommended she immediately terminate the relationship with her friend and engage a qualified RIA. The RIA conducted a comprehensive analysis of the trust’s portfolio and implemented a diversified investment strategy aligned with the trust’s objectives and beneficiary needs. We also worked with Margaret to document her actions and demonstrate her good faith efforts to rectify the situation. While the trust did suffer losses, we were able to convince the beneficiaries that Margaret had acted reasonably under the circumstances and that the RIA would provide the professional management needed to restore the trust’s value. It was a stressful situation, but ultimately, by following proper procedures and seeking professional guidance, we were able to achieve a positive outcome for all parties involved.
What documentation is necessary when delegating investment authority?
Proper documentation is critical. The trustee should create a written delegation agreement outlining the scope of the delegate’s authority, investment guidelines, reporting requirements, and compensation arrangements. This agreement should be reviewed by legal counsel to ensure it complies with applicable laws and regulations. The trustee should also maintain detailed records of all communications with the delegate, including performance reports, investment recommendations, and any concerns raised. This documentation will be invaluable in demonstrating that the trustee exercised reasonable care and skill in overseeing the delegate’s work.
About Steven F. Bliss Esq. at San Diego Probate Law:
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Feel free to ask Attorney Steve Bliss about: “Does a trust protect against estate taxes?” or “How do I remove an executor who is not acting in the estate’s best interest?” and even “What happens if I move to or from San Diego after creating an estate plan?” Or any other related questions that you may have about Trusts or my trust law practice.