Risk Exposures in a Trusteeship
often appears relatively risk-free, especially for those with
considerable experience and expertise in finance and business
matters. It seems like a simple responsibility with just two
basic duties: follow the instructions in the trust document
and keep the beneficiaries satisfied. Because a CPA may be
the one financial advisor a client trusts above all others,
accepting a trusteeship from a long-standing good client without
sufficient consideration of the risks could easily happen.
are rarely as simple in practice as they are in theory.
For example, the trust document instructions may prevent
the trustee from keeping all of the beneficiaries satisfied.
The instructions may even create disappointments and conflicts
between beneficiaries. Competing interests, sibling rivalries,
family dysfunction, disruptive lawsuits, and financial losses
can all play havoc with a relatively simple family trust.
The results can be excessive stress and loss of time for
the trustee, who might suffer damage to her reputation and,
even worse, be sued.
trustee also has a fiduciary duty to the trust and its beneficiaries,
requiring the trustee to follow the trust instructions and
to act solely in the interest of the trust. Any actions
by the trustee that serves a self-interest, or serves any
purpose unconnected with the trust, create legal liabilities.
Such actions also create the perception of self-dealing
and are not consistent with the trustee’s fiduciary
obligations. For example, the trustee should not borrow
from or lend to the trust, or engage in outside business
with the trust, even if it is a “good deal”
for the trust. The trustee can be personally liable for
any breach of fiduciary duty to beneficiaries and nonbeneficiaries,
such as contract creditors, tort creditors, and federal,
state, and local governments.
claims against CPAs have risen steadily in frequency and
severity over the past several years, and the trend will
likely continue. The Social Welfare Research Institute of
Boston College studied the intergenerational transfer of
wealth projected between 1998 and 2052; it estimated such
wealth to be at least $41 trillion (assuming a 2% growth
scenario). Much of that wealth is being placed in trusts
designed to provide for surviving spouses, children, grandchildren,
and other beneficiaries. Increasingly, families creating
such trusts are approaching their CPAs to serve as trustees.
Trusteeship is not a role to be taken lightly, considering
its potential for difficulty, stress, and loss. There is
often little guidance for trust work unless the trustee
petitions for judicial instructions, a relatively simple
legal process that should be initiated on the advice of
a trust attorney. Without such guidance, trusts are sometimes
so poorly managed that they end up in court anyway, so it
is important for trustees to consider whether they will
need a trust attorney.
Accepting a Trusteeship
following are some of the most common sources of risk in
A lack of understanding or appreciation for the duties
and responsibilities of a trustee;
lack of clear and consistent communication between the
trustee and the beneficiaries or other interested parties;
A conflict of interest (or perception of a conflict) on
the part of the trustee;
A lack of appropriate engagement checks and balances on
the activities of the trustee;
Fee and billing issues;
Imprudent or controversial investment strategies; and
Dysfunctional relationships among the beneficiaries, settlors
(those who create a trust), and prior trustees.
relationships are often major sources of risk in trusteeships.
Prospective trustees should look carefully at the relationships
among the interested parties, especially between family
members, and decide whether the risks posed by them can
be managed and minimized.
a CPA considers a trusteeship engagement, professional standards
require that she have the requisite skills and knowledge
to render the services competently. If a business is being
managed by the trust, the trustee should understand the
business and possess the expertise to manage the business.
If a CPA does not have the necessary skills and knowledge,
standards require that she acquire them or decline the engagement.
but the simplest of trusts will require at least an annual
review by a trust attorney. Prospective trustees should
assess whether and what an attorney should review in the
trust document before accepting a trusteeship. It may not
be possible to change the document, but a trust specialist
should examine it thoroughly.
prospective trustees should know the answers to the following
questions: Why was the trust created, and why was I asked
to serve as trustee?
Engagement Control Techniques
though an individual in a CPA firm, rather than the firm
itself, is usually asked to be a trustee, the firm should
treat the trustee work as it would any other engagement.
The success or failure of a firm member acting as a trustee
often has a significant impact on the firm as a whole, and
the firm’s reputation, insurance coverage, and legal
liability can be significantly and negatively impacted.
distinction between the trust services provided by the firm
member and the nontrust services provided by the firm (e.g.,
accounting, tax) is crucial. While the trustee is responsible
for supervising work done for the trust, the firm is responsible
for supervising its firm member. A nontrustee partner of
the firm should review and sign off on the firm’s
accounting work done for its trust, thereby enabling the
firm to control oversight for the trust engagement.
steps to consider include the following:
Any member of the firm considering a trusteeship should
complete a client screening process, with second-partner
review if possible.
trusteeship that has been accepted by a member of the
firm should be described and listed so that all owners
of the firm are aware of the trustee engagement.
If any professional services, other than the trustee services,
are to be provided by the firm to the trust, a nontrustee
firm owner should review and sign off on the work. Standard
firm client screening and engagement letters should be
used so that the relationship between the firm and the
trustee remains at arm’s length, in perception and
Client Screening Techniques
with other types of engagements, the “clients”
in a trustee engagement (the settlor, beneficiaries, and
prior trustees) may present risk. Appropriate client screening
processes will help not only in deciding whether to accept
a trusteeship, but also in managing potential risk areas
trustee work it is easy to become caught in the middle of
a family squabble. Many trustee claims result from dysfunctional
family relationships. These claims involve disputes among
various beneficiaries, constituencies, and interests, often
pitting the life estate or income beneficiaries against
the remainder beneficiaries. The trustee may be pressured
to resign by someone in line to be the successor trustee,
or attacked by one constituency which perceives that the
trustee has taken sides with another. A trustee should consider
the following questions:
What is the potential for dispute among beneficiaries
and the settlor? Are there differential distributions
that may appear inequitable (e.g., disparate treatment
of siblings)? Have there been multiple marriages, with
children from each? Have there been recent changes to
the distribution scheme or the status of beneficiaries?
there beneficiaries with substance abuse problems, mental
illness, or behavioral issues?
there been prior litigation between or among the beneficiaries?
Were there problems with the prior trustee?
there any transactions (loans, investments) between the
trust and the settlor or a beneficiary? Are there any
loans to the beneficiaries or other individuals? Are they
secured? Are there any loans or transactions between the
trust and the firm, or a member of the firm, or another
client of the firm?
the nature of the trust corpus (principal): Are there
specific investments or investment types required by the
trust? Are there illiquid assets? Are there assets with
negative cash flow? Is there an operating business that
will increase the complexity of the trustee’s work?
Are there potential environmental concerns with any trust
Risk Through the Trust Document
the trust document has not been finalized, or the settlor
is still alive, it may be possible to minimize risk through
the trust document. Even if the trust document cannot be
changed, a prospective trustee should examine it thoroughly
and have a trust attorney review it before accepting any
are some crucial legal points that may significantly affect
the risks to the trustee:
Any successor trustee has the duty to investigate and
report upon the activities of the prior trustee. If this
duty is not fulfilled, the successor trustee may become
responsible for the acts of the prior trustee. The trust
document can state that any successor trustee has no such
duty to investigate or report.
trust document can require the trust itself to defend
and indemnify the trustee against allegations of negligence.
This is a relatively standard clause in trust documents.
trust may also contain a clause limiting liability of
the trustee to gross negligence only, protecting him from
simple mistakes. Again, this is a relatively standard
clause that can provide significant protection to a trustee.
often contain “no contest” clauses that reduce
or eliminate a beneficiary’s rights if the beneficiary
disputes anything with the trustee. These clauses can
reduce risk to the trustee by creating an incentive for
beneficiaries to get along.
The trust document can grant broad discretion to the trustee.
While there are limits on the amount of discretion that
can be granted a trustee, discretion clauses can be helpful
in specific circumstances. For example, if the trust owns
a business that the trustee will likely need to dispose
of, the trust document could grant wide discretion to
the trustee to determine the best way to dispose of it.
the area of investments, the trust document can provide
“safe harbor” protection to the trustee as long
as a “reputable investment advisor” is chosen
to manage the investments. Neither the CPA nor her firm,
nor an affiliate of the firm, can be considered a “reputable
investment advisor” for purposes of the “safe
there are any potential conflicts of interest between the
trust and the personal interests of the trustee, the settlor
can specifically acknowledge their existence in the trust
document. While this does not relieve the trustee of any
fiduciary responsibility to the trust or beneficiaries,
it can provide some protection. Even with such acknowledgment
in the trust document, the trustee must pay special attention
to any conflicts, perceived or real. Where they exist, the
trustee should be especially diligent about keeping beneficiaries
and others informed of actions and decisions, and seek approval
from the beneficiaries or the court for actions or decisions
that may be affected by any conflict. A conflict of interest
might also be reason for a trustee to resign.
serving as trustees will often provide tax and accounting
services to the trust, either individually or through their
firm. It is best to have the settlor acknowledge this and
stipulate that payment for such services is in addition
to the payment of trustee fees.
and others normally have a statutory period (often three
years) within which to object to any “accounting,”
which can include notification of specific actions or decisions
of the trustee (e.g., decisions to sell trust assets; major
investment decisions). Most states allow the trust document
to shorten this period to as little as 120 days. A trust
attorney should be consulted to determine how this could
Risk While Acting as Trustee
as a trustee is just as critical as the pre-engagement activity.
Making good decisions for the trust and the beneficiaries
is critical, but it is not enough. Consider the following
If either the CPA or the firm provides other services
to the trust, issue a separate engagement letter for those
services. It may be best to have the engagement letter
approved by, or at least seen by, the beneficiaries.
the provisions of the trust in a synopsis, along with
calendar distribution dates and other events.
Most trusts and trustees should, at a minimum, have an
annual review of activity performed by a trust attorney.
More complex trusts may require further services. Any
major decision or transaction may require review by a
trust attorney, who can provide invaluable advice regarding
any periodic or special reporting as well.
The trust attorney should advise the trustee on when and
how to seek judicial instruction (e.g., in the event of
a major pending decision or a conflict between beneficiaries).
Usually the trust will be obligated to pay for the costs
of seeking such instruction. In addition, once the court
provides instruction, the trustee may gain significant
protection from “hindsight” complaints, which
otherwise might materialize years later.
trust attorney should protect the trust and the trustee,
though the trustee is responsible for monitoring the work
of the trust attorney. In some situations, such as a disagreement
over the trust attorney’s actions, the trustee may
need his or her own attorney.
types of investments required by the trust document may
affect the selection of an investment advisor. For example,
if investment income is required by the trust, but not income
at the expense of principal, an investment advisor must
be able to fulfill that requirement.
diligence should be performed when selecting an investment
advisor for the trust. Background, references, and credit
histories should be checked. How competent is the advisor?
How independent is he? How is the advisor compensated? The
trustee is responsible for monitoring the advisor and the
fees the advisor charges the trust.
types of investments required by the trust document may
put beneficiaries in conflict. For example, a surviving
spouse who receives rental income from a property may be
in conflict with beneficiaries who are to receive the property
itself, especially if the property declines in value.
the trust document directs the trustee to make allocations
between income and principal, or among different types of
investments, the trustee should always keep foremost in
mind the purpose of the trust in making such allocations.
The trustee may also seek guidance from the trust attorney,
who may in turn recommend petitioning for judicial instruction.
Regardless of the actions taken, it is critical that the
trustee consistently report to settlors and beneficiaries.
Even if not required by the court, periodic reporting is
necessary to ensure that all affected parties are kept informed
in order to start the clock on the time within which anyone
can object to an action or decision of the trustee. Periodic
reporting should include any financial information as well
as any other information necessary for the beneficiaries
and others to be fully informed.
special reporting can be used to garner approval from the
beneficiaries for a specific act or transaction. A trustee
must provide the beneficiaries with full information, including
recommendations, in order for the beneficiaries to be bound
by their approval. In addition to the formal methods of
reporting, the lines of communication to all beneficiaries
should be kept open. Any beneficiary who feels left out
of the loop is much more likely to feel that the trustee
is not acting appropriately.
in a trusteeship depends to a great extent on keeping clients
and beneficiaries satisfied. Success can also depend on
having in-house office administrative staff that understand
trusts, are alert to the problems related to trusts, and
are sensitive to the human side of beneficiaries.
potential for dissatisfaction by any one beneficiary increases
with their number. The trustee, as a matter of risk management,
certainly desires to operate on the basis of consensus among
interested parties, but the trustee ultimately must follow
the trust’s instructions and dictates, even if this
runs counter to the consensus. In the desire to seek consensus,
the trustee should not do things contrary to her charge
a prospective trustee concludes that she can create the
conditions necessary to remain impartial, to administer
the trust in accordance with its instructions, and to protect
herself, trusteeship can be rewarding. On the other hand,
if these conditions are unattainable, it may be wise to
simply decline the engagement.
Klein, JD, CFE, is vice president of claims with
Camico Mutual Insurance Company. He is a member of the California
Society of CPAs’ committee on professional liability
and is coauthor of the CPA’s Guide to Loss Prevention
Practices and the CPA’s Guide to Effective Engagement
Letters (CPA Journal Book Review, November 2002).