You are the local banker. An elderly husband and wife have been long-standing customers of your bank. They have a modest estate and have set up a living trust so they can avoid the costs of probate. If they both sign as co-trustees, can they add their daughter, who lives in another state, as a co-signer to the living trust account?
Another customer was named as the trustee for his parents’ irrevocable trust. He has a full-time job, but his wife has offered to help with the administrative tasks. Can he add his wife as a convenience signer to the trust account?
The widow of a longstanding business customer has been named as the trustee of a large testamentary trust set up by her husband. The trust includes a ranch, oil and gas interests, securities, a closely held company, a family limited partnership, a large residence and a vacation home. She recently hired her husband’s personal assistant to help her with her significant duties as trustee. Can she add the assistant as a signatory on the account?
These examples raise a question frequently presented by trustees to their banker: Can I delegate some of my responsibilities as trustee to an agent? As a general rule, a trustee may not delegate discretionary functions to an agent, because those responsibilities were appointed to the trustee by the grantor. Only the trustee can act for the trust. A trustee may, however, delegate ministerial functions.
What constitutes discretionary versus ministerial functions? There is no bright-line test. The Restatement of Trusts (Third), § 80, affirms the proposition that only ministerial powers may be delegated, but acknowledges that there is no precise definition of what constitutes ministerial powers. It lists several factors to be considered in making this decision:
- The nature and degree of discretion or judgment involved in the delegation;
- The burdens and complexity of the decisions or activities involved;
- The relationship of the acts or functions involved to the competence and facilities possessed (or represented) by the trustee;
- The amount of funds or the value and character of the property involved;
- Considerations of efficiency, convenience, and cost in light of the situs of the property or activities involved; and
- The fairness and appropriateness of the responsibilities in question to the trustee’s compensation and the overall burdens of the trusteeship.
For banks, the question often becomes whether a trustee can add an agent as a signatory to an account or give the agent electronic access to accounts, including the right to transfer funds electronically. Are these actions an exercise of discretion or ministerial functions? Under the case law, this may depend on how the trust is managed by the trustee.
If the trustee, or her accountant or bookkeeper prepare the checks and the agent only signs them, the action might be considered ministerial. If the agent writes a check to purchase hay for cattle on a ranch, this might be ministerial decision if it is a routine function. If the agent writes a check to purchase an adjacent property or to make a major improvement to a trust-owned property, that likely is a discretionary function reserved to the trustee.
The bank should not be placed in the position of reviewing trust accounts to determine whether the trustee or the agent is properly performing her responsibilities. The trustee, ultimately, determines what functions to keep and what functions to delegate. Even a court may not have the authority to interfere with a trustee’s discretionary powers, except in the case of fraud, misconduct, or clear abuse of discretion.
By adding an agent to a trust account, however, a bank could have some risk of exposure to claims from beneficiaries. If an agent commits fraud, misapplies trust funds, or engages in self-dealing, a beneficiary may look to the bank (as well as the trustee) to recover losses on the theory the bank allowed a non-trustee to exercise discretionary authority over trust assets. A beneficiary might argue that the agent did not have proper authority to transact business on a trust account and ask a court to set aside the transaction.
How does a bank protect itself? First, the bank should exercise caution when allowing a non-trustee to exercise banking powers. As a general rule, only the trustee is authorized to act for the trust. Even beneficiaries lack authority over trust assets. Consequently, special scrutiny should be used in adding agents to an account. The bank should require legal authority to support the trustee’s right to delegate a trust function to an agent.
The first place to look for this authority, of course, is the trust instrument. Does it authorize or preclude the trustee’s delegation of authority to agents? Second, the bank should look for statutory authority regarding what powers a trustee can delegate to an agent. Some states, such as Illinois, impose a statutory duty on the trustee “not to delegate to others the performance of any acts involving the exercise of judgment and discretion, except as constituting investment functions.” 60 ILCS 5/5.1(a). A number of states identify specialized areas of expertise where delegation is appropriate. These often include attorneys, accountants, real estate agents, investment agents, and brokers “reasonably necessary in the administration of the trust estate.” See e.g. Tex. Prop. Code § 113.018(a). A number of states also specifically authorize the delegation of investment functions. See e.g. Tex. Prop. Code § 117.011. In making this delegation, however, the trustee must exercise reasonable care in the selection of the agent; establish the scope and terms of the delegation; and periodically review the agent’s actions in order to monitor his performance and compliance with the terms of the delegation. Id. These restrictions limit the scope of agent’s authority and require the trustee to oversee the agent’s actions. If the trustee does these things, she is not liable to the beneficiaries or the trust for decisions made by the advisor. Note, however, that these statutes do not authorize the agents to transact banking business for the trust.
Another type of statute that may authorize the trustee’s delegation of functions to an agent is the power of attorney statute. Illinois law includes in the definition of a “principal” an “individual acting as trustee, representative or other fiduciary” who signs a power of attorney or other instrument of agency granting powers to an agent.” 755 ILCS 45/2-3. (As discussed above, however, the trustee can delegate on ministerial functions to the agent, except as constituting investment functions. 60 ILCS 5/5.1(a).) Texas law, by contrast, defines “principal” as an adult person who signs on a power of attorney that designates an agent to act on the “person’s” behalf. There is no reference to a trustee.
A third type of statute that may affect the trustee’s delegation of functions to an agent is the statute defining the types of accounts authorized by state law. The statute may define the types of accounts, such as single party accounts, joint owner accounts, accounts with rights of survivorship, convenience accounts, payable on death (POD) accounts, trust accounts, or business accounts. It may also define the rights of the holders of each type of account. For example, the statute might allow the addition of a convenience signer for an individual or joint account, but not for a trust account.
In addition to statutory authority for the delegation of powers to an agent, the common law of the state may provide guidance on a trustee’s delegation of functions to agents, often following the discretionary versus ministerial function distinction discussed above. Under this standard, the decision of whether to allow the trustee to add agents as signatories may depend on such factors as the competence of the trustee, the complexity of the decisions involved, and the size of the trust.
Living trusts present unique issues for delegation of trust functions. A living trust is not deemed to be a creature of the state, as would a testamentary or inter vivos trust. It is often set up to manage family assets, so specialized expertise such as that of investment brokers or real estate agents may not be involved. The trust assets may not be particularly complex. They function like individual accounts until the person becomes incapacitated or dies. Because of the personal character of the account, the trustee may want to add a family member as a co-signer to the account. Adding a family member as a co-owner, however, may give the agent rights over trust assets that are inconsistent with the beneficial interests of the trust. Statutory provisions authorizing the addition of convenience signers to personal accounts may not apply to a trust accounts. Further, there may be fewer controls (or no control) of the agent by the trustee in the case of incapacity. Consequently, some banks adopt policies precluding the addition of co-signers or convenience signers for revocable or living trust accounts.
By contrast, some trusts may have assets of significant size and complexity, including ranches, oil and gas interests, real estate properties, family held businesses securities or specialized investments. These trusts may have a large number of beneficiaries. Oversight of a large trust or several trusts may require the employment of staff to assist the trustee with the administrative functions of the trust, such as bookkeeping, payment of expenses, receipt of income, or management of real property. It may be easier to justify the addition of a full-time employee to an account as “reasonably necessary in the administration of the trust estate.” Tex. Prop. Code §117.011. Even then, proper controls should be in place. Where possible, the bank should obtain an agreement with the trustee requiring her exercise of reasonable care in the selection of the agent; establishing the scope and terms of the delegation; and requiring periodic review of the agent’s actions in order to monitor her performance and compliance with the terms of the delegation. The agreement should also properly allocate the risk between the parties.
While the general trend in trust law may be to allow greater delegation of trustee functions to a trustee, a bank allowing the trustee to appoint agents to transact business on an account should require express authorization for the action. This authorization might be found in the trust instrument, statute or, after a careful application of the factors discussed above, common law.