Generally speaking, unless the trust allows for unproductive assets to be held the trustee must sell or distribute unproductive assets and reinvest in productive ones.
Let us examine how this rule plays out in a trust administration.
First, if the trust is being settled after the death of the settlor – in which case the trustee pays the deceased settlor’s debts and taxes, pays trust administration expenses, and distributes the remaining assets to the death beneficiaries – then any assets that are specifically gifted are kept for distribution to the beneficiary even if economically unproductive.
But, if these unproductive assets are costly to maintain then they should be distributed sooner to reduce expenses.
Vehicles, especially, should be sold or distributed expeditiously to avoid unnecessary expenses and potential liabilities.
Existing stocks and bonds, moreover, should be periodically evaluated by a certified financial planner, knowledgeable in the portfolio theory of investments and trust administration, and either kept or sold as appropriate.
The portfolio theory of investments says that the performance of the portfolio as a whole, and not any single stock’s or bond’s performance alone, determines whether the trustee has invested prudently.
Lastly, cash not needed to pay debts, taxes and administration expenses should be prudently invested, in consultation with a competent financial advisor.
Second, if the trust is not being settled, but is being administered long term for a beneficiary – such as when a successor trustee replaces an incapacitated settlor as trustee – then the personal residence may be kept (even though it doesn’t produce rents) to provide a home for the beneficiary.
Otherwise, the trustee should periodically review the trust’s assets to determine which should be kept and which should be sold and reinvested.
Lastly, if the trustee fails to keep the trust productive, or takes unnecessary risks (such as making speculative investments), then the beneficiary can petition the court for instructions to the trustee.
The beneficiary can also ask the court to impose financial penalties on the trustee and/or to reduce or to eliminate the trustee’s fees
Clearly, then a trustee must be proactive and diligent in meeting his or her duty to keep the trust productive. Competent financial advisors should be consulted to help the trustee make appropriate investment decisions.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 First St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235.
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