In selecting a trustee, a settlor normally chooses someone who will administer the trust with sound judgment and faithfulness to the settlor’s vision for the future. It is common, nonetheless, for a trustee to find himself asking—can a trustee delegate certain powers given him by the settlor? And if delegation is possible, he may also wonder—can a trustee be liable to beneficiaries for the decisions made by his chosen agents?
This article will briefly explore common situations in which a trustee may delegate powers. It will also discuss what the trustee should watch out for when making such delegations, and how to delegate in a way that reduces risk of liability to beneficiaries down the road.
When Is Delegation Allowed?
Simply put, Texas law allows a trustee to delegate duties and powers that a similarly situated trustee with similar trust property would employ an outsider to carry out. The Texas Property Code states that “[a] trustee may employ attorneys, accountants, agents, including investment agents, and brokers, who are reasonably necessary in the administration of the trust estate.” Tex. Prop. Code § 113.018(a). Agents are “reasonably necessary” when a reasonable owner of the same type of property as the trust property, and who held that property for similar reasons as those of the trust, would employ outside assistance. Gerry W. Beyer, Texas Estate Planning Statutes with Commentary 714 (2015).
Delegating Powers in a Real Estate Transaction
When carrying out real estate transactions, it is common for a trustee to delegate powers to an agent. Texas law assigns special responsibility to the trustee in this context. See Texas Property Code § 113.018(b)-(c)). This special responsibility applies when the agent is employed to:
(1) execute and deliver any legal instruments relating to the sale and conveyance of the property, including affidavits, notices, disclosures, waivers, or designations or general or special warranty deeds binding the trustee with vendor’s liens retained or disclaimed, as applicable, or transferred to a third-party lender;
(2) accept notes, deeds of trust, or other legal instruments;
(3) approve closing statements authorizing deductions from the sale price;
(4) receive trustee’s net sales proceeds by check payable to the trustee;
(5) indemnify and hold harmless any third party who accepts and acts under a power of attorney with respect to the sale;
(6) take any action, including signing any document, necessary or appropriate to sell the property and accomplish the delegated powers;
(7) contract to purchase the property for any price on any terms;
(8) execute, deliver, or accept any legal instruments relating to the purchase of the property or to any financing of the purchase, including deeds, notes, deeds of trust, guaranties, or closing statements;
(9) approve closing statements authorizing payment of prorations and expenses;
(10) pay the trustee’s net purchase price from funds provided by the trustee;
(11) indemnify and hold harmless any third party who accepts and acts under a power of attorney with respect to the purchase; or
(12) take any action, including signing any document, necessary or appropriate to purchase the property and accomplish the delegated powers.
When any of the powers just mentioned have been delegated, the trustee is liable to the beneficiaries or to the trust for improper actions taken by the agent in the exercise of the delegated power. Furthermore, delegations in a real estate transaction must be documented in a written instrument acknowledged by the trustee in front of a notary public or other officer authorized to take acknowledgments to deeds of conveyance and administer oaths. Powers delegated in the real estate context generally terminate six months from the date of the acknowledgment of the written delegation.
Delegating the Power to Manage and Invest Trust Assets
A high duty of care is imposed on trustees who delegate the management and investment of trust assets because a single bad investment can significantly damage a trust’s overall value. In general, Texas law allows a trustee to delegate investment and management functions when a “prudent trustee of comparable skills” would delegate under the same circumstances. Tex. Prop. Code § 117.011(a). When delegating in this context, the trustee must exercise “reasonable care, skill, and caution” in:
(1) selecting an agent;
(2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and
(3) periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.
Each of these three activities should be taken seriously. When selecting an agent to invest or manage trust property, a trustee should interview multiple candidates, check their referrals, consider their qualifications, and document this candidate research process for future reference. When a trustee chooses a family member or a close friend to manage trust property, or chooses someone arbitrarily, without considering other prospective agents, he risks exposing himself to suit for violation of the Texas Property Code’s “Prudent Investor Rule.” See generally, Tex. Prop. Code § 117.
Once an agent is chosen, the trustee must then take care to explain the purpose and scope of the trust to the agent, so that the agent can manage the trust in a manner appropriate to the purposes and people the trust is designed to serve.
Finally, the trustee is not released from liability simply by choosing a competent agent. The trustee must seek regular and meaningful feedback from the agent, perhaps every quarter or even every month. The trustee should, during this periodic review, compare the trust property’s investment performance to the performance of investments in other industries, or to popular investment benchmarks. If the agent regularly fails to meet status quo investment return rates, the trustee should find a new trust property manager, or else risk liability to the beneficiaries.
If the trustee has carefully chosen and monitored someone to invest and manage the trust property, then he will not be liable for poor decisions made by that agent. In fact, both the trustee and the beneficiaries may have a right to recover against the agent, depending on the nature and gravity of the agent’s mistake.
The Takeaway
Delegating powers is a more time-consuming process than the typical trustee might otherwise think. It involves diligently researching prospective agents, explaining the trust to the agent, and frequently monitoring the agent. In a typical case, the trustee who has exercised caution in selecting his agents and monitoring their work will avoid liability for the decisions made by those agents in the course of carrying out the delegated functions.
– The Business Team
Scott | Josh | Jeremy
The Allen Firm, PC
181 S. Graham Street | Stephenville, Texas 76401
Ph: 254.965.3185 | Fax: 254.965.6539
The Allen Firm, PC is composed of a team of attorneys located in Stephenville, Texas. Our mission is to improve people’s lives by providing reliable and practical help with their legal matters while operating under our values of honoring people, operating with integrity and striving for excellence. We offer help in forming businesses or companies, estate planning, lawsuits, real estate, probate, oil and gas, collections, agriculture, bankruptcy, family law, and accident and injuries.