In the area of estate planning, the use of trusts has become so commonplace that most all estate plans utilize a trust in some manner. There are a wide variety of trusts in which practitioners utilize and recommend, but the general concept of a trust is that it is a legally binding agreement between the person who creates the trust, often referred to as grantor, trustor, settlor, etc., and a trustee who was appointed by the creator of the trust, who holds property in a fiduciary relationship for the benefit of beneficiaries. The importance on selecting the trustee of a trust cannot be understated, as this person or entity has not only significant responsibilities in administering the trust, but also substantial liability if the trustee breaches their fiduciary duties in this crucial role. Prior to selecting a trustee of a trust, it is important to consider the roles and responsibilities that all trustees will have upon accepting to serve as the trustee.
Understanding the Role of a Trustee
Trustees can be individuals, such as family members, friends, or professionals like lawyers or financial advisors, or they can be corporate entities like financial institutions, trust companies, or private fiduciaries. Regardless of whether individuals or entities are serving, all trustees are bound by various fiduciary duties, which are legal obligations to act in the best interests of the beneficiaries and to manage the trust prudently and responsibly.
Key Duties of a Trustee
1. Prudent Management of Assets: One of the primary responsibilities of a trustee is marshal all of the assets in order to manage the trust assets prudently and in accordance with the terms of the trust agreement. This involves understanding the goals and wishes of the grantor, as specifically detailed in the trust agreement, and making sure the decisions made by the trustee align with these objectives and the law.
2. Distributions to Beneficiaries: Trustees are responsible for distributing income or principal from the trust to beneficiaries as outlined in the trust agreement. This is easier said than done, as the dispositive provisions within the trust agreement may can vary from simple to incredibly complex. For example, the trust agreement may require the trustee make a one-time distribution versus regular distributions based upon percentages of assets or the amount of income generated. Additionally, most trust agreements include provisions relating to distributions based upon an ascertainable standard, such as making discretionary distributions for a beneficiary’s health, education, maintenance, and support.
3. Record-Keeping and Accounting: Trustees must keep detailed and accurate records of all transactions related to the trust, including income received, expenses paid, and distributions made to beneficiaries. This often requires that the trustee provide regular accounting statements to beneficiaries, but also potentially to a court or other legally permissible interested parties.
4. Investment Management: Depending on the terms of the trust agreement, trustees may ultimately be responsible for investing trust assets to generate income or growth. In many states with the U.S., the trustee must adhere to the so-called “prudent investor rule,” which generally requires the trustee to make investment decisions that are reasonable and in the best interest of the beneficiaries. This does not necessarily mean the trustee must be an expert in finance or investing, but may ultimately retain advisors in those areas to consult with on how the trustee should be investing the assets of the trust.
5. Tax Compliance: Trustees are responsible for ensuring that the trust complies with all applicable tax laws and regulations. Considering how lengthy and complex the tax code is presently, this is no easy task. In general, tax compliance and reporting includes filing tax returns for the trust in a timely manner and paying any and all taxes owed on behalf of the trust. This also does not mean your trustee has to have a degree in accounting or have credentials as a certified public accountant, as the trustee can certainly hire tax professionals to assist the trustee on preparing and filing the tax returns.
6. Communication and Transparency: Trustees generally have a duty to communicate regularly with beneficiaries and keep them informed about the administration of the trust. This includes providing information about the trust assets, distributions, and any other relevant matters pertaining to the trust. Depending on the complexity of the assets and the administration, along with difficult beneficiaries certain beneficiaries can make the administration, communication with beneficiaries can be difficult at times where many trustees task their attorney with most all of the correspondence to the beneficiaries.
7. Legal and Ethical Considerations: In general, trustees must act with honesty, integrity, and loyalty towards the beneficiaries, as the trustee is a fiduciary holding the assets of the trust for the benefit of the beneficiaries. In administering a trust to meet these legal and ethical consideration, the trustee must avoid conflicts of interest and refrain from using trust assets for personal gain or benefit.
Legal Obligations and Liability
The role of trustee certainly comes with significant legal obligations and the corresponding potential liabilities for failing to fulfill one’s duties as a trustee. Trustees have a fiduciary duty to act in the best interests of the beneficiaries at all times. This duty requires them to exercise care, skill, and diligence when managing trust assets and making decisions on behalf of the trust.
If a trustee breaches their fiduciary duty—for example, by mismanaging trust assets, making improper distributions, or failing to act in the best interests of beneficiaries—that trustee can be held personally liable for any losses suffered by the trust along with other potential legal damages. Beneficiaries or other interested parties may take legal action against the trustee to recover damages or seek removal from their position.
To protect a trustee from such liability, trustees often seek guidance from legal and financial professionals throughout the course of the administration and, depending on the amount of assets involved in the administration, the trustee may obtain insurance coverage specifically designed to protect trustees from claims arising from their actions or decisions.
Conclusion
In conclusion, the role of a trustee is often rather complex and many times demanding. It generally requires a combination of financial acumen, legal knowledge, and ethical integrity, as trustees are entrusted with the responsibility of marshaling and managing assets of the trust for the benefit of the beneficiaries, often with significant legal and financial implications. By understanding and fulfilling their duties diligently and responsibly, trustees play a crucial role in upholding the integrity of trusts and ensuring the well-being of beneficiaries. When selecting a trustee, a key question to consider is as follows: Whom do you trust the most to fulfill such fiduciary duties and do so in a manner to effectuate your estate planning goals? While many times one person or entity may not be perfect in every single aspect of administering a trust, the trustee certainly has the power to hire attorneys, financial advisors, and accountants to assist in fulfilling such duties competently and effectively.
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