What Is the Trustee of a Trust? What Are His Or Her Duties? Who Should I Consider When Deciding Who Will Serve as the Trustee of My Trust?
What Is a Trustee and a Successor Trustee?
A trust is basically a way to organize and direct your estate plan and a trust may be created as a revocable or irrevocable trust.
Trusts for families are often referred to as family trusts.
Trusts may also be formed while the trust maker is living (a/k/a living trust) or may be testamentary trusts created in a last will and testament and trusts can hold virtually all types of assets including life insurance proceeds for estate planning and are often used for high net worth estate planning.
Trusts are also very useful for estate planning objectives like business continuity succession planning AND estate tax planning and these areas can get complicated.
Regardless of the type of trust concerned. The trustee is the person who administers a trust pursuant to the rules laid out in the trust document(s) and the applicable jurisdiction’s laws.
A successor trustee is someone who takes over if the trustee either declines the appointment, dies or otherwise becomes unable to continue to serve in that role.
The trustee oversees the operations of the trust, including maintenance and distribution of whatever property or assets are in the trust and the distribution of those assets to the trust beneficiary in the manner and as specified by the trust.
A trustee must affirmatively accept his or her appointment, however, so it is also important to also appoint a successor trustee.
Once a job as a trustee has been accepted, a trustee typically is not permitted to resign without the consent of all trust beneficiaries or a court order.
What Are The Specific Duties of a Trustee?
In simple terms, the trustee is responsible for running the trust. He or she makes sure that the trust assets are properly invested and that the trust is managed in the best interests of the trust beneficiaries.
To illustrate what a trustee does, take a fairly common example. Say that a trustee is administering a trust that a deceased grandparent had set up with his or her grandchildren as beneficiaries with the stated intent to pay for their college education, but only at four year colleges and if the grandchild is making progress towards a degree.
The trust consists of a portfolio of stocks and bonds worth $2,000,000. There are eight grandchildren ranging between ages 2 and 17 named as the beneficiaries.
The trustee would be responsible for ensuring that the money is invested wisely considering the age of each of the grandchildren and the assets in the trust.
The trustee would also ensuring that all disbursements made from the trust are consistent with the objectives of the trust, which would mean ensuring that a beneficiary is (i) making progress towards a degree and (ii) attending a four year college or university, before making any distributions under the trust.
What Laws or Sources of Authority Govern a Trustee’s Exercise of His Or Her Duties?
Several sources of law and authority govern a trustee’s exercise of his or her duties. These consist of the actual trust documents, in addition to state laws in the applicable jurisdiction.
However, whether it is under the trust documents themselves or state common law duties that apply to all trustees in the state, a simple way to boil down the legal duty of a trustee is that he or she is responsible for managing the trust in the beneficiaries’ best interests.
Every decision the trustee makes needs to be in the best interests of the beneficiaries, period.
The trust document itself will specifically set forth any specific restrictions and/or instructions regarding how the trustee should discharge his or her duties. In addition, state law also provides certain duties that a trustee must uphold while executing his or her duties.
Most states impose a fiduciary duty on trustees, which includes a number of related legal duties.
These include duties of loyalty, impartiality and the duty to also keep trust beneficiaries regularly informed.
The duty of loyalty requires the trustee administer the trust solely in the interest of the beneficiaries.
The trustee also has a duty of impartiality, meaning he or she cannot show any favoritism between beneficiaries.
Finally, a trustee also has the duty to inform beneficiaries at regular intervals (how regularly is typically set by state law).
To borrow the example above, the trustee would be responsible for
- ensuring the assets are invested appropriately considering there will be distributions needed at varying intervals for paying for college for the beneficiaries,
- for ensuring that beneficiaries’ actual tuition, room and board and other expenses associated with college are paid each semester (after the trustee has ensured that the beneficiary is enrolled at a qualifying education institution and making progress towards a degree first) and
- for sending out periodic or as requested reports regarding the remaining assets in the trust, what expenditures have been made over the previous interval and on which beneficiary’s behalf.
Many individuals who are setting up a trust will appoint a family member or trusted friend as a trustee. Someone who has no interest in the trust itself is often a good choice as a trustee because such a person will not have any conflicts of interest that may prevent him or her from discharging his duties as a trustee with the temptation to favor certain beneficiaries.
Others will appoint even the attorney that prepared the trust documents him or herself as trustee.
There is typically no prohibition against doing so and this can often be a good idea given that the attorney who prepared the trust documents will have a good idea as to what the grantor, or the person who set up the trust, had in mind when setting up the trust.
In addition, attorneys owe their clients ethical duties in addition to the duties required of trustees under state law.
Appointing one of the beneficiaries of a trust as the trustee is fraught with problems because this increases the chances that the trust will not be managed in the interests of all beneficiaries because a beneficiary who is also appointed as a trustee may favor him or herself at the expense of the other beneficiaries. This is such a delicate issue that some jurisdictions even have a legal prohibition on a beneficiary under a trust being appointed as the trustee.
If you have a trust or are creating one, there are a number of qualities you should consider when selecting who will serve as your trustee and successor trustee.
Integrity and trustworthiness are the first, and most important, qualities that should be considered.
You are trusting this person with some or all of your earthly assets and possessions and asking that he or she manage those assets in the best interests of whomever you have named as the beneficiaries of your trust.
Therefore, you want to ensure that the person not only has a meticulous attention to detail, but, more than anything, will be faithful to his or her duties in acting as the trustee.
This is one of the few areas where we here at I&E understand that we’re not going to be all the much help to you in deciding who you should make as trustee. But, what we can do is help answer any questions that you may have regarding how creating a trustee is performed.
If you have any questions whatsoever, feel free to give us a call here at I&E, we’d be happy to help!