Being named a trustee is an important responsibility. In many instances a friend or relative is asked by an individual to serve as trustee for a trust and that individual may have no prior experience or in-depth understanding of what this role entails. Serving as a trustee requires knowledge of many required duties and rules that govern trusts.
What is a Trustee?
A trustee is an individual or entity appointed to manage and oversee a trust on behalf of the trust beneficiaries. They serve as the legal owner of the trust assets on behalf of the trust. They are responsible for administering the trust according to the written instructions in the trust document and applicable state law. This could include paying the trust’s bills, keeping detailed records, distributing funds to or on behalf of the beneficiaries, filing taxes, overseeing the investments, maintaining adequate insurance on trust assets where appropriate, and communicating with the beneficiaries.
Fiduciary Responsibilities of a Trustee
Regardless of the type of trust that the trustee is administering, fiduciary responsibilities apply to their role. Accordingly, they are held to a high standard. These duties arise from the trustee’s obligation to carry out the grantor’s intentions in creating and funding the trust.
- The duty of loyalty, at its core, requires any fiduciary to act in the best interest of the beneficiaries. A trustee should never act in their own self-interest (known as “self-dealing”) or in the interests of parties other than the beneficiaries.
- The duty of impartiality requires a trustee to balance the interests of all beneficiaries (lifetime and remainder) while abiding by the terms of the trust and to treat beneficiaries without bias. The trustee must further the grantor’s intention, not the trustee’s personal biases.
- The duty of care is also referred to as the duty of prudence. Essentially, this duty requires all trustees to act reasonably, as any prudent person would, when managing a trust. When a trustee is notably skilled in certain areas of trust administration, they will be held to a higher standard of care or prudence when it relates to those areas. When a trustee is not skilled in certain areas, it is often recommended that a trustee delegates those duties to an experienced professional.
- The duty to inform and report varies by state law. New York law requires the trustee to provide trust information to beneficiaries when requested to do so by the beneficiary.
Additional Duties of a Trustee
As mentioned above, the trustee’s responsibilities are spelled out in the document creating the trust, whether it’s a will or a separate trust agreement. A trustee typically has very broad powers. The trustee may be required to do some or all of the following:
- Understand the terms of the trust document and ensure safety of assets: This responsibility would include understanding the intensions of the trust creator, collecting trust assets and properly transferring them into the name of the trust, properly insuring the trust assets, and understanding the discretions granted to the trustee (such as discretion regarding investment or distribution decisions).
- Invest assets when necessary: This would include developing and documenting investment objectives for the management of trust assets, including identifying goals, performance objectives, targeted assets allocation, types of investments permitted and roles and responsibilities of any appointed parties.
- Administer the trust: The trustee will be responsible to become familiar with each beneficiary’s needs and circumstances so that the trustee can act in the best interest of the trust beneficiaries while balancing the needs of the trust and the needs of the other beneficiaries, current and future.
- Make ongoing decisions: It will be important for the trustee to conduct a periodic review of all trust assets to determine whether they are being managed according to the terms of the trust and investment objectives. It will be necessary to hold periodic meetings of the trustees if there are co-trustees. The trustee should also regularly communicate with the beneficiaries and provide pertinent information.
- Keep track of records and prepare tax related forms/filings: The trustee is responsible for filing periodic and final accountings as required by state law, filing timely and accurate fiduciary income tax returns for the trust, paying any applicable tax due, and providing regular statements and tax information to the beneficiaries and others as required. The trustee should also be up to date on other reporting obligations that may be required such as the Corporate Transparency Act.
Commonly Asked Questions
- Can a trustee be held personally liable? Yes, a trustee can be held personally liable for breaches of their fiduciary duties. If a trustee fails to act in the best interests of the beneficiaries, acts negligently, or fails to comply with the terms of the trust, they can be held personally responsible for any losses suffered by the trust or its beneficiaries.
- How does a trustee get paid? Trustees are typically entitled to receive reasonable compensation for their services, unless the trust explicitly states otherwise. The method and amount of payment should be specified in the trust document. If not, trustees can seek court approval for their fees based on the time, effort, and skill required to administer the trust.
- What happens if the trustee is either unable or unwilling to serve in the role required? If a trustee is unable or unwilling to serve, they may resign from their position. In this case, a successor trustee, if named in the trust document, would typically take over. If no successor is named, or if the trust does not provide for a successor, the court may appoint a new trustee.
- What experts can help support a trustee? Trustees can seek the assistance of various professionals to help them fulfill their duties, including attorneys, accountants, financial advisors, and investment managers. These experts can provide guidance on legal, tax, and investment matters, helping trustees make informed decisions and fulfill their fiduciary responsibilities.
The role of a trustee is a significant responsibility that comes with fiduciary duties and legal obligations. Understanding the role, duties, and potential liabilities is crucial for anyone considering or serving as a trustee. Some guiding principles for a good trustee are maintaining confidentiality, remaining loyal yet impartial, avoiding conflicts of interest or any act of self-dealing, maintaining solid documentation and policies, and acting prudently in fulfilling fiduciary responsibilities.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
