A trustee is one of the most critical roles in any trust arrangement. As an estate planning attorney, I am often asked, “What exactly does a trustee do?”
In this article, I’ll provide an overview of the main duties and responsibilities trustees undertake, the types of trustees you can choose from, and tips for selecting the ideal trustee to fulfill your wishes.
What Is a Trustee?
A trustee is a person or institution named to manage and distribute the assets held in a trust according to the trust terms and applicable laws. Often called a “fiduciary,” a trustee has a legal duty to administer the trust in the best interests of the beneficiaries.
Key Trustee Duties and Responsibilities
While specific trustee duties may vary depending on the purpose and terms of the trust, there are core responsibilities common to all trustees. These include:
Administering the Trust
The trustee is responsible for carrying out the terms of the trust as outlined in the trust documents. This includes distributing assets to beneficiaries, filing tax returns, keeping detailed records, and communicating regularly with beneficiaries.
Trustees have a fiduciary duty to administer the trust in the best interests of the beneficiaries and follow all applicable laws.
Managing Assets
A key duty of the trustee is overseeing the investment and management of assets within the trust. This includes making decisions about investing liquid assets like cash and stocks and managing real estate, businesses, or other assets placed into the trust.
The trustee must invest and allocate assets in alignment with the grantor’s wishes and make prudent adjustments over time. They must also keep trust assets separate from their assets.
Distributing to Beneficiaries
The trustee is tasked with disbursing funds and assets to beneficiaries according to the terms outlined in the trust documents. This includes deciding on the timing and amounts of distributions.
For example, the trust may outline that the beneficiary will receive a monthly income distribution for several years. The trustee ensures these payments are made on time and for the right amounts.
Reporting
Another important trustee responsibility is informing beneficiaries and relevant regulators through regular reporting. This includes filing any required reports with state and federal agencies.
The trustee should also provide account statements and updates to beneficiaries so they are aware of trust activity and performance. Frequent and transparent communication prevents misunderstandings down the road.
The trustee must avoid conflicts of interest and self-dealing in carrying out these duties. The trustee also has a duty not to delegate core responsibilities to others.
How Is a Trustee Different Than an Executor or Power of Attorney?
An executor is named in a will and is responsible for settling the estate of someone who has died by collecting assets, paying debts, filing taxes, and distributing property to heirs. Their role ends once the estate is closed.
A power of attorney is designated to handle finances and make legal decisions for someone else while they are still living if they become incapacitated. The power ends when the person granting it passes or regains capacity.
A trustee’s role begins when assets are transferred to a trust and can last for years or decades after someone dies or becomes incapacitated. The trustee actively manages the trust assets and distributions for potentially long periods of time.
Who Can Serve as Trustee?
One of the most important decisions when creating a trust is selecting the trustee. As the legal owner of the trust assets, their capabilities and character are critical.
There are a few common options to consider when choosing a trustee, each with pros and cons.
Professional Trustees
Banks, trust companies, and wealth management firms commonly serve as professional trustees. The benefit of using a professional trustee is that they have specialized knowledge in trust administration and investing. They are also regulated entities with fiduciary obligations to clients.
The downside is professional trustees charge fees, which are paid from the trust assets. The fees vary based on the size and complexity of the trust.
Friends or Family Members
Some grantors choose a close friend or family member to serve as trustee. Relatives or friends often know the grantor well and can serve as an unpaid trustee. However, family members may struggle with the complex duties required of a trustee. There is also potential for conflicts of interest if a beneficiary is a trustee.
If you go this route, be sure to select someone highly competent, organized, and with full availability to serve as trustee. Outline their specific duties clearly in the trust documents.
Attorneys
Given their trust and estate law knowledge, estate planning or trust attorneys are another option. However, unless they specialize in financial management, they may lack the investment experience to grow the trust assets effectively.
Attorney fees are also typically higher than those of financial advisors at trust companies. The legal knowledge of complex trusts might justify the additional expense.
Key Traits for Any Trustee
Regardless of whether you choose a professional trustee, friend, or family member, several traits make an ideal trustee:
- Trustworthiness – They must have a track record of integrity and honesty. Handling large asset values requires someone who is reliable and ethical.
- Responsibility – A trustee needs to be diligent, organized, and detail-oriented. Carelessness could lead to mismanagement.
- Impartiality – A trustee should remain objective and keep the beneficiaries’ interests first. Personal biases have no place in trust decisions.
- Availability – They should have the time and commitment to serve as trustees for the duration required, which could be years or decades.
- Investment experience – Financial savvy is vital to prudent investing for trusts holding substantial liquid assets.
- Alignment with your goals – A trustee who shares your values and intentions will remain faithful to them when carrying out trust terms.
How to Select the Right Trustee
Choosing the right trustee starts with assessing your trust goals, assets, beneficiaries, and timeframe. Some key factors to consider:
Your Assets and Beneficiaries Needs
What kinds of assets will the trust hold? Complex assets like a business require a trustee with relevant experience. Young beneficiaries depend on a trustee committed to long-term involvement.
Weigh Pros and Cons
Assess the advantages and disadvantages of a professional versus a friend/family member as a trustee for your situation. Outline these clearly during your trustee selection process.
Define the Terms
Draft clear instructions for the trustee in the trust documents, outlining their powers, duration of service, and replacement protocol. Ambiguity leads to problems down the road.
Plan for the Future
Name at least one or two successor trustees who can step in if your first-choice trustee dies or becomes incapacitated. This prevents court appointment of an unknown replacement.
What Fees Can a Trustee Charge?
If appointing a professional trustee, the fees and commission rates they charge will be an important consideration. Corporate trustees typically structure their fees on a sliding scale based on factors like:
- Size of the trust
- Types of assets held
- Complexity to administer
- Time invested by the trustee
- State laws on trustee fees
Our estate planning attorneys report that corporate trustee fees often start around 0.6% to over 1% of assets under management each year, depending on the above factors. The fee includes investment management, distributions, and all administrative services.
State laws prohibit excessive fees for trustees, so beneficiaries can always petition a court for fee adjustments they consider unreasonable. Some trusts also include provisions to replace trustees charging excessive fees.
Select an Experienced Trust Lawyer for your Future
Consulting with an estate planning attorney can help you evaluate options and make the optimal trustee selection for your needs. They can also draft the necessary trust terms related to the trustee role.
While appointing a trustee might seem simple, it requires careful consideration. The trustee will determine how smoothly your trust operates and whether your wishes are fulfilled long after you’re gone. Invest time upfront in choosing the right trustee so you can feel at peace about your trust’s future.
Choosing competent, honest trustees committed to following your wishes is one of the most meaningful gifts you can leave your family.
