Someone named as the trustee of a trust has a fiduciary duty to the trust’s beneficiaries. At its most basic, this means the trustee must place the needs of the beneficiaries of the trust ahead of their own needs. While following this rule, the trustee must ensure that all the administrative functions involved in overseeing the trust are carried out. These tasks may call for the trustee to invest trust assets in a prudent manner, avoid self-dealing, file tax returns as needed, keep adequate records and sometimes perform other specific duties spelled out in the trust documents. Trustees can get paid for their efforts, but their fees must be reasonable. A financial advisor can help you set up a trust as part of your estate plan.
Trustee Essentials
Trusts are legal entities often used in estate planning to own and manage assets on behalf of beneficiaries. Parties in a trust include the grantor or creator of the trust, the beneficiaries who will receive assets from the trust, and the trustee who is charged with overseeing the trust. The trustee’s role is a powerful one, and trustees are charged with considerable responsibility to ensure that they are carrying out this task fairly.
Trustees have to follow a specific set of legal obligations called fiduciary duty, which are also required of some types of financial advisors. The obligations of fiduciary duty are supposed to guide the trustee’s actions as they manage the trust, which may include investing its assets or buying and selling property. While doing this they have to maintain separation between their personal assets and the trust’s assets. Finally, they have to distribute the trust’s assets to the beneficiaries as spelled out in the trust documents.
Trustee Fiduciary Duties
The concept of fiduciary duty in the financial field dates to the Investment Act of 1940, when some financial advisors were required to follow it in their dealings with clients. Other financial and professional services providers, including corporate board members, legal guardians, attorneys, investment corporations and trustees, also came to be covered by the requirement.
The term was refined later on and, in relation to trustees, fiduciary duty can be split into four main areas. These include the duties of:
- Acting in good faith and loyalty. This limits the trustee to always act in good faith to promote the best interests of the beneficiaries, and not in their own self-interest.
- Employing reasonable skill and diligence. This involves using their own abilities, such as their skill in overseeing investments and their diligence in administering the trust.
- Applying personal attention. This allows the trustee to delegate tasks, but not duty, making important decisions such as buying and selling property or managing assets.
- Keeping and rendering accounts. This can include documenting actions, filing tax returns and demonstrating that they are distributing assets as called for in the trust documents.
Following these duties may direct a trustee to, for instance, invest in publicly traded securities rather than assets with limited liquidity or excessive risk profiles in order to demonstrate prudent behavior. A trustee likely won’t be held responsible if an individual investment turns out to be unsuccessful as long as the trustee’s actions in making the investment were prudent and reasonable.
Breaching Fiduciary Duty
A trustee could breach fiduciary duty if they fail to avoid conflicts of interest, do not disclose important information or engage in self-dealing by taking advantage of their position to make a personal profit at the expense of the beneficiaries. More extreme examples of breaching fiduciary trust include fraud, embezzlement and theft of assets from the estate.
A beneficiary who feels the trustee has acted out of line with the requirements of fiduciary duty can bring a lawsuit that potentially could lead to the trustee being required to reimburse any losses experienced by the estate due to their falling short of the fiduciary requirements. More often, a beneficiary will seek to have an unsuitable trustee replaced with someone more trustworthy. A breach of fiduciary duty can lead to criminal charges against a trustee, albeit rarely.
Bottom Line
“Is a trustee a fiduciary?” is a common question when setting up a trust. Fiduciary duty is a set of obligations that trustees must fulfill as part of their task of administering the trust. A trustee fulfills the basic obligation if they always put the interests of the beneficiaries of the trust ahead of their own. However, there often are other duties, including exercising skill and prudence in managing assets, keeping good records, and personally overseeing the trust operations.
Tips for Setting Up a Trust
- A financial advisor can provide you with advice about ways to plan your estate and pursue other financial objectives. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While there are several different types of trusts, trusts aren’t the only option you have when it comes to estate planning. You can also consider whether an estate or a will could suit your needs.
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