A trustee is an individual appointed to administer assets or property for the benefit of a third party. A trustee could be appointed for the purpose of bankruptcy, a charity or certain kinds of retirement plans, but the most common is a trust. A trust is a legal agreement designed to control how an individual leaves an estate to their heirs. Many people choose to create trusts to protect the interest of their beneficiaries. The owner of the trust, known as the grantor, must appoint a trustee to administer the wishes outlined in the trust. You can work with a financial advisor to help you properly set up a whole estate plan in order to protect your assets.
What Is a Trustee?
A trustee is an individual – typically a lawyer, accountant or family member – responsible for administering the wishes of the grantor for the benefit of a third party. The most common type of trustee is a successor trustee who is responsible for handling property and other assets within the trust in the case that the grantor dies or becomes incapacitated. All trustee duties are distinctive to the specific trust agreement and directed by the type of assets in the trust. Additional responsibilities of a trustee may include tax filing for the trust and distribution of assets according to the guidelines of the trust.
There are very few qualifications required to serve as a trustee. A grantor can appoint someone a trustee as long as the individual is at least 18 years old and is not likely to become bankrupt or mentally incompetent. Grantors can also be the trustee themselves, as long as the trust is a revocable living trust. This means the trust can be changed during the grantor’s lifetime. However, if the trust is an irrevocable trust, the grantor must name another individual as the trustee.
What Are the Duties and Responsibilities of a Trustee?
Being a trustee might sound like a great honor, but in reality it requires quite a bit of responsibility for whoever takes it on. A trustee must take their position very seriously as they have legal requirements to fulfill their responsibilities. These responsibilities span from financial duties to keeping proper records. Let’s take a closer look at the three most important responsibilities.
One of the most critical responsibilities of a trustee is the fiduciary or loyalty duty. A trustee must put the interest of the trust above all others. The fiduciary duty obligates a trustee to maintain five essential responsibilities:
- Protect and preserve the trust’s property and assets.
- Defend all beneficiaries and the trust against legitimacy challenges.
- Separate the trust’s assets and property from the trustee’s property. Trustees who co-mingle assets are liable for any losses as a result of combining wealth.
- Handle all assets with care and attention to detail. Complex assets may require greater attention to detail.
- When acquiring, selling, managing or investing the trust’s property, the trustee must proceed with caution.
Typically, these duties and responsibilities require a substantial commitment. The fiduciary standard requires that the trustee pay closer attention to the investments and assets of the trust than to their own accounts.
Asset and Property Management
Beyond the fiduciary standard, a trustee may need to oversee bank accounts, file tax returns, and pay bills and expenses. Trustees may also collect rent or unpaid debts, obtain insurance or complete other tasks that are written into the trust or mandated by state law.
A trustee must manage the funds and assets of the trust with the utmost care. Some of the other asset and property management duties that come with being a trustee include:
- Distributions: Some trustees may have discretion when it comes to making distribution decisions. Trustees need to evaluate the beneficiaries’ needs, other sources of income and responsibilities to the other beneficiaries. Often, the trustee must set limitations and boundaries on the use of all trust assets.
- Taxes: Depending on the type of trust, the trustee must file tax returns and pay any tax obligations. If the trustee is a good record keeper and allows the accountant to prepare the tax documentation, this task may not require a lot of attention.
- Delegation: Although you cannot delegate your trustee obligations, you can, however, delegate some tasks. For instance, the trust may allow you to hire financial advisors to handle wealth management, accountants to manage bookkeeping and lawyers to advise the interpretation of trust guidelines.
A trustee must keep impeccable records of all the happenings related to their duties and responsibilities. Good record keeping should include keeping a detailed list of all assets received and spent, as well as receipts and documentation of all trust expenses. Even if a trustee makes a decision with the best intentions in the interest of the beneficiaries, it could still be called into question. And, that decision may even result in litigation if not properly documented.
How Do You Appoint a Trustee?
You can appoint a trustee in several ways. Generally, the individual that develops the trust appoints the trustees. You can have up to four trustees. Many grantors appoint their executors to also act as trustees. Similar to an executor, you can request professionals to act as trustees, such as an accountant or lawyer. As is the case with many professionals, they may require a fee for their services.
Choosing one or more trustees may depend on the size and nature of the trust. Therefore, it’s wise to discuss the intricacies with any trustee candidate. When selecting potential trustees, you may want to consider individuals with knowledge of complex matters. These matters can include taxation, fiduciary standards, management of securities and trust issues.
Additionally, a grantor may wish to interview corporate trustees. This could help them understand how they work and could contribute to the preservation of their wealth. Once appointed, that individual will be stated in the trust as the trustee. This document may also be known as the declaration of trust.
The Bottom Line
Although a grantor can choose just about anyone to be the trustee of their trust, the role comes with significant responsibilities and duties. A trustee will execute the wishes outlined by the grantor while keeping the beneficiaries’ best interests in mind. Be sure to consider all the duties and responsibilities that come with the role if you’re appointed the trustee of a trust or are looking to appoint a trustee for your own trust. With a little time and careful thought, the right trustee will be selected for the trust.
Tips for Estate Planning
- If you’re ready to develop your own trust, consider enlisting a financial advisor to help. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- Whether you’re just starting retirement or just starting a family, it’s never too soon to start estate planning. One of the first steps to estate planning is creating a will and updating it over time. Consider drafting a will so that your property, assets and family are protected in case of an emergency.
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