As you plan how you will leave your estate, it’s important to your family’s future that you leave a legacy with well-executed documents. It’s also essential that you understand all of the roles of the people involved in your estate, especially the person or organization who will manage your estate. The good news is that if you choose to use a trust to organize that estate, then whomever you appoint as trustee has certain legal obligations, known as fiduciary duty. Here’s what that duty entails.
Consider working with a financial advisor as you create or update an estate plan.
What Is a Trustee?
In estate planning, a trustee is a person or organization that is responsible for managing a person’s money or other assets that have been put into a trust. This person makes decisions in the beneficiary’s best interests.
A trust that takes effect while you’re still alive is called a living trust. Some people choose to be their own trustee and continue to manage their affairs for as long as they are able. Married couples can be co-trustees on their trusts, and when one dies or is no longer able to execute on their accounts, the other continues to manage the trust on their own.
A successor trustee will be appointed by the owner of the trust. They are expected to manage the trust when the trustee or co-trustees are no longer able to handle the duties the trust – either because they’ve passed away or become otherwise incapacitated.
Fiduciary Duties of a Trustee
The fiduciary duties of a trustee are to act in the best interest of the beneficiaries. Therefore, their responsibilities are to act within the following parameters:
- The assets that a trustee manages are not their own, and therefore a trustee will never mix their personal assets with the assets in the trust.
- A trustee cannot use trust assets for their benefit and must not favor one beneficiary over another.
- The trustee must follow all instructions laid out in a trust document.
- Trust assets must be invested conservatively to result in reasonable growth of the assets with minimum risk.
- The trustee must keep accurate records, file tax returns, and report to the beneficiaries as laid out in the trust.
A fiduciary is a person or organization that manages another person’s assets. By law, they must fulfill three elements of fiduciary duties involving a trust:
- Full disclosure
These duties ensure that a trustee cannot act in their own interests or the interests of anyone other than the owner of the trust’s assets and their beneficiaries. They are held to a high standard and must avoid conflicts of interest.
Following the Terms of the Trust
Each trust’s terms will vary based on the desires of the owner. There is no such thing as a “standard” distribution of a person’s assets. Therefore, the trustee is required to know the trust itself and to follow the terms laid out in the trust. The trustee is required to follow the directions of the trust regardless of their desires. They are also required to follow through with distributing income from the trust and making any necessary reports.
A trustee is required to manage the assets of the trust both day-to-day as well as when it comes time to distribute the assets in a trust. They will have the legal responsibility to reassess the objectives of the trust and consider current market conditions to be sure that the assets in the account meet the objectives of the trust. Sometimes, trustee will hire someone like a financial advisor to perform day-to-day investment management.
Funding the Inheritances
It is important to protect both the assets as well as the beneficiaries of a trust. Therefore, the inheritances of a trust must be closely managed and used advantageously for all parties involved. Trusts and inheritances can be heavily taxed, so a trustee will be responsible for minimizing the taxable impact of a trust’s distribution. The trustee will also be responsible for distributing any assets at the time of the trustor’s death.
Taxes and Accounting
The trustee will also oversee the preparation of any documentation, including tax returns and other trust accounting. They may delegate the preparation to a trusted accountant but will ensure that all the documentation is within state and federal legal requirements.
A trustee is expected to delegate certain responsibilities. For example, a trustee may not be the best person to perform certain tasks such as day-to-day asset management. They will then hire a trusted financial advisor to manage investments.
Being a fiduciary is a time-consuming and often difficult job. Therefore, it’s appropriate for the trustee to be paid well for their services. The will or trust may detail what the trustee is paid in the documentation. Otherwise, many states provide a fixed fee schedule depending on the size of the estate and the time spent by the fiduciary. If the trustee is a family member, they may not accept fees, but banks, trust companies, and other fiduciaries will typically charge a percentage of the funds they manage as payment.
Other Fiduciary Duties in Estate Planning
Trustees are not the only people involved in estate planning who have fiduciary duties. One such person is a lawyer, who advises a client as an estate plan is being put together to ensure that it is legally compliant. Another is an executor, named in someone’s will, who carries out an individual’swishes after his or her death: probating the will, collecting and distributing assets, filing taxes and paying off any debts.
A third type of fiduciary, known as an agent, has durable power of attorney. This person handles financial and related matters. He or she makes account transactions, sells property, receives payments from Social Security, pensions and retirement funds or makes gifts to others. Someone with medical power of attorney or durable power of attorney for health care, as set out in an advance medical directive, is also a key fiduciary in estate planning. Finally, a guardian is a fiduciary for a minor child or an adult who needs special, ongoing care. The guardian sees to that person’s day-to-day needs. For example, if you’re a guardian for your aging parent, you may be responsible for things like:
- Deciding where they’ll live
- Helping them transition to assisted living or nursing home care if necessary
- Making decisions with regard to their health care
The Bottom Line
To ensure your estate is managed according to your wishes, there are several fiduciary duties a trustee must uphold. A trustee has a fiduciary responsibility to the owner and beneficiaries of a trust’s assets. They can provide a service to everyone involved by ensuring that the assets are managed for growth and to minimize the tax impact of the assets. While they typically charge for their service, the value they provide far outweighs their fees. And beyond trustees, many other people involved in the estate planning process may have a fiduciary duty, including lawyers and executors.
Estate Planning Tips
- Consider talking to a financial advisor about making a trust part of your estate planning. Finding the right financial advisor who fits your needs 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 interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- There are many types of trusts, so it’s a good idea to have at least a basic familiarity of what your options are when considering the creation of a trust.
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