A trust is a legal arrangement through which an individual (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for the benefit of another person, called a “beneficiary.” If you have been appointed the trustee of a trust, this is a strong vote of confidence in your character, judgment and maturity. However, with that comes legal liability and a significant number of duties.
Outlined below is a brief overview of some of the key duties and responsibilities of a trustee:
As a trustee, you stand in a “fiduciary” role with respect to the beneficiaries (current and future), meaning you have a legal duty to act solely in another party’s interests. As a fiduciary, you will be held to a very high standard of personal and professional conduct in administrating the benefits of the trust.
The Trust’s Terms
Read and understand the trust. The trust is your guide and you must follow its directions, whether about when and how to distribute income and principal or what reports you need to make beneficiaries.
Your investments must be prudent, meaning that you cannot place money in speculative, self-serving or risky investments. In addition, your investments must take into account the interests of both current and future beneficiaries.
Where you have discretion on whether or not to make distributions to a beneficiary, you need to evaluate his/her current needs, his/her future needs, his/her other sources of income and your responsibilities to other beneficiaries before making a decision.
Keep track of all income to distributions from and expenditures by the trust. Usually you must give an account of this information to the beneficiaries on an annual basis.
Depending on whether the trust is revocable or irrevocable and whether it is considered a “grantor” trust for tax purposes, the trustee will have to file an annual tax return and may have to pay taxes.
You cannot delegate your responsibility as trustee, but if the trust document permits it, you may hire agents to carry out certain functions. For example, you may be able to hire financial advisors to make investments, accountants to handle taxes and record keeping for the trust, and lawyers to advise you on questions of interpretation. However, as trustee, you are ultimately responsible for the actions of agents taken on your behalf.
Trustees are entitled to reasonable fees for their services. Family members often do not accept fees. Banks, trust companies and law firms typically charge fees for their services. In general, what’s reasonable depends on the work involved, the amount of funds in the trust, other expenses paid out by the trust, the professional experience of the trustee and the overall expenses for administering the trust.
Marc has 36 years in financial services and 6 years in teaching.
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