Whether individual family member or a corporate professional, the roles and responsibilities of a trustee are the same, and not everyone is aware of the extent, importance and liability of the job.
Has anyone ever asked you, or someone you know, to be their trustee? Or have you named someone as trustee of your own trust, or executor of your own will? If so, it’s important to understand what the role actually entails.
Below is a step-by-step guide for anyone who has ever been asked to act as a trustee:
1. Accept the role
The first step may seem obvious, but it brings up several important points. First, it is not required that you accept the role. Being asked to act as a trustee is really a nomination to the role, and can be declined. You can also modify the acceptance by adding a co-trustee, for instance. If you do accept, you can do so in writing, or simply by starting to carry out the role’s responsibilities. So consider carefully whether this is something you should take on. Ask yourself if you have the time, knowledge and resources to commit to the role, and whether you have the proper safeguards in place for the liability involved. After all, mistakes will come out of your pocket.
2. Read the document
The trust is essentially instructions from the person who created it as to what they want to happen, when, how, on what conditions, for whom, and with respect to what funds. It is a legal document, so while the words should carry their plain meaning, it’s also important to be aware of the fact that words in the law may have very specific meanings as well. Once you read the document, reflect on: What is the purpose of the arrangement? What monies were set aside to carry out that purpose? And who does it benefit now, and in the future? These are the people you will be accountable to, and who, if you were to do something wrong, might have cause to sue you. This isn’t being alarmist, just realistic.
3. Inventory the assets
It is the job of the trustee to marshal the assets, safeguard them, keep records and invest them appropriately. The assets are titled in your name as trustee, which is to say you become the legal owner of the assets, even though they are for the benefit of others. So if assets have an inherent risk, like environmentally tainted real estate, that becomes your problem, because you are the registered owner. You should not, however, co-mingle the assets with your own, since that creates another risk for the assets.
4. Communicate with the beneficiaries
Beneficiaries have the right to understand the steps above and deserve to know what their rights are under the trust. They have the right to statements and accountings and a copy of the trust (or at least the portion that pertains to their interest), even if they are a future beneficiary of the trust. Agree upon an ongoing communication schedule so everyone involved knows how they will be communicated with, when, and about what.
5. Invest the funds
As trustee, you are responsible for keeping the assets productive, appropriate to the requirements of the trust, sensitive to the income, gift, estate, and generation-skipping tax issues that may affect the trust.
6. Distribute the funds
Trusts may have automatic distributions (e.g. pay all income annually, or give a third of the assets to the beneficiary when they turn 35 years old), or discretionary distributions (e.g. pay so much, or all, of the trust funds to the beneficiary as needed for their health, education, maintenance, and support as determined by the trustee). When it comes to handling discretionary distributions. you should keep records of what was distributed and why, since these questions might be asked by future beneficiaries.
7. File tax returns
A trust, not unlike a person, owns assets and earns income on those assets, and therefore must file all appropriate tax returns, Federal and State. In some cases the trustee may also be responsible for filing the estate tax return if one is required or advisable.
8. Delegation of duties
The trustee needs to ensure that all of these things are done, but that does not mean they need to do it all themselves. The trustee may even use trust funds to hire professional help, such as an attorney to help interpret the document and for insights into local law, an accountant for the filing of the tax returns and for tax advice and accountings, and a financial advisor or investment manager to handle the day-to-day investments in the trusts. Sometimes multiple duties can be carried out by a single firm designed to act in this role, such an independent professional trust company. When delegating duties, the trustee is responsible for selecting and monitoring these agents.
9. Remain loyal
It is important to understand that many activities that may be acceptable, fair business practices in our day-to-day world may be prohibited for a trust. Purchasing from or selling assets to the trust, even at fair market value, or being partial to one beneficiary over another can be an issue. You’ll need to balance the tax implications of the investments with various beneficiaries, communicate as needed, and keep transparent records.
10. Termination of the trust
At some point, in the near future or generations later, the trust will end, which involves the distribution of all the remaining assets in accordance with the trust document, and again filing all of the appropriate tax returns. In cases of court created trusts and trusts created by a will, there may also be court reporting that is required.
Being a trustee is a big job and considering all of the responsibilities is important. Whether it is you being named to the role, or helping a client think about naming someone to the role, make sure they have a clear understanding of all of the responsibilities.
If not, seek another trustee or a professional trustee. Trucendent has partnered with a network of top-tier trust administrators to help advisors offer the best possible recommendations to their clients. Click here to learn more.