Understanding trustee responsibilities

One of the most important decisions you must make when establishing a trust is naming a trustee to manage and preserve the assets you intend to pass on to your beneficiaries.

Serving as a trustee is a meaningful responsibility that often extends beyond day-to-day administration. Naming the right trustee requires thoughtful consideration of available options, including whether an individual or corporate trustee is best suited to carry out your wealth transfer strategy. What questions should you ask, and where do you begin?

Before you start planning, keep in mind that your situation is unique. What works well for one family may not be a suitable approach for another. Selecting a trustee is an important decision that can have lasting implications for your family and estate plan, making it essential to understand the role and responsibilities involved.

Trustee responsibilities and complexity

The complexity of your plan and assets also affects what you are asking your trustee to do. Granting a trustee broad discretion to make distributions carries significant responsibility and can create challenges, particularly when there are multiple beneficiaries. Complex assets, such as closely held business interests or real estate, may also require a trustee with specialized business and financial experience.

Considering an individual trustee

When considering an individual to serve as trustee, such as a family member or trusted advisor, it can be helpful to ask a few essential questions:

• Does the individual have the time, expertise, experience and willingness to take on this responsibility?
• Could changes in the trustee’s life, such as retirement or relocating, affect their ability to continue serving in this role?
• Is the individual comfortable accepting the responsibilities and potential risks associated with serving as a trustee?

Trustee duties and responsibilities

Generally, a trustee is responsible for managing trust assets for the sole benefit of the beneficiaries. The trust document and applicable laws guide decision-making, so before the administration work begins, a trustee should become familiar with the terms of the trust and laws that govern trustee authority, duties and responsibilities. While serving in this role, the trustee must avoid self-dealing and act impartially toward all beneficiaries.

In the initial phases, a trustee typically:

• Assumes control of trust assets
• Establishes bookkeeping and recordkeeping processes
• Assesses income needs and goals through discussions with the grantor and beneficiaries
• Reviews prior accountings and tax returns
• Takes inventory of trust assets and determines their value
• Confirms that trust property is appropriately insured
• Takes steps to ensure expenses and beneficiary distributions can be met

Take the time to grasp what you will be asking your trustee to do. The following, while not an exhaustive list, provides an overview of some trustee duties and can help guide you to make the right decision for you.

Keeping accurate records

The trustee is responsible for establishing and maintaining timely records of all activities and transactions related to the trust, such as receipts, distributions, taxable income, adjusted cost basis of assets and details of discretionary decisions.

Prudent investing

If assigned investment discretion, a trustee develops and puts into action investment strategies; manages assets and minimizes investment risks; provides ongoing monitoring to match the current needs of the beneficiaries with investment strategies; reinvests proceeds; understands the value and performance of illiquid assets like closely held business interests and real estate; performs periodic investment reviews; and takes measures to minimize taxes to the trust and its beneficiaries.

Consistent communication

Keeping beneficiaries and all interested parties abreast of distributions and other trust matters is a critical function of the trustee. Communication responsibilities include sending detailed account statements, reporting changes that impact the trust and notifying beneficiaries regarding tax returns. The law of the state where the trust is domiciled may require additional notification requirements of the trustee.

Making distributions

A trustee makes income and principal payments as instructed by the trust provisions. This may include giving the trustee discretion to make principal distributions for educational or medical needs, or even as broad as in the best interest of a beneficiary.

Taxes

As required by law, trustees are charged with satisfying tax obligations in a timely manner. Duties include recordkeeping, preparing and filing fiduciary income tax returns, making estimated payments, communicating tax return information to beneficiaries and staying current with tax law changes.

Ending the trust

Upon termination of the trust, a trustee makes sure remainder assets are properly distributed, assets are transferred and final expenses are settled.

When to consider a corporate trustee

If you have reservations about naming an individual as trustee, you may want to consider a corporate trustee. A corporate trustee can offer institutional experience, objective decision-making and continuity over the life of a trust. Many families find comfort in knowing that established processes and long-term oversight help support consistent administration across generations.

Choosing a corporate trustee does not have to exclude family involvement. Depending on the structure of the trust, families may:

• Appoint a family member to serve as co-trustee
• Grant beneficiaries the ability to remove and replace the corporate trustee
• Name a family member as a trust advisor to provide input on investment decisions, distributions or both

Getting the advice you may need

Whatever path you ultimately take, many people find that working with an experienced trust advisor helps put the selection process on solid footing.