What are the duties of a trustee? I ask because my parents have asked that I become the trustee for their family trust. It is a small estate with only a few assets – mainly the family home and some investments. Right now things are fine because they are in good health, but they are worried about the future (if one dies or they become incapacitated). So, they want to settle that now. I’m not sure what to tell them because I don’t know what the responsibilities of a trustee entail. I have two siblings, and don’t want to get in over my head.
It's great that they have placed their trust in you (no pun intended). It is important for your parents – or anyone setting up a trust - to plan for the future. If one or both die, or they become incapacitated, then the trustee would take over. Whether it is a small trust or a large one, the trustee’s responsibilities are fundamentally the same. In this article, we discuss general trustee duties. These duties would apply even if your parents are alive and you are simply managing their trust for them. Of course, when they die a trustee normally has other responsibilities involved in settling the estate. These are discussed more at how to settle a living trust.
Trustee Definition or Description:
The dictionary defines Trustee as "someone who is given the legal authority to manage money or property on behalf of someone else". The particulars of this "authority," or trustee duties, vary from state to state, but basically the legal duties of a trustee come down to the 3C’s: Care, Custody, and Control.
A trust is a legal relationship between the trustee (who manages property in a trust for the benefit of one or more persons) and the beneficiaries. The trustee is responsible for the care and nurturing of the trust. In addition to important investment duties and responsibilities, there are record-keeping and reporting tasks.
The trustee must be willing to analyze a number of factors before making a decision that affects a beneficiary. These include things like tax consequences, the economy, etc. If a beneficiary thinks that the trustee is not acting properly, the beneficiary can petition the court to reverse a decision or impeach the trustee for breach of duty. Again, the trust language is the governing document. However, some decisions require discretion. In these cases the trustee must act reasonably in order to meet the “fiduciary duty” test. Basically, the fiduciary duty test would look at the trustee’s actions to determine when or not those actions were in the best interest of the beneficiary.
The trustee is also authorized to pay administrative expenses including taxes, accountant and attorney fees and other expenses related to the maintenance of trust property. The trust may also be liable for debts sustained during the decedent’s lifetime, and once the debt is established as legitimate, the trustee is responsible for insuring they are paid.
A trustee’s failure to file the required returns could cause personal liability for penalties and interest. However, the risk of liability can be mitigated if the trust provides trustee indemnity for any reasonable mistakes.
Since the trustee has broad discretion over the choice of investments of trust assets, it is important that those assets be managed in a reasonably prudent manner. Diversification of trust investments and management of trust assets are an important trustee responsibility.
The trustee controls the assets held by the trust. This is probably the single most important duty of the trustee. The trust will have specific instructions about how the fiduciary responsibilities are to be carried out. For example, you cannot write yourself a check for a loan from the trust. You cannot co-mingle funds. You cannot invest the funds in your business. While these may seem like common sense issues on the surface, it is important to remember that the trustee’s primary duty is to manage and conserve the assets held in the trust. Upon the decedent’s death, the trustee inventories all assets and determines the fair market value. Cash investments and securities are straightforward. Other property (real estate, jewelry, antiques, etc) require a professional appraiser. This appraisal will set the amount of estate tax owed and determine the cost basis for the trust assets.
A trustee makes distributions of income to the beneficiaries in accordance with the terms of the trust. The trustee also distributes the assets of the trust when it terminates. The trustee can make a partial distributions along the way, before the trust is settled -- but needs to be sure all debts are paid before a trust is completely paid out.
Now, as to the question of being in over one’s head – well, that is a matter of family dynamics and relationships. Some can carry that mantel – others find it destroys their relationship with the beneficiaries. Being a trustee involves substantial record keeping and management. It's good to have set procedures in place so there are no questions about why you did whatever you did. You would benefit tremendously from consulting with an attorney, accountant, and/or investment professional before beginning the job. They can help you understand your duties and responsibilities as a trustee -- from the outset.
Once the procedures and systems are properly established, most trusts can be managed by individual trustees with minimal additional assistance from accountants and attorneys. But, you will also have relationships with them if and when you do need them.
Almost all trusts will allow you, as the trustee, to hire outside consultants (attorneys, accounts, bookkeepers, investment consultants) as necessary to assist you in managing the trust. Their fees are usually paid from the trust assets as administrative expense. Some trusts will even allow you to be paid a reasonable amount for your time. Of course, this can become an issue of dispute between siblings, so if you plan to do that, it's probably best to "hash that out" with them right up front.
If you need a trustee, here's an article about how to pick a trustee and some comments about what a trustee or executor should do after a death. You might also be interested in an explanation of executor duties which are similar to trustee duties.
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