I'm a Trustee, Now What?
Serving as a Trustee of a trust comes with many responsibilities. If you’ve been named as a Trustee, understanding these responsibilities early on will make your life easier and help you avoid legal liability. The following is a brief guide detailing some of the important things you will need to know when taking on the role of Trustee.
Set-up and Maintenance
If the trust is newly formed, a Trustee likely will need to open a trust bank account. Unless the trust is a grantor trust, a Trustee is also responsible for acquiring a tax identification number from the IRS. Similarly, unless the trust is a grantor trust, a Trustee is responsible for filing a Form 1041 (trust and estates income tax return) annually.
After the initial set-up is accomplished, a Trustee’s ongoing duties include managing and investing trust assets prudently, making distributions according to the trust’s terms, and complying with notice and accounting requirements as set forth in the trust instrument and state law. In certain cases, the Trustee must provide annual accounting reports to the beneficiaries.
Broadly, a Trustee’s job is to manage the trust in accordance with its terms while adhering to his or her fiduciary duties. While this may entail a variety of different jobs, one of the most difficult jobs is the Trustee’s role in making distributions to beneficiaries.
A trust instrument usually will give a Trustee some direction on how and when to make distributions to beneficiaries. One common direction is that distributions may be made for “health, education, maintenance, and support” in the beneficiary’s “accustomed standard of living.” Essentially, this standard directs a Trustee to cover medical and educational expenses and to provide enough funds to the beneficiary to maintain the lifestyle the beneficiary had at the time of trust creation. Even with guidance like this, a Trustee’s role in deciding the amount and timing of distributions can be challenging.
At all times, a Trustee’s actions in respect to a trust must comply with the overarching legal standards associated with the duties of a fiduciary. If a Trustee breaches a fiduciary duty, the Trustee can be personally liable. A trust document may waive some of the fiduciary duties, but the following generally apply:
- The duty of loyalty directs that a Trustee cannot put his or her interests above the interests of the trust beneficiaries. Therefore, a Trustee generally cannot engage in self-dealing activities or use trust property for the Trustee’s own benefit.
- The duty of care requires the Trustee to carefully manage the trust property and assets. This duty includes a duty to act prudently, particularly with regard to the prudent investment of trust assets.
- The duty of care also encompasses the duty to identify, secure and safeguard trust property, the duty to pay taxes, and the duty to organize and account for trust property. A Trustee may delegate his or her duties (such as delegating accounting responsibilities to a CPA), but must do so wisely.
- Generally, a Trustee has a duty to treat beneficiaries impartially. This can be difficult when beneficiaries have competing interests.
- A Trustee has a duty to act in good faith.
A Trustee has many complicated responsibilities, only some of which are discussed here. To ensure proper administration of a trust, a Trustee may employ advisors such as accountants, bookkeepers or attorneys. If you have accepted the role of Trustee and could use guidance, the attorneys in the Stokes Lawrence Estate Planning & Administration practice would be happy to assist.