What are a Trustee’s Duties?
A trustee has many responsibilities. Generally, a trustee has the following duties:
Administer the Trust. It is the trustee’s responsibility to administer the Trust in accordance with the terms of the Trust document.
Exercise Skill and Care. The trustee must use the care, skill, prudence, and diligence that a competent professional individual would normally use in managing the Trust. This is a high standard.
Give Notices. Both state law and the Trust document may require that the trustee notify beneficiaries of events specified in the Trust document.
Furnish Information and Communicate. Both state law and the Trust document may require that the trustee keep beneficiaries informed regarding the activities of the trustee, to provide a copy of the Trust document, and to provide annual accountings. Upon reasonable request by a beneficiary, the trustee may have the obligation to provide additional information.
Account. Both state law and, usually, the Trust document require that the trustee periodically provide the current Trust beneficiaries with a written accounting of the assets, liabilities, receipts, and disbursements of the Trust.
Ultimate Responsibility. The trustee has the ultimate responsibility for the Trust and its management. The trustee should keep a record of all significant trustee decisions and any discretionary decisions made by the trustee. The trustee may employ agents, such as attorneys, accountants, and investment advisors, to advise or assist in the performance of administrative duties. Normally, such advice may not eliminate the trustee’s responsibility to the beneficiaries.
Be Loyal. The trustee’s primary responsibility is to act always in the best interests of the Trust and its beneficiaries.
Avoid Conflict of Interest. The trustee may not use either the Trust or its assets for personal gain.
Segregate Trust Property. The trustee may not commingle the trustee’s personal assets with Trust assets.
Be Impartial. The trustee has a duty to treat all beneficiaries fairly and impartially.
Commencing a Trust Administration
A trust administration is not normally supervised by a court – in fact, that is one of the many benefits. Jurisdiction for the review of trust matters, and where disputes arise, generally is with the probate court of the state. The major steps in a typical trust administration include:
Select a Lawyer and Other Professionals. The trust administration involves legal questions. You will need the services of an experienced estate planning lawyer. Our West Palm Beach estate planning attorneys will be glad to talk with you as to how we can help you with this work. There are also fiduciary income tax returns that will be required to be filed. You will also need to engage a certified public accountant to assist you in preparing these returns.
Find, Read, and Interpret Trust Documents. A Trust is normally a written document. It is your responsibility to find the Trust document. Many times there are amendments to the Trust. It is your responsibility to read the Trust document and to fully understand all of the Trust provisions. If any provisions are ambiguous, it is your responsibility to obtain legal advice on the proper interpretation of these documents.
Gather Information. Before a trust administration can be commenced, it is necessary to get basic information on the Trust and the beneficiaries. This information includes names, addresses, telephone numbers, dates of birth, and social security numbers for all beneficiaries. You will also need to gather any other information needed to administer the Trust.
Obtain a Tax Identification Number. A Trust is a separate taxpayer. As a result, you will have to apply for a tax identification number (“TIN”) for the trust. This TIN will be used by you when opening any bank or other accounts in the name of the Trust. This number will also be required for the filing of the Trust’s fiduciary income tax return (Form 1041). You will be required to file this return each year during the trust administration.
Find, Protect, and Value Assets. After being appointed as the trustee, you must find, take control over, and protect all of the Trust assets. Normally Trust assets are valued at current value on each accounting. As Trustee, you will have establish this fair market value for each accounting.
Conduct Ongoing Trust Administration. A Trust checking account should be opened to receive the income to the Trust and pay out Trust expenses. Any payments owed to the Trust should be deposited to this account. The Trust checking account should be held by the lawyer for the Trust so that he or she can monitor payments out of the Trust and ensure that such payments are made according to the requirements of the law. Your West Palm Beach estate planning lawyer can prepare the Trust checks for you to sign. The bank should be instructed to send statements and canceled checks monthly, so that those records will be available to prepare the Trust accountings as required by law.
Some of your work during an ongoing trust administration includes:
- Arranging for safekeeping of Trust property.
- Maintaining an accurate and efficient system for processing and accounting for the receipts, disbursements, investments, and distributions from the Trust.
- Accurately reporting the accounting and other relevant Trust information to the beneficiaries on a periodic basis.
- Arranging to make distributions and disbursements from the Trust on a timely basis.
- Engaging competent counsel to advise on legal and compliance issues, including compliance with the requirements of any court which has jurisdiction of the Trust.
- Obtaining competent fiduciary income tax return preparation services.
- Engaging competent advice for the continuing investment of the Trust property.
- Reviewing investments to determine whether particular investments should be retained by the Trust. You will need to consider the risk of holding an investment and the diversification of the investment portfolio.
- Selling inappropriate Trust assets.
- Complying with probate court accounting requirements and laws, if any.
- Providing adequate liability and fidelity insurance.
- Filing required fiduciary income tax returns.
- Paying all required income and principal distributions.
- Considering all discretionary income and principal distributions and making approved discretionary distributions.
- Filing the federal and/or state fiduciary income tax returns.
- Paying the remaining Trust assets to the residuary beneficiaries upon the termination of the Trust.
Address Liquidity Needs. One of your most important tasks will be to make sure that you will have sufficient cash to meet all of the Trust’s obligations and distributions to beneficiaries.
Oversee Investment Activity. Most states now require that the trustee handle the Trust’s assets in accordance with the investment standard know as the “Prudent Investor Rule.” This rule permits the trustee to delegate investment decisions to an independent advisor provided that the trustee exercises reasonable care in selecting the advisor, establishes that the delegation is consistent with the terms of the Trust, and monitors the investment performance on a regular basis. It requires that the total investment portfolio be appropriately diversified to reduce risk and be allocated among investment classes to provide a reasonable return.
File Tax Returns. If the Trust receives income during any year, a federal “fiduciary” income tax return must be filed for the Trust. A state fiduciary income tax return must be filed as well for any state in which the Trust earned income during the Trust’s administration. A trustee must also maintain copies of filed tax returns that are also a standard part of Trust records.
Records and Accountings. As trustee, you are required to maintain Trust records and provide periodic accountings to beneficiaries. If you fail to do so, you may create a personal liability for yourself. Such records include statements on all Trust assets, including copies of all bank and brokerage statements. Normally, beneficiaries have a right to inspect Trust records. Required records typically include:
- Records of Trustee Actions. Trustees often are authorized by the Trust instrument to make discretionary decisions. Any discretionary action must be documented.
- Trust Accountings. The beneficiaries of a Trust have a legal right to receive sufficient information about the Trust to protect their beneficial interests in the Trust. This obligation is normally satisfied by providing an annual accounting. Most accountings should be prepared on an annual basis and should show initial assets, income and principal transactions, and assets on hand at the end of the year. Accountings for prior periods are also essential when there is a change of trustee to ensure that the successor trustee begins his or her responsibilities with full knowledge and a clean slate.
Powers of a Trustee
Both state law and the Trust document grant powers and authority for the actions of the trustee. These delegated powers normally include, among other items, the power to sell or buy assets, make investments, hire professional assistance, make distributions, enforce actions, file tax returns, etc. It is your responsibility as trustee to know and understand the powers granted to you. It important to note that you must exercise these powers in your role as a fiduciary for the Trust.
Investing Trust Assets
As noted above, the trustee has the responsibility to invest the Trust assets in a prudent manner. This includes both the responsibility to make proper choices for investments and to prudently diversify trust investments.
Distributing Trust Assets
The trustee must follow the provisions of the Trust document and make appropriate distributions to designated beneficiaries. Distributions to beneficiaries can be characterized as either “required distributions” or “discretionary distributions.” A required distribution is a distribution that is specified in the Trust instrument. An example is a clause that requires the trustee “to pay all of the net income” to a beneficiary. A discretionary distribution is a distribution that may be made if the trustee deems it to be appropriate for the benefit of the beneficiary. An example is a clause that requires the trustee “to distribute principal to maintain a beneficiary’s standard of living.” Such a decision is often defined by reference to an “ascertainable standard” based the beneficiary’s “health, education, support and maintenance.”
It is your responsibility as the trustee to ensure that proper tax planning is done during the administration of the Trust. This involves planning for investment income, expenses, and distributions to Trust beneficiaries. Normally, a Trust pays income tax on the fiduciary income tax return on capital gains and losses recognized by the Trust. Ordinary income (interest and dividends) is taxed to the beneficiaries, if distributed out to them. If income is retained inside the Trust, it is taxed to the Trust. It is important to note that a Trust’s federal income tax rates are compressed. That means that a Trust pays tax at the higher rate brackets with a lower amount of income.
A trustee is entitled by law to receive a commission (fee). The method of computation is determined both by the amount of the assets in the Trust and by state law. Your lawyer will be glad to discuss this with you. The commission will be income to you and taxable when you receive it. You are not required to accept the commission and if you intend to waive it, you should advise your West Palm Beach estate planning lawyer as soon as possible. The commission will constitute a tax deduction for the Trust which may be applied against the Trust income.
A trustee must accept the trusteeship position in order to assume that role. Without a provision in the Trust instrument permitting resignation, once an individual has begun serving as a trustee, that individual may not just be able to resign from such position. It is important to make sure that the Trust instrument contains a provision permitting resignation. If there is no provision, then a trustee will have to petition the court having jurisdiction for permission to resign. They may or may not permit the resignation. The primary concerns of the court will be that the Trust assets be preserved and that the trustee’s resignation is in the best interests of the Trust’s beneficiaries.
A trustee can become personally liable for a breach of duty as trustee when the breach results in a loss to the Trust. A trustee may also be liable for the actions of agents such as an investment manager, unless there is specific authority for delegating responsibility to the agent and relying on the agent’s advice.
Every Trust in the United States is governed by the laws of a specific state. The state of domicile is either specified in the Trust agreement or is established by the location of the trustee. If a Trust is located in a state, then that state may be entitled to tax the estate. The state of the trustee’s domicile is also usually the state of jurisdiction for any litigation.
Time Period for Trust Administration
The term of a Trust is dependent upon the Trust’s provisions. A Trust can not be closed until the Trust document permits the trustee to do so. If a Trust becomes too small to be managed efficiently, it may be possible to have an early termination of the Trust.
Consulting with a Lawyer
You will need the assistance of an estate planning/and probate lawyer. There are legal issues that will need to be addressed throughout the administration of the Trust, and as Trustee you can have personal liability for your actions and in-actions, even if well-intended.