What Does a Trustee Do?
Unraveling the Trustee’s Role
In the field of estate planning and asset management, trustees play a pivotal role in overseeing and safeguarding the interests of beneficiaries. Appointed to manage a trust, trustees serve as fiduciaries, which means they have a legal and ethical obligation to act in the best interests of the beneficiary or principal and are entrusted with significant responsibilities.
Understanding the trustee’s duties and obligations is important for anyone involved in estate planning or considering the creation of a trust. Read on to learn more about the multifaceted role of a trustee, exploring their responsibilities, legal obligations, and the importance of their expertise in ensuring the efficient administration and long-term success of a trust.
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Defining the trustee’s role
A trustee is an individual or entity appointed to manage a trust established by a grantor (also known as a trustor or settlor). The trust document outlines the trustee’s duties, the beneficiaries’ rights, and the terms governing the trust’s operation. Trusts can serve various purposes, such as preserving wealth, providing for loved ones, supporting charitable causes, or ensuring the well-being of beneficiaries with special needs.
Legal obligations of a trustee
As fiduciaries, trustees are held to the highest standards of care, loyalty, and good faith in carrying out their responsibilities. Trustees have a profound responsibility to act in the best interests of the trust beneficiaries and to carry out their duties with utmost integrity and diligence.
Some of the key legal obligations of a trustee include:
- Duty of Loyalty: Trustees must act solely in the best interests of the beneficiaries and avoid any conflicts of interest that could compromise their fiduciary duty.
- Duty of Care: Trustees are required to exercise the same level of care and skill that a prudent person would exercise in managing their own affairs.
- Duty to Follow Trust Terms: Trustees must adhere to the trust document’s provisions and follow the grantor’s intentions as expressed in the trust.
- Duty of Impartiality: If a trust has multiple beneficiaries, trustees must treat all beneficiaries fairly and impartially, considering each beneficiary’s needs and circumstances.
- Duty to Account: Trustees must keep detailed and accurate records of all trust activities, including financial transactions, income received, and distributions made.
- Duty to Diversify Investments: Trustees have a duty to prudently manage the trust’s investments and to diversify the portfolio to minimize risk and maximize returns.
- Duty to Avoid Self-Dealing: Trustees cannot engage in self-dealing or personally benefit from the trust’s assets unless explicitly authorized by the trust document or applicable law.
- Duty to Avoid Commingling: Trustees must keep the trust assets separate from their personal assets and avoid commingling funds.
- Duty to Preserve and Protect Trust Assets: Trustees have a duty to preserve and protect the trust assets from loss or depreciation, using reasonable care and diligence.
- Duty to Exercise Discretion: Trustees must act in good faith and with impartiality.
Key responsibilities of a trustee
Keeping those legal obligations or duties in mind, a trustee has some key responsibilities that they need to perform in their role. These include:
Asset management: One of the primary roles of a trustee is to manage the trust’s assets prudently and in accordance with the trust document’s provisions. This may involve making investment decisions, overseeing property management, and maintaining accurate records of all financial transactions.
Distribution of income and assets: Trustees are responsible for distributing income and, when appropriate, assets to the trust’s beneficiaries based on the terms outlined in the trust document. This may include regular payments or discretionary distributions based on specific criteria.
Record keeping and reporting: Trustees must keep detailed records of all trust activities, including financial transactions, income received, and distributions made. They are also required to provide regular reports and accountings to the beneficiaries, ensuring transparency in the trust’s administration.
Tax compliance: Trustees are responsible for ensuring the trust complies with all applicable tax laws. This includes filing tax returns and paying any necessary taxes on behalf of the trust.
Prudent decision making: Trustees must make decisions regarding the trust’s management and distributions in a prudent and thoughtful manner, taking into consideration the best interests of the beneficiaries.
Conflict resolution: In some cases, conflicts may arise between beneficiaries or in interpreting the trust’s terms. Trustees must address such conflicts impartially and resolve them in a fair and equitable manner.
Can I be my own trustee?
Whether or not you can act as your own trustee depends on which type of trust you are considering.
In a revocable trust, such as a living trust, you can act as your own trustee. In this situation, you, as the grantor, retain control and can act as the initial trustee.
However, in an irrevocable trust, you cannot be your own trustee. Because irrevocable trusts involve transferring assets permanently out of the grantor’s ownership and control, the grantor cannot serve as their own trustee in an irrevocable trust. Instead of being your own trustee, you must appoint an independent trustee to manage and administer the trust.
Trustee’s role in specialized trusts
Trustees may be involved in managing various types of specialized trusts, each with its unique considerations and objectives. Some examples include:
- Special Needs Trusts: Trustees of special needs trusts must carefully navigate the complex rules to ensure that distributions do not jeopardize the beneficiary’s eligibility for government benefits.
- Charitable Trusts: Trustees of charitable trusts are tasked with managing assets for charitable purposes, such as funding education, research, or community projects.
- Revocable Living Trusts: For revocable living trusts, the grantor often serves as the initial trustee during their lifetime, retaining full control over the trust assets. Successor trustees take over management upon the grantor’s incapacity or passing.
Choosing the right trustee
Selecting the right trustee is crucial to the success of a trust. Make sure you consider individuals or entities with the necessary expertise, integrity, and understanding of the grantor’s objectives. Family members or close friends may be appropriate choices, as long as they possess the required financial acumen and impartiality.
Alternatively, professional trustees, such as banks or trust companies, can offer expertise, stability, and objectivity in managing complex trusts.
Trustee succession planning
If you’re considering setting up a trust, make sure to consider trustee succession planning to ensure a smooth transition of trustee responsibilities. Naming successor trustees and defining the process for their appointment is essential to avoid potential disruptions in trust management.
Putting it all together
The role of a trustee is complex and multifaceted, requiring a deep understanding of trust law, financial management, and the grantor’s intentions. As fiduciaries, trustees bear the responsibility of safeguarding the trust’s assets, adhering to legal obligations, and acting in the best interests of beneficiaries. By understanding the trustee’s role and carefully selecting the right trustee, individuals can establish a robust and well-managed trust that will provide for the well-being and future of their loved ones for generations to come.
About Norway Savings Asset Management
At Norway Savings Asset Management Group, we manage trusts and investments for people like you. We’re more than just financial advisors—we’re family fiduciaries—which means we’re both legally and ethically bound to put your interests first. We take the responsibility of safeguarding your assets incredibly seriously. We’re here to make sure your story lives on.
*This article is intended for educational purposes only and should not be construed as legal or tax advice.