A Brief Overview of a Trustee’s Duties

If you have been appointed the trustee of a trust, it is a strong vote of confidence in your judgment and trustworthiness. It is also a major responsibility. A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” In this article, we will provide a brief overview of a trustee’s duties and offer some guidance to help you fulfill your obligations.

Fiduciary Responsibility

As a trustee, you stand in a “fiduciary” role with respect to the beneficiaries of the trust — both the current beneficiaries and any “remaindermen” named to receive trust assets after the current beneficiaries’ interests end. Because you are a fiduciary, you must adhere to a very high standard of care, paying close attention to every aspect of trust management, including investments, disbursements, and record-keeping.

Standard of Care

This “high standard” means you must act in good faith and with the same level of prudence you would use in managing your own affairs — in fact, often to an even higher degree. You should gather and review all relevant information before making decisions, and you must put the trust beneficiaries’ best interests ahead of your own or anyone else’s.

Potential Liabilities

A trustee who breaches their fiduciary duty can be held personally liable for any losses sustained by the trust. Such breaches could include investing trust assets imprudently, misusing funds, or failing to follow the terms of the trust. To avoid these pitfalls, always document your decision-making process and, if necessary, consult legal or financial professionals for guidance.

The Trust’s Terms

Your primary guide as trustee is the trust document itself. Read it carefully at the outset and revisit it whenever questions arise. The trust document will specify how and when to distribute income or principal, the types of reports you must provide to beneficiaries, and any limits on your powers as trustee.

When Questions Arise

Trust language can sometimes be complex. If you have difficulty interpreting a provision, consider seeking professional advice from an attorney or other qualified expert. It is critical to understand your powers and limits to ensure you do not inadvertently exceed your authority or neglect an important duty.

Investment Standards

Your investments as trustee must be prudent. This typically means following the “prudent investor rule,” which requires you to invest and manage assets with reasonable care, skill, and caution. You must consider the trust’s overall investment strategy, the trust’s purpose, and the beneficiaries’ needs, both current and future.

Balancing the Needs of Different Beneficiaries

Often, one beneficiary may be entitled to current income while others are entitled to the trust principal later. Investing solely for high current income might reduce long-term growth for future beneficiaries. Conversely, investing solely for growth might short-change current beneficiaries who rely on trust income. Striking a balance is essential.

Assessing Future Needs

Before selecting specific investments, consider each beneficiary’s current and future expenses. Are they saving for retirement, planning to purchase a home, or expecting large educational expenses? The trust’s investment plan should align with these timelines and priorities where allowed by the trust terms.

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Distributions

Where the trust document grants you discretion to make or withhold distributions, you must evaluate the beneficiary’s current and future needs, other sources of income, and your responsibilities to other beneficiaries. All these considerations must be weighed against the size and expected longevity of the trust.

Making Difficult Decisions

Sometimes, saying “no” to a beneficiary’s request may be in the best long-term interest of the trust. It can be challenging when the immediate need seems clear, but you must remain mindful of your duty to preserve trust assets for future beneficiaries. Good communication and transparency can help beneficiaries understand the rationale behind your decisions.

Accounting

One of your core responsibilities is to keep detailed, accurate records of all trust income, distributions, and expenditures. You generally must provide these records to beneficiaries on at least an annual basis, though the trust document may require more frequent reporting. In strict trust accounting, principal and income must be tracked and reported separately.

Record-Keeping Tools

You may choose to use accounting software or hire a professional bookkeeper to help maintain precise records. Whatever method you select, consistent and organized record-keeping will make it easier to prepare any required reports and tax returns, and to address beneficiary inquiries promptly.

Taxes

Depending on the type of trust (revocable or irrevocable) and whether it is considered a “grantor” trust for tax purposes, the trustee may be required to file annual income tax returns and possibly pay taxes on behalf of the trust. In some cases, the trust functions as a pass-through entity, with income taxed to the beneficiaries.

Working with Professionals

Many trustees opt to work with a qualified accountant or tax preparer to handle trust tax returns. By keeping thorough financial records throughout the year, you can streamline this process and reduce the potential for errors or disputes with taxing authorities.

Delegation

While you cannot delegate your ultimate responsibility as trustee, you can delegate the specific tasks involved in trust administration. For example, you can hire financial advisors to assist with investment decisions, accountants to manage bookkeeping and taxes, and attorneys to help interpret the trust document.

Choosing the Right Professionals

When delegating tasks, choose reputable experts who are experienced in trust administration. Even with professional help, you must stay informed and actively supervise their work. All final discretionary decisions, such as distribution of principal, remain your responsibility.

Fees

Trustees are entitled to reasonable compensation for their services. Family members often forgo fees, depending on their relationship with the beneficiaries and the complexity of the trust. In professional settings, fees might be a percentage of the trust’s assets or based on hourly work.

Determining What Is Reasonable

What constitutes a “reasonable” fee can depend on various factors, including the amount of work involved, the size of the trust, other professional services employed, and the trustee’s own expertise. If you delegate investment management to an outside firm, for example, you might reduce your own fee accordingly. Consult with a professional experienced in trust matters to determine an appropriate fee structure under your specific circumstances.

Conclusion

Acting as a trustee is an opportunity to provide significant support and protection for the beneficiaries of a trust. It can be a deeply rewarding responsibility when you understand and fulfill your duties. By adhering to the trust’s terms, maintaining meticulous records, investing prudently, and seeking professional advice where necessary, you will safeguard the trust’s assets and honor the confidence placed in you as trustee.