A trustee is a person or entity entrusted with assets to hold and manage for the benefit of the beneficiary. Trustees generally act under a fiduciary duty and can be a trust company, bank, or an individual. Trustees of irrevocable trusts usually manage the assets given in trust for the benefit of minor children, disabled beneficiaries, or a dynasty trust. These assets typically consist of liquid assets such as stocks and bonds, but can also include real estate and tangible property such as artwork and firearms.
In this article, we will explore the role of a trustee and the various duties they are responsible for, as well as the different types of trustees that exist. We will also discuss the differences between a guardian and a trustee, the advantages and disadvantages of using a family member as a trustee, and how to pick a trustee. Understanding the role and responsibilities of a trustee is important for anyone who is considering establishing a trust or who is considering serving as a trustee.
What is a Trustee and What are Their Duties?
A trustee is a person or entity responsible for managing and administering assets held in trust for the benefit of another person or entity, known as the beneficiary. The duties of a trustee vary depending on the terms of the trust and the specific needs of the beneficiary. However, some common duties of trustees include:
- Managing and investing the trust’s assets: The trustee is responsible for managing and investing the trust’s assets in a way that is consistent with the terms of the trust and in the best interests of the beneficiary.
- Keeping accurate records and tax filings: The trustee is responsible for maintaining accurate and complete records of the trust’s assets and transactions. In addition to records, the trustee is also responsible for filing the trust’s fiduciary tax returns and issuing any 1099’s to the beneficiaries.
- Communicating with the beneficiary: The trustee should keep the beneficiary informed about the trust’s assets and any decisions made regarding the trust.
- Fulfilling specific duties specified in the trust: The trust document may specify specific duties that the trustee is responsible for fulfilling, such as distributing trust assets to the beneficiary at certain ages or in certain circumstances.
- Managing Distributions: Deciding upon and managing the distributions from the trust is an important responsibility for the trustee. This involves determining the appropriate amount and frequency of distributions to the beneficiary, as well as ensuring that the distributions are made in a timely and consistent manner.
- Preserving the Assets: Preservation of the trust corpus is paramount to ensuring a long lasting trust. Depending on the terms of the trust, preservation of trust assets may be of paramount importance or the needs of the primary beneficiary may come first. Either way, the trustee needs to balance the ability of the trust to issue distributions and the beneficiary’s needs.
Important Characteristics for a Trustee
As the person or entity responsible for the recordkeeping, management and administration of assets held in trust, choosing a trustee is a critical decision. I always advise clients that the right trustee should be trustworthy, competent, and available when needed.
First and foremost, a trustee must be trustworthy. There is nothing stopping the trustee from simply running off with the trust funds. You must be able to trust that the trustee will act in the trust beneficiaries best interests. This means that the trustee should be honest, reliable, and have a good track record of integrity.
In addition to trustworthiness, a trustee must also be competent. This means that they should have a good understanding of financial matters and have good decision-making skills. It may also be desirable to have specific financial, social-work, or legal expertise depending on the complexity of the trust and the needs of the beneficiary.
Finally, a trustee should be available. Trusts are generally long-term arrangements. Your revocable trust will last your entire lifetime and your successor trustee needs to be around when you need them to take over. It is important to choose a trustee who is likely to be around when you need them. This may involve considering the age and health of the potential trustee, whether they are a professional trustee, and whether they’re likely to accept the job in two decades.
Types of Trustees: Individual, Corporate, and Private Fiduciary
There are several choices when deciding on a trust administration expert. You may choose from individuals such as family members and professionals, corporate trustees whose entire business model is trust work, and private or professional fiduciaries who are licensed professionals but don’t cost as much as a trust officer at a big bank.
Differences Between a Guardian and a Trustee
A guardian is a person or entity appointed by a court to manage the personal and/or financial affairs of an individual who is unable to do so themselves due to age, disability, or other factors. Guardians are appointed by the probate court for minors who come into money (inheritance or settlement) or for individuals who are unable to manage their own affairs. Arizona splits the role between two fiduciaries, the guardian and conservator. The guardian is the person in charge of the health decisions. The conservator is the person responsible for the financial affairs of the ward. They can be the same person.
The main difference between a guardian and a trustee is that a guardian/conservator is court appointed and court supervised. The guardian also has the ability to make important decisions about the person of the ward, whereas the trustee only manages a beneficiary’s assets held in trust. The guardian/conservator process is also time consuming, expensive, and painful for all involved. You want to avoid guardianship if at all possible.
Advantages and Disadvantages of Using a Family Member as a Trustee
Depending on the family dynamics, it may be possible to appoint a family member as successor or initial trustee. One advantage is that a family member may be more familiar with the needs and preferences of your loved ones. They may be able and willing to do more than just manage the finances. In addition, using a family member as a trustee may make it easier for the beneficiary to communicate with and trust the person managing their assets. Another advantage is that their trustee fees may be lower.
However, there are also potential disadvantages to using a family member as a trustee. One concern is the potential for conflicts of interest or other family dynamics issues to arise if a family member is serving as the trustee. For example, if the family member is also a beneficiary of the trust, they may be more inclined to make decisions that benefit themselves rather than the overall interests of the beneficiaries as a whole.
Another potential disadvantage is that a family member may not have the necessary qualifications or experience to effectively fulfill their duties as a trustee. It may be advisable to choose a trustee who has a good understanding of investment management and is able to make sound decisions, even if they are not a family member.
Finally, using a family member as a trustee may also create tension or conflict within the family if there are disagreements about the wealth management choices and impartiality of the family member. It is important to carefully consider the potential risks and benefits of using a family member as a trustee before making a decision.
How Often Should a Trustee Report to the Beneficiary?
A trustee is generally required to report to the beneficiary on a regular basis, such as annually or semi-annually. The frequency of these reports may be specified by the grantor in the trust document, statute, or may be determined by the trustee and the beneficiary. In any case, it is important for the trustee to keep the beneficiary informed about the trust’s assets and any important decisions made regarding the trust.
Tips for Picking a Trustee
There are several factors to consider when picking a trustee. If choosing an individual trustee, their qualifications and experience is important. It is generally advisable to choose a trustee who has a good understanding of income tax & financial matters and is able to make sound decisions. In addition, the trustee should be trustworthy and reliable, as they will be responsible for managing and protecting the trust’s assets.
It is also important to consider the relationship between the trustee and the beneficiary. If the trustee is a family member or close friend, they may have a better understanding of the beneficiary’s needs and preferences, which can be beneficial in managing the trust’s assets. However, it is important to consider whether there may be any potential conflicts of interest or other issues that could arise if a family member or close friend is serving as the trustee.
It is also advisable to consider the workload and time commitment that serving as a trustee may require. It is important to choose a trustee who will be there when needed. Finally, it is important to have a backup plan in place in case the original trustee is unable or unwilling to serve. This may involve appointing a co-trustee or having a successor trustee in place to take over if necessary.
Overall, it is important to choose a trustee who is qualified, reliable, and able to effectively fulfill their duties in the best interests of the beneficiary.
Our Phoenix Estate Planning Attorneys Can Assist you in Picking the Right Trustee for Your Living Trust
Having an estate planning attorney assist with the process of choosing a trustee can be beneficial in a number of ways. An attorney can help ensure that the trustee is properly qualified and capable of fulfilling their duties, and can also help identify any potential conflicts of interest or other issues that may arise. An attorney can also provide guidance on how to effectively communicate the trustee’s responsibilities and expectations, and can assist with the drafting of the trust document to ensure that it clearly outlines the duties and obligations of the trustee. Overall, working with an estate planning attorney can help ensure that the trustee is chosen and appointed in a manner that is in the best interests of the beneficiary and the trust.