A trust is a legal arrangement through which an individual (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to the property for the benefit of another person, called a “beneficiary.”
An individual appointing another person as the trustee of a trust is a strong vote of confidence in your character, judgment, and maturity. However, with that comes legal liability and a significant number of duties.
Outlined below is a brief overview of some of the essential duties and responsibilities of a trustee:
Fiduciary Responsibility
A trustee stands in a “fiduciary” role concerning the beneficiaries (current and future). This means the trustee has a legal duty to act solely in another party’s interests. As fiduciaries, they will be held to a very high standard. A high standard of personal and professional conduct in administrating the benefits of the trust.
The Trust’s Terms
Read and understand the trust. The trust is a guide, a trustee must follow its directions. Whether about when and how to distribute income and principal or what reports the trustee needs to make beneficiaries.
Investment Standards
Your investments must be prudent, meaning that you cannot place money in speculative, self-serving, or risky investments. In addition, your investments must take into account the interests of both current and future beneficiaries.
Distributions
The trustee has the discretion on whether or not to make distributions to a beneficiary. The trustee needs to evaluate the beneficiary’s current needs, future needs, and other sources of income. Also, the trustee has responsibilities to other beneficiaries before making a decision.
Accounting
Keep track of all income to distributions from and expenditures by the trust. Usually, you must give an account of this information to the beneficiaries on an annual basis.
Taxes
The trustee will have to file an annual tax return and may have to pay taxes. Depending on whether the trust is revocable or irrevocable and whether it is considered a “grantor” trust for tax purposes.
Delegation
A trustee cannot delegate their responsibility as a trustee. However, if the trust document permits it, the trustee may hire agents to carry out certain functions.
For example, a trustee may be able to hire financial advisors to make investments. Also, accountants handle taxes and record-keeping for the trust. As well as, lawyers to advise on questions of interpretation.
However, as a trustee, they are ultimately responsible for the actions of agents taken on your behalf.
Fees
Compensation for trustees’ services should be appropriate and reasonable. Family members often do not accept fees. Banks, trust companies, and law firms typically charge fees for their services. In general, depending on the work involved dictates what is reasonable. This includes the amount of funds in the trust, other expenses paid out by the trust, the professional experience of the trustee, and the overall expenses for administering the trust.