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A trust can be an important component of an estate plan, even for families that aren't wealthy. Every trust has a trustee who's tasked with managing the trust on behalf of its beneficiaries. Serving as a trustee is a major responsibility, so think carefully about the decision before choosing someone or accepting the role.
What Is a Trustee of a Trust?
When you create a trust fund, you'll need to name three parties:
- The grantor, trustor or settlor creates the trust and transfers assets to the fund.
- The trustee manages the trust on behalf of its beneficiaries.
- The beneficiary or beneficiaries will receive part or all of the assets at predetermined points in the future.
Often, someone who creates a revocable living trust (as opposed to a testamentary trust, which only takes effect after someone dies) will name themselves the trustee. Additionally, they may name a successor trustee, which is a person or company that will take over the role if the original trustee dies, becomes incapacitated or no longer wants to serve as trustee.
Many people who have a trust may also want to create a will. The two documents are similar, but can serve different purposes. For example, in many states, you need to use a will to name guardians for your children. However, you can use a trust to pass assets on to your beneficiaries without the assets going through probate—a court-supervised process that can be expensive and time-consuming—like they would with a will.
Wills don't have trustees. Instead, wills include a named executor who is expected to manage the deceased's probate estate. If a will doesn't include a named executor, a court will appoint one.
What Are the Duties of a Trustee?
A trustee's responsibilities will depend on the type of trust and the trust document, but properly managing a trust can be a complicated job. The ongoing duties generally involve:
- Managing investments: Trustees have a fiduciary duty, which means they have a legal obligation to manage the trust fund for the financial interest of the beneficiaries. They may need to ensure the trust's assets are invested in safe ways that preserve the value of the fund. They could be personally liable if they stray from their duty.
- Distributing assets: Trustees must properly distribute the trust fund's assets in line with the trust document's instructions and in the best interest of the beneficiaries.
- Record keeping and filing: Keeping up-to-date records of the trust's assets, including its income, expenses and copies of financial statements and tax forms is another important duty of the trustee. The trustee may also be responsible for making sure the trust's annual tax return is prepared and filed.
- Communicating with the beneficiaries: The trustee may need to keep the beneficiaries up to date with recent statements and answer questions.
Successor trustees may have additional specific duties after the trustee dies, such as notifying relevant parties of the original trustee's death, organizing the trust's assets and paying off the estate's debt. Whether they'll have to take on ongoing management or help settle (or close) the trust could depend on the beneficiaries' age and the trust's instructions.
A trustee might not be allowed to delegate tasks they can reasonably handle on their own, but they may be able to use the trust's assets to hire expert help. Hiring an attorney, accountant and financial advisor could be a good idea, and the trustee will be responsible for overseeing their performance.
How to Choose a Trustee
You can choose almost anyone who is 18 or older to be a trustee. Many people choose a family member or close friend since having someone who knows you, your desires and your family dynamics could be beneficial. In some cases, the trustee is also a beneficiary. For example, you might choose an adult child to be the trustee on behalf of all your children. If you have a will, you might want the same person to be the trustee and executor.
However, you might not know someone who has the professional expertise that could be required to properly manage a trust. Or, you might be worried that your chosen trustee could lead to disagreements within the family.
If you're unable to find a trustee, you can appoint a third party, such as an attorney, trust company or the trust department at a bank or credit union. While these third-party trustees charge fees, they may be able to offer impartial and expert guidance you won't get from a family member or friend. (Family members and friends can also be compensated for their work as a trustee.)
You can also pick multiple co-trustees, such as a family member and third party, who will share the responsibility.
What Happens if You Don't Choose a Successor Trustee?
If you don't name a successor trustee and the trustee dies or becomes incapacitated, a court may appoint a trustee to manage the trust. With this in mind, it may be best to name a specific successor trustee and a backup in case the first successor can't or doesn't want to take on the responsibility.
What if You're Chosen as a Trustee?
Ideally, the grantor will ask or tell you that you're listed as a successor trustee when they create the trust. However, you might not find out until they die or become incapacitated.
Review the trust document and your duties carefully before accepting the responsibility. Even people who may be capable of acting as a trustee may find they need to decline due to existing obligations or if they feel it could strain their relationship with family members. You don't have to accept the role, and it can be passed on to another named successor trustee or corporate trust company.
Consider What Makes a Good Trustee
Whether you're creating a trust and naming a trustee, considering whom to name as a successor trustee, or someone else named you a trustee, think carefully about the qualities of a good trustee. Experience managing investments is often important. But the role may also require emotional intelligence as the trustee needs to regularly communicate with the beneficiaries and explain their distributions.