Many of our clients use trusts as part of their estate and wealth planning. The role of trustee is central to all trusts but may not always be well understood, especially in the context of family trusts. Whether you are (1) setting up a trust and trying to identify an appropriate person to serve as trustee; (2) considering whether to accept appointment as a trustee; (3) already serving as a trustee or named as a successor trustee; or (4) a beneficiary of a trust, you should be aware of the duties and responsibilities imposed on a trustee by the terms of the trust itself and by state law.
General Standards Applicable to Trustees
A Trustee is named in a trust document, initially by the grantor of the trust, and in the case of a successor Trustee, through a process dictated by the grantor in the trust document. As a last resort where necessary, a successor Trustee may be appointed by a court decree. The Trustee holds legal title to the trust assets for the benefit of the beneficiaries named in the trust. The Trustee is responsible for managing and preserving the assets held in the trust, administering them according to the trust terms, and distributing them to beneficiaries as the trust provides. The role of Trustee is often a long-term commitment, as some trusts can continue for multiple generations.
A Trustee is a fiduciary with the responsibility to manage, invest and use the assets entrusted to them according to the provisions of the trust instrument and state trust law (which may not always coincide with their own or the beneficiaries’ wishes). A classic law school definition of the fiduciary duty of a Trustee is: “Not honesty alone, but the punctilio of an honor the most sensitive”. That definition may not be very specific but it is clearly intended to set a demanding standard. The duties of a Trustee may be expanded or narrowed by the terms of the instrument creating the trust, but in most instances cannot be eliminated completely.
A Trustee doesn’t have to be infallible but is generally held to the standard of a “prudent person”, meaning that the Trustee is expected to exercise the judgment and care of a prudent person in administering and investing trust property. However, a Trustee who has been chosen because of their particular expertise, such as a professional Trustee, may be held to a higher standard in meeting their fiduciary responsibilities.
A Trustee may face legal challenges by claimants, current or prospective beneficiaries, or third parties for lapses in performance of these responsibilities. If a Trustee is found to be legally responsible for an amount in excess of the value of trust assets in his care, the Trustee may be held personally liable for the excess.
Trustees can be paid for their time and trouble in performing their duties only if the trust document/instrument specifically provides for payment.
Specific Duties of Trustees
More specifically, typical duties of a Trustee include, among other things:
- Knowing and carrying out the express terms of the trust instrument.
- Paying bills of the trust, including filing trust tax returns and paying taxes due.
- Keeping trust books and accounts.
- Keeping clear accounts of receipts and expenditures.
- Keeping clear accounts of investment gains and losses.
- Distinguishing among allocations of receipts and expenditures to interest and to principal.
- Maintaining trust assets.
- Arranging for security, insurance and maintenance of trust-owned real estate.
- Managing any business or other closely-held interests owned by the trust.
- Keeping trust assets separate from other assets; commingling of trust assets with other funds is not permitted.
- Investing trust assets prudently, reviewing regularly for quality and performance.
- Monitoring the trust portfolio, often in consultation with an investment advisor.
- Administering the trust in the best interest of the beneficiaries.
- Maintaining impartiality among the beneficiaries, current and future.
- Avoiding any conflict of interest with the trust or the beneficiaries.
- Defending the trust against claims and bringing claims on behalf of the trust.
- Making distributions of income and/or principal in accordance with the terms of the trust.
- Understanding and following the standard(s) of distribution set forth in the trust instrument, including any limitations on the Trustee’s discretion.
- Providing accounts of the Trustee’s actions to the beneficiaries as required by the trust instrument and applicable law.
This is not intended as an exhaustive list of everything a Trustee must do to responsibly administer a trust. Rather it is intended to provide an overview of important duties of the position to help prospective grantors or Trustees understand the gravity of naming or becoming a Trustee and to remind those already serving as Trustees of the responsibilities of that role.
By Elizabeth R. Hefferon