One of the most important things to consider when setting up a trust is deciding who will serve as the trustee. Today, we will discuss the five key things a trustee must understand regarding their role and responsibilities.
The role of a trustee is particularly relevant in situations involving irrevocable trusts, which are often established by parents (Generation One) for the benefit of their children (Generation Two) or subsequent generations. When selecting a trustee, there are two main options: an individual (such as a professional attorney, CPA, financial advisor, family friend, or family member) or a corporate trustee. Regardless of who is chosen, there are five essential things they need to know.
Before diving into these five key responsibilities, it is important to note that every trust document includes a section outlining the trustee’s authorities and responsibilities. This section may be highly detailed or quite general, depending on how the attorney drafting the trust structures it. Additionally, state laws dictate many of the trustee’s duties and obligations, so trustees must understand both the trust agreement and relevant trust laws.
The first key rule for a trustee is that they cannot borrow money from the trust or treat it as their personal bank account. Even if there is a significant amount of money in the trust, the trustee is prohibited from taking funds for personal use. Any form of self-dealing is strictly forbidden, and trustees must avoid engaging in such behavior.
The second rule builds upon the first: trustees cannot buy or sell trust assets for personal gain. Any transactions involving trust assets must be conducted at arm’s length to ensure fairness. This restriction applies not only to the trustee but also to their family members and friends, as conflicts of interest must be avoided at all costs.
The third responsibility is that the trustee must maintain clear and up-to-date accounting records for all trust assets. This includes tracking income, expenses, taxes, and any transactions related to the trust. Many trustees find themselves in trouble when beneficiaries ask for documentation, and they are unable to provide a clear record of the trust’s financial activities. Keeping thorough historical records is essential.
The fourth duty of a trustee is to furnish information about the trust to its beneficiaries. Once beneficiaries reach a certain age—typically 18 or 21, depending on the state—they have the right to request information about the trust’s assets and accounts. Failure to provide this information in a timely manner can result in legal trouble for the trustee. However, some states, such as South Dakota, allow for “quiet trusts,” in which beneficiaries do not automatically have access to trust information. If privacy is a priority, it is crucial to establish the trust in a jurisdiction that allows this.
Finally, the most important responsibility of a trustee is adhering to their fiduciary duty to the beneficiaries. This means acting in the best interest of the beneficiaries at all times. Decisions regarding trust distributions must be made with care, taking into account factors such as lawsuits, substance abuse issues, divorces, or gambling problems that could affect a beneficiary’s financial well-being. Additionally, trustees must ensure that trust assets are managed and grown responsibly to benefit the beneficiaries over time. This could involve overseeing investments, managing businesses owned by the trust, or making key financial decisions.
Because of the complexities involved in serving as a trustee, many individuals choose to hire a trust company. These companies have the necessary expertise, financial backing, and insurance to manage trusts effectively. They also employ professionals who specialize in trust administration, investment management, and business operations.
In summary, when selecting a trustee, it is crucial to ensure that the individual or entity chosen can uphold these five key responsibilities. The fiduciary duty to beneficiaries is the most important aspect of the role, and trustees must be fully prepared to meet this standard.