Were you recently informed that someone appointed you to be the Trustee of a trust? If so, and this is the first time you served as Trustee, there are a few things you need to know before stepping into your role as a Trustee. To get you started, let’s look at some key things every Trustee needs to know.
- A Trustee has several important duties and responsibilities. The overall job of a Trustee is to manage and invest trust assets and to oversee the administration of the trust. Generally, the reason behind appointing the wrong person as Trustee is a lack of understanding of the numerous and varied duties and responsibilities of a Trustee, such as:
- Following all trust terms unless they are illegal.
- Communicating with beneficiaries
- Distributing assets to beneficiaries
- Keeping detailed records
- Resolving disputes
- Filing trust taxes
- A Trustee must use the “prudent investor” standard. The prudent investment rule requires a fiduciary to invest trust assets as if they were her or his own. When applied to a trust it means that the Trustee should consider the needs of the trust’s beneficiaries and should avoid investments that are excessively risky. The preservation of trust assets should take precedence over earning income.
- A Trustee may, or may not, be able to exercise discretion. The amount of discretion a Trustee has will depend almost entirely on the terms of the trust created by the Settlor. A Settlor may create very precise terms that indicate exactly when assets may be distributed and in what amounts. On the other end of the spectrum, a Settlor may give a Trustee virtually unfettered discretion to distribute assets as the Trustee sees fit. Typically, however, a Settlor will provide a good deal of guidance while still provide a Trustee with some discretion in order to handle emergencies or unforeseen circumstances.
- A Trustee can be removed? Yes, under certain conditions. If the trust is revocable, the Settlor can always remove and replace the Trustee. In an irrevocable trust, the beneficiaries may be able to remove a Trustee. A court always has the power to remove the Trustee with good cause. Common reasons to remove a Trustee include:
- Failing to follow the terms of the trust
- Self-dealing
- Conflict of interest
- Failure to act
- Mismanagement of trust assets
- Good cause – a “catch all” for other valid reasons
- The job of Trustee ends when the trust is terminated. Once a trust is established and active, the Trustee is responsible for administering the trust until he/she resigns, is removed, or the trust terminates. The manner in which a trust terminates depends, in part, on the type of trust. The Settlor of a revocable trust may terminate the trust at any time without providing a reason for the termination. If the trust is an irrevocable living trust, the Settlor cannot terminate the trust. In that case, the trust terms may grant the power to terminate the trust to the beneficiaries, to the Trustee, or to a specific person – or to a combination of people. The trust itself may also include a term that sets a date when the trust will terminate or that sets forth an event that must occur to trigger the termination of the trust, such as a child reaching the age of majority. Finally, anyone involved in the trust may turn to a court in an effort to terminate the trust. A judge may order the termination of a trust for reasons such as the trust purpose has been achieved, the trust has insufficient assets left to warrant continuation or everyone involved agrees that termination is in their best interest.
Contact Us
Please download our FREE estate planning checklist. If you have additional questions or concerns about serving as a Trustee, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.
Timothy P. Murphy is an estate planning and elder law attorney whose practice emphasizes helping people to build, preserve and pass on their wealth. He works with his clients to accomplish their goals while avoiding unnecessary court proceedings and minimizing or eliminating exposure to death taxes.
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