A well drafted and comprehensive estate plan will likely make use of numerous tools and strategies throughout the plan. One of the most common of those tools is a trust. In fact, you may decide that you need more than once trust in your estate plan given how flexible and beneficial a trust can be. If you do decide to incorporate at least one trust in your estate plan, choosing your Trustee will be among the most important decisions you make when you create your trust because the Trustee is responsible for administering the trust. What exactly does it mean to administer a trust though? To make sure you know the answer to that question, we will explain the basics of trust administration.
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor (also referred to as a Maker, Trustor, or Grantor), who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries.
How Does a Trustee Administer a Trust?
In broad terms, the job of a Trustee is to protect the trust assets and to administer the trust using the terms created by the Settler. The specific duties and responsibilities a Trustee has during the administration of a trust may include:
- Managing and protecting assets held by the trust. Trust assets can include almost anything of value. The Trustee is responsible for any and all assets held by the trust. Consequently, this could mean something as simple as reconciling bank statements or something as complex as maintaining real property.
- Understanding the trust terms and using them to administer the trust. The Settler has great latitude when creating the trust terms. Unless the terms of a trust are impossible, illegal, or unconscionable, the Trustee is required by law to use the terms, exactly as written by the Settlor, to administer the trust.
- Investing trust funds using the “Prudent Investor Standard.” The Trustee of a trust is responsible for managing someone else’s assets, meaning they are in a fiduciary role. Investments, therefore, should never be risky. One of the most important rules for a Trustee when administering a trust is that guarding the principal should always be the primary focus with a return on investments secondary.
- Keeping trust beneficiaries informed. The Trustee of a trust has an obligation to keep the beneficiaries of the trust informed of all trust business and to correspond with the beneficiaries when necessary.
- Mediating conflicts among beneficiaries. Conflicts and disputes among beneficiaries can occur during the administration of a trust. A Trustee must remain neutral and attempt to resolve conflicts before they escalate and/or before they result in litigation. If the trust includes future beneficiaries as well, the Trustee must also consider their best interests when resolving disputes.
- Making discretionary decisions. If the Settlor gave the Trustee power to make decisions regarding investments and/or disbursements, part of administering the trust will include making those discretionary decisions.
- Distributing trust funds to beneficiaries. All trusts distribute the trust assets at some point, to someone. The trust terms establish how and when this is done by the Trustee.
- Keeping detailed trust records. Ultimately, accountability for the success, or failure, of the trust will lie predominantly with the person (or entity) that administers the trust – in other words with the Trustee. With that in mind, the Trustee needs to keep detailed records of everything involved in administering the trust.
- Preparing and paying trust taxes. Because a trust is a separate legal entity, a trust is taxed which means the trust must file a tax return every year. Completing the tax return and ensuring that any taxes due is part of the administration of the trust by the Trustee.
Please download our FREE estate planning checklist. If you have additional questions or concerns about what it means to administer a trust, 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.