An Introduction to Trusts Part 2: The Role of the Trustee
Part 2: The Role of the Trustee
Andrew J. Willms and Maureen O’Leary
Last month, we introduced the basic concepts of trusts and explained why families use them to manage and protect wealth across generations.
This month, in the second article of our series on trusts, we turn our attention to the trustee, the person responsible for overseeing trust property and carrying out the terms of the trust agreement.
The Trustee’s Role
A trustee is a person or organization legally appointed to hold, manage, and administer trust assets for the benefit of another person or group (the trust beneficiaries) according to the terms of a trust agreement and applicable state law.
The trustee is responsible for safeguarding trust property, keeping accurate records, managing investments prudently, and making distributions as directed by the trust document.
Duties of a Trustee
A trustee is a fiduciary, meaning someone who has a duty to act in the interests of the beneficiaries. Among the most significant duties are:
- Duty of loyalty. A trustee must act in the interests of the beneficiaries and avoid conflicts between personal interests and those of the trust.
- Duty of prudence. A trustee must exercise reasonable care and judgment in managing trust assets, including making investment decisions and overseeing professionals hired to assist with those responsibilities.
- Duty of impartiality. When a trust has multiple beneficiaries, the trustee must give appropriate consideration to their respective interests, which may differ under the terms of the trust agreement.
- Duty to account. Trustees generally must maintain accurate records of trust assets, income, expenses, and distributions, and provide information to beneficiaries as required by law and the trust agreement.
Making Distributions
One of the trustee's most important responsibilities is determining when and how trust assets should be distributed to beneficiaries consistent with the terms of the trust agreement.
The trust agreement may specify when and how much is to be distributed to beneficiaries or give the trustee discretion to make those determinations.
When making discretionary distributions, the trustee should balance the immediate needs of current beneficiaries against the interests of those who may benefit from the trust in the future. For example, before approving a request to pay education expenses, the trustee must consider what the trust agreement permits.
Who Can Serve as Trustee?
The person who establishes a trust, referred to as the 'grantor' or 'settlor,' generally selects the initial trustee and establishes how successor trustees will be chosen.
A trustee can be a family member, a trusted friend, a professional adviser, or a financial institution.
In appropriate circumstances, a beneficiary may serve as trustee of a trust established for his or her benefit.
A Position of Responsibility
A trustee does not need to be an expert in investments, taxes, and every other aspect of trust administration.
Rather, trustees may generally engage attorneys, accountants, investment advisers, and other professionals to assist them.
However, hiring professionals does not eliminate the trustee's responsibility to exercise appropriate oversight, and trustees must exercise reasonable care when doing so.
Ultimately, a trustee is responsible for carrying out the purposes of the trust while protecting the interests of its beneficiaries. It is a position of considerable authority, but also one of significant legal responsibility. Anyone asked to serve should review the trust agreement, understand the time commitment and consider what professional support may be needed.
Next month, we will examine the other side of this relationship: What rights do trust beneficiaries have, and what limits apply to those rights?
In the meantime, please reach out if you have any questions or would like to discuss this article.