Understanding Trustees' Duties and Responsibilities in Managing a Trust
Trusts are legal tools used in estate planning. Forming a trust — whether it’s a living trust, a testamentary trust or another type of this arrangement — involves the creation of important legal relationships between three different roles: grantors, beneficiaries and trustees.
Trusts are valuable tools for protecting important assets when used appropriately and wisely. Understanding how to use and administer trusts properly involves learning more about the roles and responsibilities of the people involved in administering them. Trustees in particular have some significant duties to fulfill, often throughout the lifetime of the trust. Learn more about these key responsibilities to better understand what a trustee does and how a trust operates.
The Basics: What Are Trusts, Grantors and Beneficiaries?
A trust is a legal entity that an individual creates to receive and hold assets while that individual is alive. A trust is different from a will. A will’s various estate processes don’t begin until you pass away. Upon death, your assets become a part of your estate, and they’re transferred to the beneficiaries you’ve listed in your will — typically after your will goes through a process called probate. In a living trust, however, the assets move out of your ownership and into the ownership of the trust once the trust is created and administered — while you're alive. Once you pass, the assets transfer to your designated beneficiaries.
In other situations, you can create a testamentary trust in your will. In that situation, you own the assets until you die, but those assets are placed in the trust upon your death. When creating that trust in your will, you define the conditions under which those assets will exit the trust to go to the beneficiaries.
The person creating the trust (either while they’re alive or in drafting a will that takes effect when they die), is called a grantor. The person or people who eventually get the assets from the trust (according to whatever rules the grantor establishes when they create the trust) are beneficiaries. And there’s a third role that’s essential when it comes to creating and administering trusts: the trustee.
What Is a Trustee, and What Do Trustees Do?
When a grantor creates a trust, they also appoint a trustee. The grantor may also name successor trustees who’ll take over in case the initial trustee becomes unable to fulfill their duties. The trustee's job is to follow the instructions that the grantor has set out in the trust — a very generalized explanation of the role of a trustee. The details are important and will vary depending on the type of trust that’s created, along with the provisions in it that are unique to the grantor’s wishes. Trustees can be individuals or corporations with expertise in managing assets.
An individual named as a trustee may bring in a corporate trustee to assist in managing the trust. Even if an individual trustee doesn't bring in a corporate trustee, they can — and should — consult with lawyers about the legal rights created in the trust, consult with investment advisors about investing the assets in the trust and consult with tax advisors about the trust's tax liabilities. Generally, however, trustees have several key responsibilities:
- To confirm what is required by the trust. This may include verifying what assets should be within the trust and the ways that those assets are within the trustee’s control; the identity of the beneficiaries; and that accurate and complete records of the values and ownership of the assets are intact.
- To investigate any outstanding assets if the trust documents refer to assets that don’t seem to be owned in the trust. Investigations may require searching for titles of real property or searching for and finding investment share certificates. If a trustee identifies assets that aren’t yet within the ownership of the trust, these may need to be brought into the trust. The way this is done will vary depending on the nature of the assets. It may require the help of professionals, including lawyers.
- To invest the trust assets in a way that preserves them for the benefit of the beneficiaries, unless the trust specifically prohibits the trustee from investing the assets. This duty of the trustee to the beneficiary is called a fiduciary duty. When investing those assets, a trustee is obligated to invest with the same care, skill, diligence and judgment that any prudent investor would use.
- To administer the trust according to the specific instructions in the trust document. This means the trustee is required to follow the specific terms of the trust. An example of a term that a trustee must follow would be a direction to give a beneficiary a certain amount of money when that beneficiary reaches a certain age. In situations where the directions may not be clear, the trustee should obtain professional advice from a lawyer, who may get recommendations from a court about ways to interpret the terms of the trust.
- To do the paperwork that’s legally required to fulfill their duty of administering the assets in the trust. One example of the paperwork a trustee might need to prepare and file is Form 1041 — a tax return for the trust that sets out the trust's income, deductions, gains, losses and other information. Depending on the complexity of the trust, fulfilling this obligation might require the trustee to get professional tax advice to fulfill their fiduciary duty.
- To account to the beneficiaries for the trustee’s handling of all the assets in the estate and to communicate regularly with the beneficiaries by providing statements of account, copies of tax returns and other documents. A beneficiary who’s concerned about the trustee's communication or accounting (or lack thereof) can ask a court to order the trustee to provide information or documents.
What Is a Trustee's Fiduciary Duty?
Though trustees manage the assets in a trust, the beneficiaries are the equitable owners. This means the beneficiaries own the future benefit of the assets, technically not the assets themselves. Trustees are required to manage those assets for the benefit of the beneficiaries who own the equitable interest.
Cornell Law School's Legal Information Institute describes a trustee's fiduciary duty as follows: "Trustees have certain legal duties in relation to the management of the trust. The most important duty is the duty of loyalty. Since trustees are the legal owners of the trust property, the duty of loyalty prevents the trustee from taking advantage of the legal ownership to use the trust property for his own benefit. The trustee must act in good faith when entering into transactions and invest prudently."
One of the key points is that a trustee's duty is owed to the beneficiaries. Someone who violates the duties of their trustee role is potentially liable for damages to those beneficiaries. Some of the most common ways that a trustee might breach their legal and fiduciary duties include:
- Failing to follow the grantor's instructions precisely
- Not handling the assets of the trust as a prudent investor would
- Exploiting the assets of the trust for their own benefit rather than for the benefit of the grantor and beneficiaries
Being designated as a trustee is an indication that the grantor significantly trusts you and is confident that you’ll follow their instructions carefully for the benefit of the trust's beneficiaries alone. Acting as a trustee involves significant legal obligations that you should perform while obtaining advice from trustworthy legal experts.