Five Things to Consider When Undertaking the Duties of a Trustee
Being appointed as trustee is a credit to a person’s reliability and judgment, as well as a major responsibility. A trustee is not required to be formally educated in financial planning, accounting or tax law, but will have to tackle those issues when performing his or her duties. The following five items provide an overview of trustee duties and responsibilities.
(1) Fiduciary Responsibility and Understanding the Terms of the Trust
A fiduciary duty describes a relationship of confidence between parties. In the case of a trust, it is between the trustee and the beneficiaries of the trust. When appointed to care for a trust’s assets, the trustee must act in a fiduciary capacity toward all beneficiaries of the trust. This is done by caring for, investing, and distributing assets in the best interest of all beneficiaries. Trustees are held to a very high standard with regard to the management of accounts and the appropriateness of investments. Failure to care for assets with consistent attention and consideration for the welfare of beneficiaries can be considered a breach of duty.
In order to act in a fiduciary capacity, it is important that a trustee completely understand the terms of the trust. The trust document provides instructions regarding how to manage the trust, when and how to make disbursements, and what reports must be made to beneficiaries. Reading the trust carefully is critical, and trustees should seek advice about items that may be unclear.
(2) Accounting and Tax Planning
Another duty of a trustee includes accounting for all disbursements and expenditures from the trust, and income to the trust. All trust activity must be reported to beneficiaries. The trust document outlines how often reports should be filed. It is critical to keep good records when overseeing the trust’s assets.
Depending on the type of trust, the trustee may have to file annual tax returns and pay taxes. Trustees not comfortable with tax law should keep good records and present the information to a professional for tax preparation.
(3) Distributions to Beneficiaries
When making a decision about disbursement of funds to a beneficiary, the trustee must consider the beneficiary’s current and future needs, current income from all sources, the size of the trust, and the needs of all other beneficiaries. Since the trustee has a responsibility to act in the best interests of all beneficiaries, there may be instances when a disbursement to an individual is inappropriate. Since the beneficiaries may be friends or family members, deciding when to distribute funds can be one of the more difficult duties of a trustee.
(4) Responsible Investments
Investment standards for trusts dictate that all investments must be prudent. Funds in a trust cannot be placed in high -risk or speculative investments. Also, the trustee must consider the future needs of all beneficiaries entitled to funds from the trust. Trustees must investigate the plans, hopes, and desires of each beneficiary. Will a beneficiary need money to attend school? Is a beneficiary planning on having children or buying a house? How are the beneficiaries funding retirement? The answers to these and other questions will help determine the best investment strategy.
(5) Delegation of Responsibilities and Hiring of Advisors
A trustee cannot abdicate responsibility for the trust, but he or she may delegate the functions of the trust to other individuals. For example, a trustee may hire financial advisors, accountants, tax professionals and attorneys to advise on any questions he or she may have. Hiring professionals can make the job easier and less stressful. However, it is important to remember that while professionals may offer advice, ultimately the trustee has the final say in all transactions.
Being a trustee can be a gratifying experience. A trustee is in the position to provide a useful service to beneficiaries who may also be family members and friends. Being organized and keeping responsibilities in mind will help make the work easier and more satisfying.