What Is a Trustee?

The definition of a trustee is an individual or institution responsible for managing property held in a trust for the benefit of others.

Their primary role is to manage the assets of the trust and records of the trust and distribute funds according to the terms of the governing document.

WHAT DOES A TRUSTEE DO?

Much of a trustee’s role is similar to things you’d do as the owner of your own investment accounts – deciding how to invest the money, deciding when to withdraw it and keeping records so you can file taxes accurately, for example.

But there are a couple major differences – one, trustees are limited in their decision-making to some extent, as they must follow the instructions in the trust agreement. Second, in making any decisions, trustees can’t think about their own interests or preferences – they have to act on behalf of the beneficiaries.

MANAGING TRUST ASSETS

Managing the trust’s assets typically means developing a prudent investment strategy, investing for total return, diversifying assets and identifying risk and return objectives. Trustees may hire a professional advisor but are responsible for overseeing that advisor.

RECORDKEEPING AND COMMUNICATIONS WITH BENEFICIARIES

Trustees have to maintain accurate records of the trust. This can include not only account statements, but also communications to and from current and remainder beneficiaries. A trustee has a fiduciary duty to communicate with and provide information on the trust to all beneficiaries.

INCOME TAX REPORTING

The trustee is responsible for preparing and filing the trust’s annual fiduciary income tax returns.

DISTRIBUTING ASSETS TO BENEFICIARIES

The trust document will tell the trustee under what circumstances they can withdraw assets and distribute them to beneficiaries. Distributions may be on a regular schedule, like monthly or yearly; when milestones are reached, like specific birthdays; for specific purposes, like education; or discretionary, based on the trustee’s judgment.

When the trust document gives the trustee discretion, they’ll have to make reasonable, good-faith decisions in keeping with the purpose, priorities and limitations that are outlined in the document, which might include the need to preserve assets for the next generation. If distributions are mandated (such as upon the beneficiary attaining a certain age), then the trustee has to make them as outlined and without unjustified delay – again, acting in the beneficiary’s best interests.

WHAT ARE THE FIDUCIARY DUTIES OF A TRUSTEE?

Trustees are held to fiduciary standards. So, what does that mean for how a trustee works? Several duties are commonly recognized.

DUTY OF LOYALTY

A trustee must act solely in the beneficiaries’ interests, avoiding self‑dealing or conflicts of interest. They must not use trust assets or opportunities for personal gain or favor one beneficiary over another unless the trust expressly allows it. (This can get especially tricky if the trustee is also one of multiple beneficiaries, although that situation is not uncommon.)

DUTY OF CARE

A trustee must manage assets with the level of care a prudent person would use when managing someone else’s property. This includes diversifying assets, exercising due diligence, monitoring investments and managing risk in alignment with the trust’s objectives.

DUTY TO FOLLOW THE TRUST TERMS

A trustee has to act within the authority granted by the trust document and follow any conditions or limitations on distributions or asset management. They have no authority to bend or change the trust rules.

OTHER DUTIES

Trustees must keep trust property separate from their personal property. Trustees must also regularly communicate with all beneficiaries and provide beneficiaries with reasonable information about the trust.

WHO CAN BE A TRUSTEE?

INDIVIDUAL TRUSTEES

Many grantors choose family members or close friends to serve as trustees, because they understand family dynamics and the grantor’s intentions and desires.

One downside to naming individuals as trustees is that it’s a big job with strict legal requirements and potential emotional minefields. Most people aren’t asset managers or tax professionals, but being a trustee can require them to have the expertise of both. Being a trustee also means managing the potential challenges of unhappy or dueling beneficiaries. Trustees are bound to act in accordance with the terms of the trust agreement and act in the best interest of all beneficiaries, even if certain beneficiaries aren’t happy about that.

CORPORATE OR PROFESSIONAL TRUSTEES

As an alternative or in addition to individual trustees, many grantors name professional trustees from a bank or trust company. They can bring legal and administrative expertise, expert investment oversight and impartiality to trust management. And, unlike an individual, an entity does not age or retire.

CO-TRUSTEES AND SUCCESSOR TRUSTEES

Some trusts name co‑trustees, such as two children or a family member paired with a professional trustee.

And all trusts should consider naming at least one successor trustee who can take over if the original trustee resigns, becomes incapacitated or dies – or at least provide provisions for identifying a successor.

TRUSTEE VS. BENEFICIARY: WHAT’S THE DIFFERENCE?

Every trust has at least one trustee and one beneficiary. Here’s how they differ.

TRUSTEE ROLE AND RESPONSIBILITIES

Trustees manage the assets in the trust and ensure legal requirements and trust terms are followed. When the trust allows discretion, they’re the one making the calls.

Trustees are fiduciaries and required by law to act in the best interests of the beneficiaries. If it’s found that they breached their fiduciary duties, they can be held personally liable.

BENEFICIARY RIGHTS

Beneficiaries are the people who benefit from the assets in the trust. They receive distributions as required or allowed by the trust and may have rights to information and accounting.

Beneficiaries can seek court intervention if they believe the trustee has breached fiduciary duties.

HOW TRUSTEES INTERACT WITH TAXES

TRUST TAX FILING BASICS

A trust is a tax filing entity, and trustees have to report the income and capital gains earned by the trust on a fiduciary income tax return. Tax reporting is done at the federal level and potentially at the state level, depending on the status of the trust.

COORDINATION WITH TAX PROFESSIONALS

Trustees may hire a CPA or tax attorney to prepare and file the fiduciary income tax return and provide advice on tax strategies. 

HOW A FINANCIAL ADVISOR HELPS SUPPORT TRUSTEES

INVESTMENT OVERSIGHT AND STRATEGY ALIGNMENT

Financial advisors can help trustees develop and maintain investment strategies that align with the trust’s objectives and the beneficiaries’ needs. Doing so is critical because it’s part of the trustee’s fiduciary duty.

TAX-AWARE PLANNING SUPPORT

Like individuals, trusts can be strategic in what they invest in and how they distribute income in order to be more tax-efficient. Financial advisors can coordinate with tax professionals to evaluate the tax impacts and suggest strategies.

COMMON QUESTIONS ABOUT TRUSTEES

CAN A TRUSTEE BE PAID?

Yes. Trustees are generally entitled to reasonable compensation unless the trust states otherwise. The trust document and state law govern how trustee compensation is calculated.

CAN A TRUSTEE BE REMOVED?

The trust document may include terms under which a trustee could be removed – for example, if all beneficiaries request it. Courts may also remove a trustee for cause based upon a breach of one or more fiduciary duties.

DOES A TRUSTEE HAVE PERSONAL LIABILITY?

Trustees may be personally liable for breaches of fiduciary duty but can reduce that risk by acting in good faith and within the trust’s terms.

WHERE THE TRUSTEE ROLE FITS INTO A BROADER FINANCIAL PLAN

A trustee plays an important role in estate planning, which is one component of a financial plan. Choosing the right trustee to be part of your team – which may also include an estate attorney, financial advisor and tax professional – can go a long way toward seeing your goals achieved and your legacy solidified.