The Ins and Outs of Naming a Trustee

If you set up a trust to hold assets for a beneficiary or beneficiaries, you’ll also need to name a trustee. The best option is usually a person, such as a trusted friend or family member, or a financial institution. This is an important decision because the role of a trustee carries key legal responsibilities. The trustee must administer the trust for the benefit of the beneficiaries, in accordance with the terms laid out in the trust documents.

What Are a Trustee’s Responsibilities?

The specific duties of a trustee can become quite involved. For example, although accountants may be engaged to prepare tax returns, it is the trustee’s responsibility to ensure they are completed — and filed correctly in a timely manner.

The trustee administers the trust, which includes investments and distributions. When funds are distributed to pay for a beneficiary’s education expenses, for example, the trustee must keep an accurate and current record of both the distribution and the specific expenses it relates to. The beneficiaries could request an accounting of the transactions at any time.

The trustee has a fiduciary responsibility for investing the trust assets reasonably, with due care and in the beneficiaries’ long-term best interests. The trustee must avoid any potential conflicts of interest — that is, he or she should not receive any personal benefit from managing the trust.

Finally, a trustee must be unbiased and independent. He or she may need to balance the interests of multiple beneficiaries, while still carrying out the directives of the trust documents. For example, a trust may provide that current income should be distributed to a first beneficiary during his or her lifetime, after which the remaining assets pass to the second beneficiary.  The first beneficiary would probably prefer the trust’s assets be invested in income-producing assets, while the second would likely favor growth assets.

What Qualities Should a Trustee Have?

To be an effective trustee, it is important to have a concrete understanding of tax and trust law, investment management and bookkeeping. Integrity, trustworthiness, and the capacity to work with all beneficiaries impartially and unemotionally are also essential traits.

In addition, some trusts remain in place for generations. Because of the delicate responsibilities assumed by the trustee and the length of time over which some trusts extend, many professionals suggest engaging a corporate trustee, such as a bank or financial institution, rather than asking a friend or family member to assume this responsibility.

It might sound appealing to name a friend or family member as a trustee as a possible way to reduce, or avoid, the fees associated with an institutional trustee. But many do not realize that acting as a trustee requires a significant amount of time, dedication and expertise. Trustees deserve to be compensated for their efforts. Even when the trust documents don’t specify a fee for the trustee, many states allow for a “reasonable fee.”

What Are the Ramifications?

It makes good sense to know how the fee will be determined, and to mutually agree what services are included within it, before appointing a trustee. Trying to save money by avoiding a trustee fee may end up costing more in the long run.

Selecting a trustee is an important decision, as this person or organization will be accountable for implementing the terms delineated in the trust documents. Your accounting professional can help you weigh the options available to you.

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