Although a Last Will and Testament remains the most common estate planning document, a trust agreement isn’t far behind in terms of popularity. One reason trusts have become so common within the average estate plan is that there are numerous different types of trusts that are each geared to help achieve a specific estate planning goal. One thing all trusts have in common, however, is the need for a Trustee to administer the trust. If you recently learned that someone named you as the Trustee of a trust, and you have never before served as a Trustee, you may be feeling a bit overwhelmed. To help you get started, the trust administration attorneys at Augulis Law Firm put together the following “Trust Administration 101” for the first-time Trustee.
The Big Picture – How Does a Trust Work?
At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. A trust is created using a trust agreement. The trust agreement includes terms, created by the Settlor, that dictate how the trust is to be administered. A Settlor may include almost any terms he/she wishes and the Trustee must abide by those terms unless a term is illegal or unconscionable. All trusts fall into one of two broad categories – testamentary or living trusts. A testamentary trust does not activate until after the death of the Settlor, usually through a provision in the Settlor’s Will. A living trust, on the other hand, will activate during the Settlor’s lifetime once all elements of creation are in place. A living trust can be further divided into revocable and irrevocable living trusts whereas a testamentary trust is always revocable.
Trust Administration Duties and Responsibilities
The overall job of a Trustee is to manage and invest trust assets and administer the trust according to the terms created by the Settlor. Among the most common reasons for a trust to fail is a Trustee who is ill-prepared for the wide range of complex duties and responsibilities required of a Trustee. Unfortunately, successfully administering a trust requires much more than simply good intentions. Some of the most common duties and responsibilities of a Trustee include:
- Managing and protecting trust assets. Trust assets can include almost anything of value. Consequently, this could mean something as simple as reconciling bank statements or something as complex as maintaining real property.
- Abiding by the trust terms unless they are impossible, illegal, or unconscionable. As the Trustee, you must under the trust purpose and follows the terms exactly as written by the Settlor.
- Investing trust funds using the “Prudent Investor Standard.” As a Trustee you are handling someone else’s assets, meaning you are in a fiduciary role. Investments, therefore, should never be risky. Guarding the principal is more important than a huge return on investment.
- Communicating with trust beneficiaries. You have an obligation to keep the beneficiaries of the trust informed of trust business.
- Resolving conflicts among beneficiaries. Disputes among beneficiaries do happen. As the Trustee, you must remain neutral and attempt to resolve the conflict before it turns into litigation. If the trust allows for future beneficiaries as well, you must take their best interest into account as well when resolving conflicts.
- Making discretionary decisions. If the Settlor gave you the power to make decisions regarding investments and/or disbursements, you should use that authority sparingly and carefully, always think of what is best for the beneficiaries.
- Distributing trust funds to beneficiaries. The trust terms establish how and when this is done.
- Keeping detailed trust records. Ultimately, accountability for the success, or failure, of the trust will lie predominantly with you as the Trustee. Be sure to keep detailed records that show how you fulfilled your job as Trustee.
- Preparing and paying trust taxes. A trust is a separate legal entity. As such, a trust is taxed. As the Trustee, you must see that a tax return is completed for the trust each year and any taxes due from the trust are paid.
Contact a Trust Administration Attorney
For more information, please join us for an upcoming FREE seminar. If you have questions or concerns about fulfilling your role as Trustee of a trust, contact an experienced trust administration attorney at Augulis Law Firm by calling 908-222-8803 to schedule your appointment today.