6.0 MIN READ
Trustees are named because they earned the grantor’s confidence over time. The grantor lists their trustees as the protectors and decision-makers of their trust, whether living or irrevocable. As a trustee, you may have the technical expertise to have earned this responsibility, or you may have demonstrated that you exercise sound judgment in your decision-making process. Being an individual trustee is an honor and a responsibility.
Yet, as an individual trustee, you may find yourself in unfamiliar territory.
Corporate trustees have policies, procedures, and a paid support system in place that they use to administer trusts. They do this as professionals (it’s literally their job), so they tend to know what they’re doing. On the other hand, an individual named as a trustee may feel like they’re needing to figure it out as they go.
No matter the circumstances, as a new trustee, you’re going to be thrust into an administrative learning curve. This can feel overwhelming because you already have your own life — financial and otherwise — to manage, and now you’re tasked with the responsibility of safeguarding and protecting a totally separate financial entity: the trust.
In this article, I’ll go over some things to know and what to expect when you’re asked to accept your trusteeship.
First, Understand the Trust
Even when the grantor communicates the trust’s instructions, intentions, and assets, it’s best to get legal guidance once you’re confronted with becoming a trustee. It’s preferable if the lawyer who drafted the trust’s language can communicate with you about your responsibilities as the trustee. Yet trustees can be thrust into this responsibility without knowing about the trust’s assets or instructions. In either case, getting third-party legal guidance can provide a good time to pause and take a step back to evaluate if you’re up to this trustee role.
As a trustee, you have a fiduciary responsibility for the best interests of the trust beneficiaries. You’re tasked to oversee and safeguard the assets for the beneficiaries’ benefits per the trust’s terms and instructions. As the trustee, you do not own the assets and must keep them separate from your personal life. The lawyer can help you understand your duties. Here are some questions you can ask:
Am I acting alone as a trustee, or do I need to collaborate with any co-trustees?
Tell me more about the distributions that are necessary and which are discretionary.
Who are the beneficiaries and how can I contact them?
What state-specific circumstances and rules do I need to follow for the trust and for communications with the beneficiaries?
How may I be compensated for my efforts?
Who are the successor trustees if I decline or when I become unable to serve as a trustee?
You have the option to decline to serve as trustee. The lawyer can communicate the timeframe for when you need to make your decision. After understanding the terms of the trust, you’ll gain a better understanding of your role as a trustee.
The trust is a separate financial entity from your personal life. But keep in mind that you’re still liable on a personal level since the beneficiaries can pursue legal action if they feel like you’ve been reckless or mismanaged the trust’s assets.
Once you decide to become a trustee, ask an attorney to provide a document allowing you to formally accept the trusteeship. You can then continue your trustee journey with the next steps.
Take an Inventory of the Trust’s Assets
Find out what you’re responsible for as a trustee. Living trusts may already have assets in the trust’s name. This is known as a funded trust. Other trusts may receive assets after an event like the grantor’s incapacity or death, at which time their assets are funneled into the trust.
For example, I have a testamentary trust in my last will and testament. This trust doesn’t exist unless and until my wife and I pass away. After our passing, through our pour-over will, the majority of our assets will be funneled into a trust. A trustee will then manage it for the benefit of our children.
For funded trusts, the trust will own assets by legal titling. For example, homes, bank accounts, brokerage accounts, vehicles, and more. As the trustee, you can work with relevant institutions to gain access to information and control of assets by providing proof of your powers as the trustee.
Financial Tip: When handling a trust for someone who passed, obtain extra copies of the death certificate. These will come in handy when handling financial institutions’ paperwork.
For unfunded trusts after the death of a grantor, you’ll work in conjunction with the personal representative or executor of the grantor’s estate. Together, you’ll review which assets need to be transferred into the trust, which assets cannot be transferred, and which assets may be transferred into the trust. Some assets may have listed the trust as a beneficiary, like retirement accounts, financial accounts, and/or insurance contracts. These distributions are straightforward and follow the beneficiary contract. In other cases, you’ll need to follow the trust’s provisions and instructions to understand how to divvy up the assets.
At this stage, it’s crucial to simplify your life and protect yourself legally by separating the trust’s financials from your own. Create separate bank accounts, brokerage accounts, and other financial accounts in the trust’s name to store the trust’s assets. Keep detailed financial records, and try not to make any major financial moves until you have a clear understanding of:
The assets within the trust.
The beneficiary designations of assets within the trust.
The beneficiary designations of assets that are transferring to the trust.
The value of the assets on the date of death (for trustees handling a trust after a death).
The income of the assets after the date of death (also for trustees handling a trust after a death).
Next Steps as a Trustee
Now that you have your arms around the trust’s terms, assets, and logistics, it’s time to notify the beneficiaries. As a trustee, you have a legal responsibility to notify beneficiaries of the trust and to give them your contact information. Each state has its own rules, and it’s best to confirm which rules apply with your legal counsel.
The trust’s beneficiaries are those for whom you’re acting as a fiduciary. Given your legal responsibilities as a fiduciary, it’s best to openly communicate with them. Avoid playing favorites if there are multiple beneficiaries, and treat them equally. Also, be sure to provide reports and statements in a timely fashion and answer their questions.
In this stage, it’s also best to find a team of professionals to help you administer the trust so you don’t need to spend too much time and energy year after year. You don’t have to be a lonely trustee trying to figure everything out on your own and stretching yourself thin in areas in which you don’t have expertise. The trust’s provisions will likely allow you to outsource professional services for bookkeeping, investment management, real estate property management, and tax preparation. Your job is then to oversee these services on behalf of the beneficiaries.
As the trustee, you don’t need to pay for these services out of your personal account. You can direct that the trust pays for these professional services. Still, you need to keep track of your accounting, explain your due diligence on the professionals you hire, and plan to evaluate their performance and costs on a regular basis.
Other things to remember as you adjust to your new role as a trustee:
Keep trust assets and matters separate from your personal assets by ensuring that you pay all expenses from a separate account in the trust’s name.
Keep detailed records of all medical, funeral, and other administrative expenses.
Develop a system to provide financial reports and statements to the beneficiaries on a scheduled basis.
Estate taxes only apply to taxable estates for high-net-worth households. However, you still need to account for any income that these assets generate within the trust. You must also file income taxes for the year in which the trust generates income.
Overall, Get the Guidance You Need
Becoming an individual trustee can be a lonely experience. Collaborating with professionals who have experience guiding people in similar situations can give you the opportunity to make more confident decisions. It also allows you the chance to discuss these matters with people who “get it.” There aren’t any “trustee support groups” that I can think of that bring trustees together so they can vent about the stresses of these roles.
In addition to meeting some service needs and having the opportunity to let out frustrations, you can decrease your liability as a trustee while protecting yourself and the beneficiaries you serve by working with professionals.
For example, by working with a financial planner to manage the trust’s assets, the financial planner can hopefully minimize taxes with certain investment strategies and also invest in prudent investments per the trust’s provisions. Thus, you can avoid investing in speculative investments, which can lead to the beneficiaries developing an argument that you mismanaged the trust’s assets.
About the Author
Dan Andrews is a CERTIFIED FINANCIAL PLANNER™ professional, Accredited Estate Planner® designee, and Chartered Advisor in Philanthropy® as well as the Director of Estate and Financial Planning at Financial Planning Fort Collins. Helping clients since 2012, Dan aims to make the financial planning process less daunting. Even though he also has extensive knowledge in estate planning, Dan enjoys financial planning with a professional yet light-hearted approach.
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