Estate Planning: What Is the Role of a Trustee?
Bridget Wall is a Sophisticated Planning Strategies Attorney at Northwestern Mutual.
Trusts are an integral component of many estate plans, and naming a trustee to administer a trust is a consequential decision. After all, your trustee will have significant responsibility and power in administering your assets both during your lifetime and after your death, directly affecting your and your beneficiaries’ futures for years to come. As such, before naming a trustee, it’s important to understand the responsibilities and expectations that come with the role.
Here, we’ll discuss:
- The role of your trustee.
- Your trustee’s fiduciary responsibility.
- Individual vs. corporate trustees.
While it is common to select yourself or your spouse as trustee of a revocable trust during your lifetime, this article focuses on trustees and trust administration after death.
The Role of Your Trustee
Whether you select an individual or corporate trustee, your trustee will have the authority and power to administer assets held in trust for your beneficiaries. Importantly, this person or business assumes fiduciary responsibility (more on that later) for the trust, its assets and current and future beneficiaries. As a fiduciary, your trustee can be held liable for breach of that duty.
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Your trustee will have five primary responsibilities:
Administering the trust – Your trustee will be responsible for administering the trust according to your wishes as set forth in the terms of the trust. As such, you’ll want your trustee to be as familiar as possible with your intentions as described in the trust document. Additionally, your trustee will be responsible for maintaining documents and procedures related to the trust.
Managing trust assets – Your trustee will also be responsible for managing your trust’s assets according to the trust’s investment objectives. A key part of this requires acting in accordance with fiduciary standards. This means exercising care, skill and diligence in investment decisions, which often includes appropriately diversifying investments to manage portfolio risk. It also entails developing and documenting investment objectives for the trust and managing any unique assets (such as fine art, real estate or family business interests) within the trust.
Distribution of assets – In addition to managing the trust’s assets, your trustee may be able or required to make distributions to beneficiaries. To do this effectively, the trustee may need to build an understanding of each beneficiary’s unique needs and circumstances and balance their needs as directed in the trust.
Handling tax and accounting matters – Handling tax matters and providing statements to beneficiaries is also part of your trustee’s responsibilities.
Managing third-party professionals – Your trustee may choose to engage third parties to help with some of the responsibilities. Often, this will include hiring an accountant or attorney. An experienced financial advisor can help the trustee manage the trust’s assets according to the trust’s investment objectives. When using third parties, your trustee will be responsible for supervising their work.
Fiduciary Responsibility
Simply put, fiduciary responsibility means your trustee must put the best interests of the trust and its beneficiaries first. Although specific tenets of fiduciary responsibility may vary from state to state, many states have adopted the Uniform Trust Code (UTC), which is a model law intended to help codify common trust law. States that haven’t adopted the UTC often have similar requirements.
Article 8 of the UTC deals with fiduciary duties and provides that, by accepting the role, your trustee must exercise these key principles:
Duty to administer trust in good faith – Your trustee is responsible for administering the trust in good faith, in accordance with the trust’s terms and in alignment with the beneficiaries’ interests.
Duty of loyalty – Your trustee must always put the well-being of the trust and its beneficiaries first. Should a potential conflict of interest arise, your trustee should either remove the conflict or recuse him- or herself from a given situation.
Impartiality – If your trust has multiple beneficiaries, your trustee must give due regard to each beneficiary’s interests when it comes to investing, managing and distributing trust assets.
Prudent administration – All decisions and administrative matters of the trust must consider the purpose and terms of the trust. What’s more, your trustee must exercise reasonable care, caution and risk awareness in doing so.
Cost of administration – Trustees may only incur costs that are reasonable when considering the types of assets held within the trust, the purpose of the trust and the skills of the trustee.
Trustee’s skills – If you trustee has special skills, knowledge or expertise, they should be used when administering the trust.
Duty to inform and report – Your trustee must keep beneficiaries informed about the administration of the trust and respond to beneficiary requests for information related to trust matters.
While we cover trustee selection more in-depth next, it's important to highlight that trustees can be held personally liable for a breach of these duties. Thus, if a beneficiary believes your trustee is mismanaging trust assets, failing to fulfill their legal duties, embezzling from the trust or otherwise conducting trust business in a manner that fails to meet fiduciary standards, the beneficiary can file suit against the trustee. Other interested parties (like creditors, government officials, divorcing spouses, and remainder or contingent beneficiaries) can also sue your trustee. You’ll want to keep this in mind, especially when selecting an individual as your trustee.
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Selecting a Trustee: Individual vs. Corporate Trustees
When choosing a trustee, there are generally three paths you can take:
- Selecting one or several individual trustees, usually family members or close friends
- Selecting a corporate trustee, a business that can administer trusts
- Selecting individual trustee(s) and a corporate co-trustee
There are numerous factors to consider when choosing between individual and corporate trustees. As you consider which option is right for you, keep in mind that your financial advisor can support your trustee, and your financial advisor’s involvement may influence how you perceive certain trustee criteria. As you weigh the pros and cons, you’ll likely want to keep these important factors in mind:
Depth and breadth of expertise – Administering a trust requires significant knowledge, from legal, tax and accounting issues to investment management. In many cases, an individual serving as trustee will require the help of outside professionals to do this effectively, while a corporate trustee does this work every day and has access to the resources and skill sets needed to administer your trust to a fiduciary standard. It’s worth noting that it is a common misconception that a family member who is trained as an accountant or works in the finance industry, for example, will possess the requisite knowledge and/or experience required for this responsibility.
Cost – An individual may choose to accept the trustee role with or without compensation; however, individual trustees often do receive a trustee fee due to the considerable time and effort, expertise and potential liability associated with serving as a trustee. A corporate trustee might be more expensive but also provides expert professional trust administration. Corporate trustee fees are often charged as a percentage of trust assets based on a laddered fee schedule. Some states might even have statutory fee schedules.
Individual or corporate trustees commonly enlist the help of paid third-party professionals (such as accountants or attorneys) to perform additional duties, adding to the cost. In some scenarios, an individual or corporate trustee might delegate the investment management of the trust to an investment management firm, which, in turn, will designate your financial advisor to manage the assets. In this case, it is common to have two separate fee schedules applied; however, the trustee fee is usually reduced due to the delegation of investment management duties.
Family knowledge – Understanding your wishes and each beneficiary’s circumstances is important when serving as a trustee. While a family member or close friend may have more direct family knowledge than a corporate trustee, hiring a corporate trustee can help eliminate real or perceived conflicts of interest in the trust’s administration and minimize the risk of family disputes. To help bridge the family knowledge gap, it’s a good idea for a professional trustee to collaborate with your financial advisor, who will have knowledge of your family situation and investment philosophy.
Because financial advisors can play such a valuable role in supporting your trustee, you might be wondering if your financial advisor can serve as your trustee. However, due to potential conflicts of interest, financial firms generally prohibit financial advisors from serving as trustee on their clients’ trusts.
Other factors that may impact your decision include:
Trustee characteristics – These include characteristics like the trustee’s age, availability, geographic location and whether the trustee will accept the burden. This is especially important when selecting an individual as trustee or co-trustee.
Trust laws – Corporate trustees may strategically base their operations in jurisdictions that design their trust laws and tax rules as favorably as possible to attract trust business. These jurisdictions may allow for the creation of dynasty trusts (trusts that can last an exceptionally long time or even forever, enabling them to serve numerous future generations) or levy little to no state income tax on trust income.
While appointing a trustee is a consequential decision, and the above and other factors should be given serious consideration, in many cases you retain the ability to change your mind. If you do, you can remove your trustee and appoint a new one for any or no reason (assuming the power exists in the trust or state law).
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Whether you intend to select an individual or corporate trustee or have yet to decide, enlisting the help of an experienced financial advisor is a smart choice. From experience helping similar clients navigate this process, your financial advisor can offer both unique perspective and access to his or her network of third-party professionals to help you make a decision that brings the peace of mind you’re looking for. What’s more, your financial advisor can help your trustee better understand and be involved in the ongoing management of the trust’s assets.
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