Duties and Responsibilities of a Trustee in Estate Planning

If you have been named as the trustee for someone’s trust, it is important that you understand your responsibilities.

Who Is Involved With a Living Trust?

The grantor (also called the settlor, trustor, creator, or trustmaker) is the person who creates the trust. Married couples who establish one trust together are co-grantors of their trust. Only the grantor(s) can make changes to the trust.

The trustee manages the assets in the trust. Many grantors choose to be the trustee and continue managing their affairs for as long as they are able. Married couples are often co-trustees; when one dies or becomes incapacitated, the surviving spouse can continue handling their finances with no other actions required, including court interference.

A successor trustee steps in and manages the trust when the trustee is no longer able to continue (usually due to incapacity or death).

Typically, several are named in succession in case one or more cannot act. Sometimes adult children are named to act together; or, a corporate trustee is named. In certain cases, it’s a combination of the two.

Beneficiaries are the persons or organizations who will receive the trust assets after the grantor dies.

What Is a Trust?

A trust is a legal entity that can own assets. Like a will, a trust includes instructions for who will handle the grantor’s final affairs. It also outlines who receives the grantor’s assets after death.

Different kinds of trusts include:

• testamentary (created in a will after someone dies);
• irrevocable (usually cannot be changed); and
• revocable living trusts.

Today, many people use a revocable living trust in addition to a will in their estate plans. A revocable living trust avoids court interference (probate) at death and incapacity. It’s also flexible. If the grantor is alive and competent, they can change the document, add or remove assets, or cancel it.

How Does a Living Trust Work?

For a living trust to work properly, the grantor must transfer assets into it. They must change titles from their name to the name of the trust. The grantor should discuss with their estate planning attorney what type of assets should be transferred to the trust.

Because the grantor’s name is no longer on the titles, there is no reason for the court to get involved if the grantor becomes incapacitated or dies. This makes it easy for the trustee to step in and manage the grantor’s financial affairs.

What Do Trustees Need to Know?

The grantor should familiarize you with the trust and its provisions, including where important papers, such as the following, are located:

• the trust document,
• trust assets, and
• insurance policies (medical, life, disability, long-term care).

Don’t be offended if the grantor doesn’t want to show you the values of the trust assets. Some people are very private about their finances.

Make sure appropriate titles and beneficiary designations have been changed to the trust. (Some assets, like annuities and individual retirement accounts, may list the trust as a contingent beneficiary.)

Find out who the trustees and successor trustees are, the order in which you are slated to act, and whether you’ll act alone or with someone else.

What Responsibilities Does a Trustee Have?

When stepping in as trustee, remember that these are not your assets. You are safeguarding them for the grantor (if living) and their beneficiaries, who will receive them after the grantor dies.

As a trustee, you must follow the instructions in the trust document:

• You cannot mix trust assets with your own (keep checking accounts and investments for the trust separate from your own).
• Don’t use trust assets for your benefit (unless the trust authorizes it).
• Treat beneficiaries the same; you cannot favor one over another (unless the trust says you can).
• Invest trust assets prudently, in a way that will result in reasonable growth with minimum risk.
• Keeping accurate records, file tax returns, and report to the beneficiaries as the trust requires.

Does a Trustee Have to Work Alone?

No; professionals can help, especially with accounting and investing. You may also need to consult with an attorney. However, as trustee, you are ultimately responsible to the beneficiaries for prudent management of the trust assets.

What If the Grantor Is Incapacitated?

Usually, the trust document contains instructions for determining the grantor’s incapacity. It may require one or more doctors to certify the grantor is not physically or mentally able to handle their own financial affairs.

If all assets have been transferred to the trust, you’ll be able to step in as trustee and manage the grantor’s financial affairs without court interference.

If the grantor becomes incapacitated, the trustee:

• Ensures the grantor is receiving quality care in a supportive environment. Give copies of health care documents (medical power of attorney, living will, etc.) to the physician. If someone has been appointed to make health care decisions, make sure that person has been informed. Offer to help notify the grantor’s employer, friends, and relatives.
  
• Reviews the trust document and notifies any co-trustees right away.
  
• Notifies the attorney who prepared the document. You may want to meet with them to review the trust and your responsibilities or ask questions. They can also prepare a certificate of trust, a shortened version of the document proving you have the legal authority to act.
  
• Becomes familiar with the grantor’s insurance (medical and long-term care, if any), and its benefits and limitations. Assuming insurance will cover certain procedures or facilities could be a costly mistake.
  
• Has the doctor document the incapacity as required in the trust document. Banks and others may ask to see this and a certificate of trust before they let you transact business as a trustee.
  
• Oversees the care of any minors or other dependents. The trust may have specific instructions. If the grantor’s incapacity is expected to be lengthy, the court may need to appoint a guardian (of the person, not assets) . The attorney can help with this.
  
• Becomes familiar with the finances, including know what the assets are, where they’re located, and their current values. You also need to know where the income comes from, how much it is, and when it is paid, as well as regular ongoing expenses. You may need to prepare a budget.
  
• If you cannot readily find this information, family members, employers, and accountants may be able to help. Last year’s tax returns may be helpful. Also, if you discover any assets that were omitted from the trust, the attorney can help determine whether they need to be put into the trust and can assist with that transfer.
  
• Apply for disability benefits through the grantor’s employer, Social Security, private insurance, and/or veterans services. Inform the bank and other professionals that you are the trustee for this person. Gather and consult with a team (attorney, accountant, banker, and financial advisor) before you sell any assets.

Now you can start transacting any necessary business, including receiving and depositing funds, paying bills and, in general, using the grantor’s assets to take care of them and any dependents until recovery or death.

Keep careful records of medical expenses and file claims promptly. Maintain a ledger of income received and bills paid. An accountant can show you how to set up these records properly.

The trust may require you to send accountings to the beneficiaries. Also, do not forget income taxes and property taxes.

What If the Grantor Recovers?

You go back to being a co-trustee or successor trustee. The grantor resumes taking care of their own financial affairs. There is no court involvement.

What If the Grantor Dies?

In this situation, take the following steps as trustee:

• Meet right away with an attorney to review the trust document, its assets, and your responsibilities. Don’t sell or distribute any assets before meeting with them.
  
• Before the appointment, make a preliminary list of the trust assets and their estimated values. You’ll need exact values later, but this will help the attorney determine whether an estate tax return will need filing. (Estate tax returns are generally due no later than nine months after the grantor’s death).
  
• If there is a surviving spouse or the trust has a tax planning provision, the attorney may need to do some tax planning. The trust may also need a tax identification number.
  
• After reviewing the terms of the trust document and all of the grantor’s individual and trust assets with the attorney, you’ll know if a probate proceeding is necessary.
  
• If all assets have been properly accounted for, probate is likely unnecessary. If it is required, collaborate with the personal representative of the grantor’s estate to ensure any assets that should be distributed to the trust make it there.
  
• Offer to assist the family with the funeral. Review the trust document for specific instructions. Notify a co-trustee as soon as possible.
  
• Gather all death benefits, including Social Security, life insurance, and retirement plans. Put them in an interest-bearing account until assets are distributed. If the beneficiaries need money to live on, you can probably make some partial distributions. Don’t make any distributions until after you have determined there is enough money to pay all expenses, including taxes.
  
• Notify the bank, brokerage firm, and others of the grantor’s death and that you are now the trustee. They will probably want to see a certified death certificate (order at least 12), a certificate of trust, and your identification.
  
• To finalize the list of assets, you’ll need exact values as of the date of the grantor’s death. Some assets will have to be appraised. You may need to organize an estate sale to dispose of household goods and personal effects.
  
• Keep careful records of final medical and funeral expenses, and bills and income received. File medical claims promptly.
  
• Have an accountant and attorney prepare final income and estate tax returns, if required.
  
• Verify and pay all bills and taxes. Make a final accounting of assets and bills paid, and give it to the beneficiaries.
  
• If the assets are to be fully distributed, divide the cash and transfer titles according to the instructions in the trust.

At this point, the trust is effectively dissolved.

If the assets are to stay in a trust (for minors, for a surviving spouse, for tax purposes, or if the beneficiaries will receive their inheritance in installments), each trust needs a new tax identification number. Proper bookkeeping and reporting procedures will also need to be established.

Trustees are responsible for ensuring everything is done properly and on time. Remember, an attorney, corporate trustee, or accountant can provide valuable assistance.

Are Trustees Paid for This Work?

Yes, trustees are entitled to reasonable compensation for their services. The trust document should give guidelines. If the document lacks this information, the attorney will determine your compensation based on the state’s case or statutory laws.

What If the Trustee Does Not Want the Role?

Consider hiring an attorney, bookkeeper, accountant, or corporate trustee to help. (A corporate trustee can manage the investments and do the record-keeping.)

If you cannot handle the responsibilities due to work, family demands, or other reasons, you can resign. The successor trustee then steps in. If no other successor trustee, or none is willing or able to serve, a corporate trustee can usually be named.

Just because the grantor names you trustee doesn’t mean you must accept the position. If you do not wish to serve, the attorney assisting with the trust administration may have you sign a document in which you officially decline to serve as trustee. This allows the next named trustee to assume the role of acting trustee.