If you are contemplating the addition of a living trust to your estate plan, one of the most important decisions you will need to make when creating your trust is who to appoint as your Trustee. One of the most common reasons for a trust to fail is appointing the wrong Trustee. Typically, that happens because the Settlor does not really understand what the duties and responsibilities of a Trustee are and, therefore, appoints someone who is less than qualified. To help you avoid making this common mistake, the Annapolis trust administration attorneys at Sinclair Prosser Gasior explain trust administration.
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also called a Maker or a Grantor, who transfers property to a Trustee. The Trustee holds that property for the trust beneficiaries. The beneficiary of a trust can be an individual, an entity (such as a charity or political organization), or even the family pet. A trust must have at least one beneficiary but may have an unlimited number of beneficiaries and may have both current and future beneficiaries.
Trusts are also divided into two categories – testamentary and living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. A living trust, on the other hand, activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts. As the name implies, an irrevocable trust cannot be changed, modified, or terminated by the Settlor once it activates. If the trust is a revocable living trust, however, the Settlor may modify or terminate the trust at any time.
Trust Administration and the Role of Trustee
Once a trust is activated, the Trustee’s job of administering the trust begins. A Trustee has a wide range of duties and responsibilities that are involved in the administration of the trust, including:
- Managing trust assets – this could require something as simple as monitoring and filing bank statements or something as complex and time-consuming as handling the maintenance and upkeep of real property or a business.
- Following trust terms — the Trustee of a trust is required to abide by the terms of the trust, as created by the Settlor, unless a term is illegal, impossible, or unconscionable. This requires the Trustee to understand the terms and to have the ability to follow a term even if the Trustee doesn’t personally agree with the term.
- Investing trust assets – ideally, the assets held in a trust are income producing assets. This, however, requires the Trustee to invest those assets wisely. A Trustee must always use the “prudent investor standard” which dictates conservative investments wherein the trust principal is never at risk. Moreover, because a Trustee is in a fiduciary role, he/she must be more careful with trust assets than the Trustee would be with his/her own assets.
- Keeping detailed records – because a Trustee is managing assets intended to benefit a third party, and receives a fee for that management, very detailed records should always be kept.
- Communicating with beneficiaries – a Trustee is responsible for keeping beneficiaries informed of all trust business in a timely manner.
- Resolving conflicts – if a conflict arises. the Trustee must defend the trust in any litigation. If the conflict is among beneficiaries, a Trustee should act as a mediator try and resolve the conflict.
- Paying taxes – a trust is a separate legal entity, meaning taxes must be prepared and paid each year by the Trustee. Even if a Trustee hires a CPA to prepare the trust taxes each year, the Trustee should have sufficient financial skills to understand the tax return and any obligation the trust has for paying gift and estate taxes.
- Distributing assets – the Trustee is responsible for distributing trust assets to the designated beneficiaries according to the terms of the trust.
- Making discretionary decisions – typically, a Trustee has some degree of discretion. Some Settlors give a Trustee only a token amount of discretion in case of an emergency while other provide a Trustee with the discretion to make major trust decisions.
Contact an Annapolis Trust Administration Attorney
For more information, please join us for an upcoming FREE Webinar. If you have additional questions or concerns about trust administration, contact an experienced Annapolis trust administration attorney at Sinclair Prosser Gasior by calling (410) 573-4818 to schedule an appointment.