- Asset Protection Planning
- Business Succession Planning
- Charitable Giving
- Disability and Special Needs
- Elder Law
- Executor and Trustee Responsibilities
- Financial Powers of Attorney
- Inheritance Planning
- Lifetime Gifts
- Medical Directives
- Planning for Minors
- Retirement Accounts
Duties and Responsibilities of a Trustee
If you have been named as a trustee or successor trustee for someone’s trust, you may be wondering what you are supposed to do. Successor trustees can relax a bit because they do not need to do anything right now. Successor trustees only begin to act when the trustee of a trust dies or becomes unable to manage financial affairs due to incapacity. If you have been named as a trustee, you may already be acting in this capacity. In either case, it is important that you understand your duties and responsibilities. Let’s start with some explanations.
Who are the people 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 set up one trust together are co-grantors of their trust. Only the grantor(s) can make changes to the trust.
The trustee manages the assets that are in the trust. Many grantors choose to be the trustee and continue to manage their affairs for as long as they are able. Married couples are often co-trustees so that when one dies or becomes incapacitated, the surviving spouse can continue to handle their finances with no other actions or steps required, including court interference.
A successor trustee is named to step in and manage 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 two or more adult children are named to act together. Sometimes a corporate trustee (bank or trust company) is named. Sometimes it is a combination of the two.
The 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. The document looks much like a will; and, like a will, a trust includes instructions for who will handle the grantor’s final affairs and who will receive the grantor’s assets after death. There are different kinds of trusts: 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 because it avoids court interference at death (probate) and incapacity. It is also flexible. As long as the grantor is alive and competent, the grantor can change the trust document, add or remove assets, and even cancel it.
How does a living trust work?
For a living trust to work properly, the grantor must transfer assets into it. Titles must be changed from the grantor’s individual name to the name of the trust. The grantor should discuss with the grantor’s 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 when the grantor dies. This makes it very easy for you as trustee or successor trustee to step in and manage the grantor’s financial affairs.
What do I need to know now?
The grantor should make you familiar with the trust and its provisions. You need to know where the trust document, trust assets, insurance policies (medical, life, disability, long-term care), and other important papers are located. However, do not be offended if the grantor does not want to show you the values of the trust assets; some people are very private about their finances. This would be a good time to 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.)
You also need to know who the trustees are, who successor trustees are, the order in which you are slated to act, and if you will be acting alone or with someone else.
What responsibilities will I have as a trustee?
The most important thing to remember when you step in as trustee is that these are not your assets. You are safeguarding them for others—for the grantor (if living) and for the beneficiaries, who will receive them after the grantor dies.
As a trustee, you have certain responsibilities. For example, you must follow the instructions in the trust document:
- You cannot mix trust assets with your own. --You must keep separate checking accounts and investments.
- You cannot use trust assets for your benefit (unless the trust authorizes it).
- You must treat trust beneficiaries the same; you cannot favor one over another (unless the trust says you can).
- Trust assets must be invested in a prudent (conservative) manner, in a way that will result in reasonable growth with minimum risk.
- You are responsible for keeping accurate records, filing tax returns, and reporting to the beneficiaries as the trust requires.
Do I have to do all of this myself?
No, of course not. You can have professionals help you, especially with accounting and investing. You will also probably need to consult with an attorney from time to time. However, as trustee, you are ultimately responsible to the beneficiaries for prudent management of the trust assets.
How will I know if the grantor is incapacitated?
Usually, the trust document contains instructions for determining the grantor’s incapacity. The trust may require one or more doctors to certify the grantor is not physically or mentally able to handle his or her financial affairs.
What do I do if the grantor is incapacitated?
If all assets have been transferred to the trust, you will be able to step in as trustee and manage the grantor’s financial affairs quickly and easily, with no court interference.
First, make sure 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 notified. Offer to help notify the grantor’s employer, friends, and relatives.
Next, find and review the trust document. (Hopefully, you already know where it is.) Notify any co-trustees as soon as possible. Also, notify the attorney who prepared the trust document; that attorney can be very helpful if you have questions. You may want to meet with the attorney to review the trust and your responsibilities. The attorney can also prepare a certificate of trust, a shortened version of the trust that also proves you have the legal authority to act.
You will want to become familiar with the grantor’s insurance (medical and long-term care, if any) and understand the benefits and limitations. Assuming the insurance will cover a certain procedure or facility could be a costly mistake.
Have 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 co-trustee or successor trustee.
If there are minors or other dependents, you will need to look after their care. The trust may have specific instructions. If the grantor’s incapacity is expected to be lengthy, a guardian (of the person, not assets) may need to be appointed by the court. The attorney can help you with this.
Become familiar with the finances. You need to know what the assets are, where they are 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 put together a budget.
If you cannot readily find this information, others (family members, banker, employer, accountant) may be able to help you. Last year’s tax returns may be helpful. Also, if you discover any assets that were left out of the trust, the attorney can help you determine if they need to be put into the trust and can assist you with that transfer.
Apply for disability benefits through the grantor’s employer, social security, private insurance, and veteran’s services. Notify the bank and other professionals that you are now the trustee for this person. Put together a team of professionals (attorney, accountant, banker, insurance, and financial advisors) to help you. Be sure to consult with them before you sell any assets.
Now you can start to transact any necessary business. You can receive and deposit funds, pay bills and, in general, use the grantor’s assets to take care of him or her and any dependents until recovery or death.
You will need to keep careful records of medical expenses and file claims promptly. Keep 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 happens if the grantor recovers?
You go back to being a co-trustee or successor trustee and the grantor resumes taking care of his or her own financial affairs. It is very easy, and there is no court involvement.
What do I do when the grantor dies?
Make an appointment with an attorney to go over the trust document, trust assets, and your responsibilities as soon as possible. Do not sell or distribute any assets before you meet with the attorney.
Before the meeting, make a preliminary list of the assets and their estimated values. You will need exact values later, but this will help the attorney know if an estate tax return will need to be filed (due no later than nine months after the grantor’s death). If there is a surviving spouse or if the trust has a tax planning provision, the attorney may need to do some tax planning right away. The trust may also need a tax identification number.
After you have reviewed the terms of the trust document and all of the grantor’s individual and trust assets with the attorney, you will know if a probate proceeding is necessary. If all assets have been properly accounted for, either through transfers to the trust or the use of beneficiary designations, then a probate proceeding will likely not be necessary. If a probate proceeding is required, you will need to collaborate with the personal representative of the grantor’s estate to ensure that any assets that should be distributed to the trust make it into the trust.
The trustee is responsible for seeing that everything is done properly and on time. You may be able to do much of this yourself, but an attorney, corporate trustee, or accountant can give you valuable guidance and assistance. Here is an overview of what needs to be done.
- Inform the family of your position and offer to assist with the funeral. Read the trust document and look for specific instructions. Notify a co-trustee as soon as possible.
- Collect all death benefits (social security, life insurance, retirement plans, associations) and put them in an interest-bearing account until assets are distributed. If the surviving spouse or other beneficiary needs money to live on, you can probably make some partial distributions. Do not 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 twelve), a certificate of trust, and your identification.
- To finalize the list of assets, you will need exact values as of the date of the grantor’s death. Some assets will need to be appraised. An estate sale may need to be held to dispose of household goods and personal effects.
- Keep careful records of final medical and funeral expenses, and file medical claims promptly. Keep a ledger of bills and income received. Contact an accountant and attorney to 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, you will divide the cash and transfer titles according to the instructions in the trust.
That’s it—you are finished and the trust is 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 inheritances in installments), each trust will need a new tax identification number, and proper bookkeeping and reporting procedures will need to be established.
Should I be paid for all this work?
Yes, trustees are entitled to reasonable compensation for their services. The trust document should give guidelines. If the trust document is silent as to your compensation, the attorney will determine your compensation based on the state’s case or statutory laws.
What if the responsibilities are too much for me?
Consider hiring an attorney, bookkeeper, accountant, or corporate trustee to help you. (A corporate trustee can manage the investments and do the record-keeping.) If you feel you cannot handle any of the responsibilities due to work, family demands, or any other reason, you can resign and let the next successor trustee step in. If no other successor trustee has been named, or none is willing or able to serve, a corporate trustee can usually be named. Remember, just because the grantor nominates you to serve as trustee does not mean you have to accept the trustee position. If you do not wish to serve, the attorney assisting with the administration of the trust may ask you to sign a document in which you officially decline to serve as trustee. This declination document will allow the next trustee in the trustee succession line to assume the role of acting trustee.