You may have heard the term “trustee” before, but what does it mean? And what does a trustee do?
Trustees are in charge of a person’s estate plan, investments, or charitable giving efforts. A trustee may have specific duties based on the type of assets they manage, but anyone named trustee must make financial decisions that protect the assets in the trust and the best interests of the beneficiary.
The assets a trustee manages can be anything from financial accounts and investments to real estate. Let’s see what a trustee is and break down their responsibilities.
Trustee definition
A trustee is a person or firm trusted to manage a person’s money or assets set aside for the benefit of someone else. Trustees are expected to make decisions in the best interest of the person who appointed them and have fiduciary (or loyalty) responsibilities, meaning they must ensure everything is executed as written.
A trustee can also be appointed to handle financial matters like an individual’s bankruptcy or retirement accounts, but the most common entity handled by a trustee is a trust. A trust is a legal agreement that determines how a person’s assets and money should be handled after passing away.
Think of it this way: If you have a dog or cat you love dearly, you would want to make sure someone you trust takes care of your pet if something unexpected happens to you. The same goes for a person’s money and assets after they die. That’s when a trustee handles their financial matters.
Here’s some basic terminology to help you better understand the concept of a trustee.
| Term | Definition |
|---|---|
| Trust | A trust is a legal arrangement intended to ensure a person’s assets eventually go to specific beneficiaries. A trust can also be referred to as a living trust. |
| Settlor/Grantor | The settlor/grantor is the individual who transfers assets into a trust for the future use of their beneficiaries. |
| Beneficiary | A beneficiary is the individual or group for whom the trust was created and who will benefit from its assets. |
| Successor Trustee | A successor trustee is second in line to serve as a trustee if the current or first trustee is unable to serve their duties. |
| Trust Agreement | A trust agreement is a legal document that details property and assets and includes instructions on who handles the affairs and where the money goes upon the grantor’s death.¹ |
| Will | A will is a legal document that coordinates the distribution of your assets and debt after death, and can appoint guardians for children who are minors. A testamentary trust is a type of trust that’s included as part of a will and last testament.² |
Trustee basics: How it works
When a trust is created, the trustor (also known as the grantor) transfers assets into the trust. A revocable trust is a legal agreement that allows the grantor the ability to alter, amend, or revoke the trust and terms during their lifetime.³ An irrevocable trust is more difficult to change once it’s established.⁴
Once the assets are in a trust, the named trustee is responsible for providing asset protection by managing those assets according to the trust’s terms and conditions.
The trustee must balance their duties to the trust beneficiary or beneficiaries by ensuring the assets are preserved and grown where possible while also distributing the money as specified.
Example: trust in action
For example, a grantor may create a trust for their minor children’s benefit. The trustee would then be responsible for managing the assets in the trust until the children reach a certain age, at which point they may receive income or principal from the trust. Principal includes cash, investments, dividend income, trust property value, or other types of income.
While the trustee’s role can vary depending on the type of assets and trust terms, they must still take wise and fair actions and make decisions that are in the best interest of the designated beneficiary and their long-term needs.
What does a trustee do?
Trustees manage money and assets that have been put aside on behalf of another person while following the rules of the trust. The trust agreement will usually detail what a trustee can and can’t do in the role.
Many people are their own trustee for as long as they’re mentally able to do the job, and if they’re married, they might allow their spouse to act as a trustee on their behalf.
If they’re not married, or the spouse can’t act as the trustee, a successor trustee may come in to manage the trust. The most important aspect of a trustee’s duties and responsibilities is to always act in the trust’s best interest.
Duties and responsibilities of a trustee
Trustees have many responsibilities, from taking care of the day-to-day finances of the trust to distributing assets to beneficiaries, sometimes through what’s called a probate process.
A trustee’s specific duties depend on what’s listed in the trust agreement and are sometimes dictated by the type of assets being held. Here are some examples of important duties and responsibilities of a trustee:
- Protect the trust’s property and assets
- Act in accordance with the trust document
- Avoid conflicts of interest and put the trust document first
- Keep detailed records
- Give beneficiaries and federal and state agencies routine reports
- Invest and diversify assets when necessary
- Prepare tax-related forms and filings
- Answer beneficiaries’ questions as needed
A trustee is also responsible for paying the federal income tax on behalf of the trust.⁵ Any income taken in by the trust that’s higher than the value of its distributions to its beneficiaries is usually subject to income tax on the tax return.
Exploring trustee types
There are different types of trustees, each with unique roles depending on the trust’s requirements and the grantor’s preferences. Sometimes, the role of a trustee is confused with an executor, but the two have a few key differences.
An executor is appointed to manage a person’s estate after their death, while a trustee manages assets during and sometimes after the grantor’s lifetime. Executors typically have a more limited scope of duties, like paying off debts and distributing assets according to the decedent’s will, while trustee duties can be more complex and ongoing.
Here are three types of trustees.⁶
Institutional trustees
Institutional trustees are typically banks or trust companies that specialize in managing trusts and asset protection. They bring professional expertise and resources, which can be helpful for complex or long-term trusts. However, their services may come with higher fees.
Individual trustees
Individual trustees are often family members, friends, or trusted advisors. They may offer a more personal touch and deeper understanding of the grantor’s wishes. However, they might lack the professional expertise needed for complex asset management and could face challenges in meeting the fiduciary responsibility without conflicts of interest.
Independent trustees
Independent trustees are neutral third parties who are neither beneficiaries nor closely related to the grantor. They offer a balance between professional and personal management that some grantors need when it comes to unbiased decision-making for the beneficiary named in the trust. This role can be ideal for trusts requiring impartiality in managing disputes or complex arrangements.⁷
Who should you choose as a trustee?
A trustee must be trustworthy and responsible with money to manage a trust. For this reason, you may consider the following people to manage your trust:
- A spouse
- A friend or family member
- A professional trustee, often with legal or financial expertise
- A trust company or corporate trustee
As the name suggests, the trustee should be trustworthy. No matter who is chosen as trustee, it’s important to revisit your choice every few years. Managing a trust can be time-consuming and involves ongoing responsibilities, so choose someone with the time and dedication to fulfill their duties.
Also, the person who is perfect for the job right now might not be the ideal candidate down the line. An attorney or financial advisor can ultimately help determine who can act as the best trustee.
Examples of trustees
As the name implies, a trustee usually manages the assets of a trust. However, they can play a role in other situations, too. Other common types of trustees include:
- Investment trustees: These trustees make day-to-day investment decisions and strategies in a portfolio or business account. They work closely with the trustee responsible as an investment advisor and oversee distributions to meet the trust’s goals.
- Bankruptcy trustees: These are trustees appointed by the Department of Justice’s U.S. Trustee Program who administer and oversee an individual or business bankruptcy. They have a duty to creditors and must make decisions in the best interest of all parties involved.⁸
- Charitable trustees: These trustees manage the assets in a charitable trust and distribute them to specific charities and nonprofits according to the trust owner’s wishes.
- Corporate trustees: These are financial institutions or investment firms that manage trusts on behalf of their clients. They have a fiduciary duty to act in the best interest of plan participants.
Choose your trustee carefully
Trustees have a critical responsibility in ensuring that a trust is handled properly. If you’re considering setting up a trust now or in the future, you may want to talk with a financial advisor to review your assets and plans.
Here are some things you may want to consider when choosing a financial advisor.
FAQs
What’s a trustee of a property?
The trustee of a property is essentially the person or firm that holds and handles the property in question. The trustee also holds the legal title to the property and is the record owner. A deed is required to transfer property into the trust. The trustee’s name will also appear on any deeds related to the piece of real estate.
How many trustees can a trust have?
There’s no limit on how many trustees a trust can have, but it might be beneficial to keep the number low. This way, you prevent potential disagreements that can happen among multiple trustees. The more trustees named, the greater the chance they’ll have different ideas about how the trust should be managed. Additionally, more trustees can be associated with higher costs since trustees are usually paid for their services.
Do trustees get paid?
Trustees get paid some type of compensation to fully perform their duties. Trustees are paid out of the trust assets and are usually paid hourly, although sometimes they’ll be compensated as a percentage.⁹ A trustee might be required to keep a detailed log of all their activities, including timeframes and tasks, to ensure they receive full reimbursement for their services.
Who cannot be a trustee?
A trustee can be almost any individual, bank, or company, but legally, they must be 18 or older and competent to manage their own affairs and fulfill the role of being a trustee.¹⁰
Can a trustee be personally liable?
Trustees are not personally liable for the trust’s debts or liabilities. However, if a trustee fails to fulfill their duties and this results in financial losses or harm to the trust beneficiary, they can be held personally liable.¹¹ Trustees should keep detailed records of any decisions made and actions they take regarding the trust account, whether financial or otherwise.