What Does It Mean To Be A Trustee?

Every trust has three components, a Settlor (a/k/a donor, trustor, or grantor), a Trustee, and a Beneficiary.  The Settlor creates the trust and transfers the asset to be held in the trust to the Trustee.  The Trustee is an individual (or an institution, such as a bank) who has legal capacity to act as a fiduciary with regards to the trust.  To act as a fiduciary means that the Trustee must act for the benefit of the beneficiaries of the trust, and a fiduciary is held to the highest standards of care in regards to his or her responsibilities.  Lastly, the beneficiary is the person(s) who benefits from the trust.

The most confusing component is the Trustee.  If a family member or nonprofessional is named as Trustee of a trust, the first question is ‘What do I do as Trustee?’  The main focus of the Trustee is to administer the trust property for the benefit of the beneficiary(ies) in accordance with the terms of the trust, and according to the Settlor’s intent.  The trust instrument dictates how the Trustee should act.  The trust instrument directs who will benefit from the trust, how the assets are to be distributed to the Beneficiary, the reporting obligations from the Trustee to the Beneficiary, and the scope that the Trustee has to invest the trust assets.

The most important duties of the Trustee are the duty of loyalty, the duty of skill and care, duty to communicate, duty to provide information, duty to segregate property, duty of impartiality of current and future beneficiaries, and duty to defend and enforce claims of the trust.  A summary of the meaning of these duties is as follows:

• The duty of loyalty – In short, the trustee cannot conduct business with the trust in any way; the trustee may not profit from the trust except from their compensation.  The Trustee’s interests can not be in conflict with those of the trust.
• The duty of skill and care – The duty of skill can care must be reasonable, and the trustee must exercise the same skill and care of a prudent person.
• The duty to provide information – The Trustee must maintain and keep accurate records of the trust assets, and have these records available for review by the Beneficiaries.  The frequency of reports to the beneficiaries goes hand in hand with the duty to communicate.
• The duty to segregate property – The Trustee cannot co-mingle their own property with that of the trust.
• The duty of impartiality – The Trustee, when making distributions from the trust to the beneficiaries, must keep in mind the current and future financial needs of the beneficiaries, WHILE remembering the interests of future beneficiaries.
• The duty to defend and enforce claims of the trust – The Trustee must take action to defend the trust against claims, and take action to enforce any claims the trust may have against another party.

It should be noted that a Trustee has the power to delegate, which means that if there is something that should be handled by a professional, the Trustee must seek out assistance from a professional.  For example, if the trust was sued by another party, the Trustee should hire an attorney to defend the trust against the suit.  In addition, all trust entities must comply with tax reporting and payment obligations, the Trustee should consult with a tax professional.

Accepting a Trusteeship is responsibility that should not be taken lightly.  This summary is a starting point of the duties of a Trustee, and does not encompass everything that Trustees should know about their roles.  All Trustees should do their own due diligence to understand their obligations and relationships.