What Is a Trustee and What Do They Do?

A trustee is a person or entity (like a bank or company) who manages property or assets on behalf of another party. Although the trustee is the legal owner of the trust assets, they’re obligated to act in the best interests of those they represent. Here are a few examples of what a trustee oversees: 

• Family trusts. Managing wealth and assets for future generations
• Bankruptcy. Overseeing the liquidation and distribution of assets to creditors
• Retirement plans. Managing pension funds or 401(k) plans for employees. 

Typically, the person who creates the trust (known as the grantor) specifies who they want to serve as trustee, but this isn’t always the case. Courts may need to appoint a trustee if the trust document doesn’t name one (or if the named trustee is unable to serve), as well as for matters like bankruptcy. 

Key duties and responsibilities of a trustee

All trustees share similar responsibilities regardless of what type of trust they represent, but these duties take priority above all: 

• Adhere to trust terms. Act in accordance with the grantor’s instructions as outlined in the trust document. 
• Fiduciary duty. Prioritize the best interests of the trust, avoiding conflicts of interest and placing the beneficiaries’ needs over their own. 
• Act prudently. Handle the trust’s assets with caution and make calculated decisions that benefit all beneficiaries fairly. 

A trustee is also responsible for the more practical aspects of managing the trust, many of which may change over time. Common duties include the following: 

Distribution and conflict resolution

The trustee must keep and protect the trust assets and then distribute them when and how the trust directs. For example, an estate trust might direct that the assets be distributed to a beneficiary on his or her 21st birthday.

However, in cases of disputes, trustees may need to mediate between beneficiaries or seek legal advice to resolve conflicts. Sometimes, this might mean trustees need to make difficult decisions, such as withholding distributions or selling property, if they have discretion and believe it’s in the trust’s best interests. 

Financial and asset management

Trustees must manage and invest assets in a way that aligns with the trust’s objectives and benefits the beneficiaries. This often involves day-to-day financial tasks similar to managing a household budget but on a larger scale, such as: 

• Paying bills associated with the trust, such as insurance premiums or maintenance costs
• Settling any outstanding debts of the trust or the deceased
• Maintaining trust properties to preserve their value
• Monitoring or adjusting investments for long-term growth, depending on the trust’s goals
• Keeping accurate records of all financial transactions 

For larger trusts, this might also involve more complex tasks like overseeing business interests or managing a diverse investment portfolio. However, the core principle remains the same: preserve and potentially grow the trust assets for the benefit of its beneficiaries. 

Compliance and legal duties

In addition to managing the finances, a trustee must adhere to all applicable laws and regulations. This includes complying with state and federal tax laws, maintaining separation between trust and personal assets, and submitting necessary reports as needed.  

For example, if an estate trust earns income, the trustee must also file a U.S. Income Tax Return for Estates and Trusts (Form 1041) with the IRS and pay any taxes due from the trust.

Depending on the size of the trust, trustees might also consult legal or tax professionals to ensure ongoing compliance. Likewise, a trustee may need to represent the trust in legal proceedings or defend their actions if challenged by beneficiaries. 

Communication and reporting

Given their responsibilities and authority, trustees must keep an open line of communication with beneficiaries and be ready to answer questions. They should proactively explain things like investment decisions, clarify distribution terms, or discuss the overall management strategy to reassure the people the trust is supposed to protect. In the same way, trustees are in charge of communicating with third parties on behalf of the trust, including financial institutions, tax authorities, realtors, or lawyers. 

Types of trustees

Each type of trustee has potential strengths and drawbacks, depending on the complexity of the trust, the assets involved, and the needs of the grantor and beneficiaries. 

Individual trustees

Individual trustees are usually family members, close friends, or trusted advisors appointed by the grantor to manage the trust. They typically have a close relationship with the grantor and beneficiaries, which helps them understand the family dynamics and intentions for the future. 

On the other hand, individual trustees may lack the financial or legal expertise to manage the trust or make prudent decisions. They also have to deal with family pressure and potential conflicts, not to mention having less time or resources for themselves. 

Professional and corporate trustees

This type of trustee includes banks, wealth management companies, law firms, or individual professionals such as attorneys or accountants. The primary advantage of professional and corporate trustees is their expertise and objectivity. They also handle record-keeping, reporting, and compliance.

However, their services come at a higher cost, and some beneficiaries may find these professionals less personal or accessible than individual trustees. There’s also a risk that larger institutions might not provide the level of personalized attention that some trusts require. 

Government or public trustees

Government or statutory trustees are appointed by law or court order to manage trusts in specific circumstances. They often come into play when no suitable private trustee is available, or the law requires a neutral, government-appointed trustee—like in bankruptcy cases. 

In addition, these trustees might be necessary for individuals who are unable to manage their own affairs, such as those with severe disabilities. In rare cases, probate courts might also need to appoint a trustee to administer estates when there’s no will and no one close to the deceased steps forward. 

How to select the right trustee

Choosing a trustee is arguably one of the most critical decisions in life, as the person you name will eventually own and be responsible for managing your assets. The ideal trustee should possess a combination of trustworthiness, financial acumen, and the ability to act impartially. They should also have the time, willingness, and capability to handle the responsibilities asked of them. Here’s what you should consider for each option: 

Family or friends

If you have a family member or close friend in mind who you think can be a trustee, ask yourself: 

• Do they clearly understand your wishes, values, and intentions? 
• Can they remain impartial, especially if they’re also a beneficiary? 
• Do they have the necessary financial and organizational skills?
• Are they willing and able to take on this long-term responsibility? 

A family member or friend can be a good choice if you’re confident in their abilities and believe they can handle potential conflicts. However, be sure to discuss the role with them and consider naming a successor trustee. Alternatively, you can also consider naming co-trustees.

Trust company

A trust company, whether a bank or financial advisory firm, might be the right choice if any of these conditions apply to you: 

• Your trust is complex or involves substantial assets
• You want professional management and investment expertise
• You’re concerned about potential family conflicts

Trust companies can be particularly valuable for complex trusts, such as those with international property, complicated or contingent terms, and the need for long-term investing and portfolio management. Still, their services should justify the fees and align with your vision for the trust. 

Trust attorney

Selecting a trust attorney as your trustee could be beneficial if you meet any of these criteria: 

• Your trust involves complex legal issues
• You want someone with both legal and financial knowledge
• You’re looking for a professional who can provide personalized service, unlike an institution 
• You need someone who can work through legal and family dynamics 

A trust attorney offers specialized expertise and a more personalized approach than a large trust company, provided they have the availability. While lawyers are more expensive than appointing a family member, they also take significant obligations off their shoulders and reduce the likelihood of a direct conflict. 

Whichever option you choose, ensure your trustee understands your wishes and has the ability to fulfill their responsibilities. Above all else, you want to select someone who will honor your intentions and protect the interests of your beneficiaries. 

FAQs

What’s the difference between a trustee and an executor?

There are a few differences between a trustee and an executor. A trustee manages assets held in a trust, potentially for years. An executor administers a deceased person’s estate per the will’s instructions and pays off their debts. Executors’ duties are typically short-term and end after probate, whereas trustees’ duties continue as long as the trust exists. 

Is a trustee the same legal title as a beneficiary?

No, a trustee and a beneficiary are different. A trustee manages the trust and its assets, while a beneficiary benefits from it. A trustee can also be a beneficiary, but they must act impartially and separate their responsibilities as trustees from their best interest.

What are the risks of being a trustee?

Trustees face potential legal and financial consequences if they mismanage the trust. Notable risks include breaching fiduciary duty, making poor decisions, or failing to follow the trust’s terms. Personal conflicts with beneficiaries and the necessary time commitment are also significant considerations. 

Can trustees remove beneficiaries?

Generally, trustees can’t remove beneficiaries unless the trust explicitly gives them this authority. Otherwise, the terms of the trust and relevant state laws allow the addition or removal of beneficiaries, meaning only the grantor or a court can make such changes. 

How does a trustee get paid? 

A trustee is entitled to reasonable compensation as specified in the trust document or as determined by state law, whether that’s an hourly rate, a flat fee, or a percentage of the trust assets. For a ballpark estimate, a reasonable rate is about one percent of the value of the estate. 

What is the 65-day rule?

Trustees must follow the distribution rules set up by the trust, but the IRS has a 65-day rule that allows a trustee to make additional distributions within the first 65 days of a new year and have it count for the prior tax year. This is sometimes necessary if there is extra income that was not distributed within the prior tax year.

Planning ahead for the benefit of your estate

Trustees are key to the successful implementation of trusts. Because the entire management and implementation of the trust rests with the trustee, it is important to choose a trustee wisely.

Trustee selection is just one aspect of establishing a personal estate plan, which also may include creating a last will, a living will, and powers of attorney.