If you've ever been involved with a trust, you may have wondered, "What does a trustee do?"
First, a trust is a document that takes specific assets and puts them under the control and ownership of the legal entity of the trust. The trustee is a person or entity (like a bank or a company) who manages property or assets that have been placed in a trust. The trustee is the legal owner of the property, but the trustee owns it for the benefit of the trust.
The trustee's role is to handle both the daily and long-term management of the assets and distribute them according to the terms of the trust.
Trustee Fiduciary Responsibility
A trustee can manage a trust set up by an individual—such as a living trust created during a person's lifetime—or an estate—known as an estate trust. A trustee also can manage a trust that is set up on behalf of a foundation (a private tax-exempt organization that provides funding for charities).
No matter the type of trust, a trustee has what is called a fiduciary responsibility. This means that the trustee must use the utmost care and loyalty when managing the trust and cannot use it for their own personal gain. The trustee is legally required to work in the best interests of the trust and its beneficiaries. The accounting for trust funds must be accurate, and the trustee must use prudent investment standards, which means investing the money responsibly.
A trustee's role is to make sure the trust funds are available for the purpose they're intended—to be given to beneficiaries, in the case of an estate trust, or to be given to charities, in the case of a foundation trust.
The trustee is required to follow the trust terms, managing and keeping the trust assets and then distributing 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. The trustee must keep and protect the assets until distribution and then distribute them on the date required.
When a trustee is appointed for a foundation's trust, they must follow the foundation and trust terms, which have a mission to distribute funds to charitable organizations.
Trust Distributions 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.
Taxes and Fees
Another responsibility of the trustee is to handle taxes for the trust. If an estate trust earns income, the trustee must file a U.S. Income Tax Return for Estates and Trusts (Form 1041) with the IRS and pay any taxes due from the trust.
Because a trustee for an estate trust is doing actual work in managing and protecting the trust, they are entitled to pay themselves an estate trustee fee for their work. The trust instrument usually says the trustee is entitled to pay themselves reasonable compensation, although it might specify a set fee. A standard rate is one percent of the value of the estate. Foundation trustees also can be paid, but in fact, only about one-quarter of all U.S. foundation trustees are paid.
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.