Role of the Trustee
If your will leaves assets to a trust for one or more beneficiaries, the executor will transfer those assets to the trustee for distribution to the beneficiaries and for continued management.
Depending upon the duration of the trust that you established, the trustee's duties can continue for a few years or many generations of your family.
The trustee is responsible for:
- Investing the trust assets
- Making distributions to the trust beneficiaries (both mandatory distributions and discretionary distributions)
- Preparing and filing fiduciary income tax returns
- Paying the income taxes
- Keeping trust records
When considering whether to make a distribution from the trust, the trustee consults with the beneficiaries about their individual needs, the needs of future beneficiaries, and what other assets may be available to the beneficiaries for their support.
The biggest decision to make in designating a trustee is whether to use a family member or a professional. Obviously, it is preferable to choose a trustee with whom the beneficiaries feel comfortable.
Family members as trustees: pros and cons
Many people choose family members to serve as trustees. They do not charge a fee and they generally have a personal stake in the trust's success. If the family member is competent to handle the financial matters involved, has the time and interest to do so, and if you are not afraid of family conflicts id one relative is named trustee, using a family member can be a good move for a small to medium sized trust. If you make a relative a trustee, be sure to consider who the successor will be in the event of death, incapacity, divorce, or other family strife.
Many individuals name co-trustees. For example, a spouse will typically be a co-trustee so that when one spouse dies, the other takes over with a successor co-trustee (individual or corporate).
Since no individual lives forever, a bank or trust company may be considered as a trustee, co-trustee, or successor trustee.
Most people reject the appointment of a corporate trustee (e.g. a bank or trust company) since they charge a fee for their service. While this is true, please keep in mind that utilizing only individual trustees (including family members) does not mean that the trust is fee-less. The individual trustee must engage someone to help invest the trust assets, to keep trust records, and to prepare income tax returns. Each of these engagements will require the payment of a fee.
As a result, individuals may be able to administer the trust for a fee that is less than what a corporate trustee would charge, but the individual will not be fee-less.
Often, individuals want to name the beneficiary of the trust as the trustee (if the beneficiary is an adult). Care should be taken in naming a beneficiary as the trustee - especially as the sole trustee - since distributions from the trust are often limited for tax reasons.
Finally, we encourage individuals to name their children as a co-trustee (not the sole trustee) of a trust for the child's benefit when the child attains 18, 21, 25, etc. years of age. This gives the child a good education on the investments of assets, the filing of tax returns, and the payment of taxes. If the child is a co-trustee with an individual or corporate trustee, the trustees will meet regularly to discuss the investment strategy for the trust and review current investment holdings.