The honor of being named a Trustee in a trust created by a family member or close friend may wear off in minutes, but the responsibility may last a lifetime, so before you accept the appointment or agree to serve as a Trustee or Co-Trustee, you should carefully examine what the position requires and what the unique circumstances may be. The ideal individual Trustee would be equal parts trust lawyer, tax CPA, Chartered Financial Advisor, bookkeeper and psychologist, with the wisdom of Solomon and the patience of Job. You could find this list daunting, but some preparation and professional advice may help you fill the bill.
First, the Trustee of an irrevocable trust, whether created under will or by agreement, should become familiar with the terms of the trust and the objectives of the Donor creating the trust. There are many ways a Trust can be drafted. A beneficiary may be entitled to all income by right, or the distribution of both income and principal among one or more beneficiaries may be entirely in the Trustee’s discretion, or the Donor of the Trust may have included directions to guide the Trustee. The Trustee may need legal guidance to interpret the document as different situations arise or to reconcile competing interests.
Trusts usually benefit a variety of family members, often over two or more generations. The Trustee owes a duty of impartiality to all beneficiaries, so may frequently have to exercise sound judgment to balance competing interests in order to properly carry out the terms of the trust. The Trustee must know all the family members and their various needs and concerns. In a real sense, the Trustee may be considered a surrogate parent (or spouse) for financial matters.
Beneficiaries are entitled to know all the trust transactions that occur in the course of administration of the trust, so an accurate accounting must be distributed to them, usually at least annually. For some trusts, a periodic accounting to the probate court may also be necessary.
An irrevocable trust is often a separate taxpaying entity and must file a fiduciary income tax return (Form1041) each year. While the tax rates are the same for trusts as for individuals, the brackets are compressed, so trusts with as little as $11,000 in retained income will pay ordinary income tax at the highest bracket of 35%. The Trustee may have to consider tax planning every year, given the nature of trust accounting and taxation.
Investing for a trust involves far more responsibility than investing for yourself, regardless of your own experience. The Trustee is a fiduciary and must ordinarily adhere to the Prudent Investor standard, which essentially adopts modern portfolio theory, focusing on total return. Thus, the Trustee must diversify between growth and income investments as well as asset classes, and balance risk and reward for the entire portfolio. Many Trustees will delegate this task to an investment advisor, as agent, but will still be responsible to regularly review the portfolio and all the transactions. Unfortunately trust beneficiaries can become unhappy about the management of their trust from any number of perspectives and can seek legal recourse. The best defenses are to know your duties, carry them out, and communicate often and clearly with the beneficiaries, documenting everything. When difficult questions or situations arise, seek counsel.
Costs are always a concern to the beneficiaries and they will be for you. Some individual Trustees take a Trustee’s fee and others do not. All the professional advisors to the Trustee will expect to be paid. Nonetheless, the cost of good advice and qualified representation may be greatly outweighed by the cost of mistakes and neglect. You, as Trustee, must coordinate their efforts.
The task of being a Trustee can be rewarding or onerous. Look before you leap! If someone asks if you would be willing to serve at some point in the future you should condition your agreement to serve on first obtaining a copy of the trust and having an experienced trust and estates attorney review it. If the position is imminent (usually triggered by a death or resignation) it is even more important to have the trust and its assets reviewed before accepting the position. You should be certain you have the right to resign and that your actions will be indemnified. The trust should also contain a clear and simple process for appointing a replacement Trustee (for you, in the event of your resignation) without the expense and delay of going to court.