Last week, I shared the first part of this series explaining the powers and duties that come with serving as trustee. Here in part two, I discuss the rest of a trustee’s core responsibilities.
Being asked to serve as trustee can be a huge honor—but it’s also a major responsibility. Indeed, the job entails a wide array of complex duties, and trustees are both ethically and legally required to effectively execute those functions or face significant liability.
To this end, you should thoroughly understand exactly what your role as trustee requires before agreeing to accept the position. Last week, I highlighted three of a trustee’s primary functions, and here we add on to that list, starting with one of the most labor-intensive of all duties—managing and accounting for a trust’s assets.
Manage and account for trust assets
Before a trustee can sell, invest, or make distributions to beneficiaries, he or she must take control of, inventory, and value all trust assets. Ideally, this happens as soon as possible after the death of the grantor in the privacy of a lawyer’s office. If assets are properly titled in the name of the trust, there’s no need for court involvement—unless a beneficiary or creditor forces it with a claim against the trust.
In the best case, the person who created the trust and was the original trustee—usually the grantor—will have maintained an up-to-date inventory of all trust assets. If not, gathering those assets can be a major undertaking, so contact a trusted legal advisor to help review the trust and determine the best course of action.
The value of some assets, like financial accounts, securities, and insurance, will be easy to determine. But with other property—real estate, vehicles, businesses, artwork, furniture, and jewelry—a trustee may need to hire a professional appraiser to determine those values. With the assets secured and valued, the trustee must then identify and pay the grantor’s creditors and other debts.
Be careful about ensuring regularly scheduled payments, such as mortgages, property taxes, and insurance, are promptly paid, or trustees risk personal liability for late payments and/or other penalties. Trustees are also required to prepare and file the grantor’s tax returns. This includes the final income tax return for the year of the decedent’s death and any prior years’ returns on extension, along with filing an annual return during each subsequent year the trust remains open. For high-value estates, trustees may also have to file a federal estate tax return.
During this entire process, it’s vital that trustees keep strict accounting of every transaction (bills paid and income received) made using the trust’s assets, no matter how small. In fact, if a trustee fails to fully pay the trust’s debts, taxes, and expenses before distributing assets to beneficiaries, he or she can be held personally liable if there are insufficient assets to pay for outstanding estate expenses.
Given this, it’s crucial to work with a trusted legal advisor and a qualified accountant to properly account for and pay all trust-related expenses and debts as well as ensure all tax returns are filed on behalf of the trust.
Personally administer the trust
While trustees are nearly always permitted to hire outside advisers like lawyers, accountants, and even professional trust administration services, trustees must personally communicate with those advisors and be the one to make all final decisions on trust matters.
So even though trustees can delegate much of the underlying legwork, they’re still required to serve as the lead decision maker. What’s more, trustees are ultimately responsible if any mistakes are made. In the end, a trustee’s full range of powers, duties, and discretion will depend on the terms of the trust, so always refer to the trust for specific instructions when delegating tasks and/or making tough decisions.
Clear communication with beneficiaries
To keep them informed and updated as to the status of the trust, trustees are required to provide beneficiaries with regular information and reports related to trust matters. Typically, trustees provide such information on an annual basis, but again, the level of communication depends on the trust’s terms.
In general, trustees should provide annual status reports with complete and accurate accounting of the trust’s assets. Moreover, trustees must permit beneficiaries to personally inspect trust property, accounts, and any related documents if requested. Additionally, trustees must provide an annual tax return statement (Schedule K-1) to each beneficiary who’s taxed on income earned by the trust.
Entitled to reasonable fees for services rendered
Given such extensive duties and responsibilities, trustees are almost always entitled to receive reasonable fees for their services. Determining what’s “reasonable,” however, can be challenging. Entities like accounting firms, lawyers, banks, and trust administration companies typically charge a percentage of the funds under their management or a set fee for their time. In the end, what’s reasonable is based on the amount of work involved, the level of funds in the trust, the trust’s other expenses, and whether the trustee was chosen for their professional experience.
Since the trustee’s duties are comprehensive, complex, and foreign to most people, if you’ve been asked to serve as trustee, it’s critical you have a professional advisor who can give you a clear and accurate assessment of what’s required of you before you accept the position. And if you do choose to serve as trustee, it’s even more important that you have someone who can guide you step-by-step throughout the entire process.
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