Last week, we shared the first part of this series explaining the powers and duties that come with serving as trustee. Here in part two, we discuss the rest of a trustee’s core responsibilities.
Being asked to serve as a trustee can be a huge honor—but it is 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, we highlighted three of a trustee’s primary functions, and here we continue with 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. As long as assets are titled in the name of the trust, there is 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. And, if the estate is extensive, gathering those assets can be a major undertaking.
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. After the assets are 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 income and estate 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 have to file a federal estate tax return or possibly a state estate tax return. However, Trump’s new tax law of 2017 doubled the estate tax exemption to $11.2 million, so very few estates will be impacted. But, keep in mind, this new exemption is only valid through 2025, at which point it is currently scheduled to return to $5.6 million.
During this entire process, it is 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 Family Business Lawyer® 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. After all, the grantor chose you as trustee because they value your judgment.
So even though trustees can delegate much of the underlying legwork, they are still required to serve as the lead decision maker. Further, 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. And if you need help understanding what the trust says, do not hesitate to reach out to us for support.
- Clearly communicate with beneficiaries
A trustee must also keep beneficiaries informed and updated as to the status of a trust, including preparing 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 related documents when requested. Additionally, trustees must provide an annual tax return statement (Schedule K-1) to each beneficiary who is taxed on income earned by the trust.
- Entitled to reasonable fees for services rendered
Given such extensive duties and responsibilities, trustees are entitled to receive reasonable fees for their services. Oftentimes, family members and close friends named as trustee choose not to accept any payment beyond what is required to cover trust expenses, but this all depends on the trustee’s particular situation and relationship with the grantor and/or beneficiaries.
What’s more, determining what is “reasonable,” can itself 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 is reasonable is based on the amount of work involved, the level of funds in the trust, the trust’s other expenses, and whether or not the trustee was chosen for their professional experience. Consult with us if you need guidance about what would be considered reasonable in your specific circumstance.
Since the trustee’s duties are comprehensive, complex, and foreign to most people, if you have been asked to serve as a trustee, it is critical that you have a professional advisor who can give you a clear and accurate assessment of what is required of you before you accept the position. And if you do choose to serve as trustee, it is even more important that you have someone who can guide you step-by-step throughout the entire process.
In either case, you can rely on us as your Family Business Lawyer® to offer the most accurate advice, guidance, and assistance with all trustee duties and functions. We can ensure that you’ll effectively fulfill all of the grantor’s final wishes—and do so in the most efficient and risk-free manner possible. Contact us today to learn more.
This article is a service of Pantea I. Fozouni, Family Business Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.