One of the most common additions to a well thought out and comprehensive estate plan is a trust. Although once used primarily by wealthy families as a way to pass down the family wealth without paying taxes on the transfer of that wealth, trusts are now commonly used by the average person. In fact, trusts have evolved to the point where there is a specialized trust for almost every estate planning goal or objective. One thing all trusts have in common though is the need to appoint a Trustee to oversee the administration of the trust. If you have been appointed as the Trustee of a trust, consider the following five things you need to know about trust administration.
What Is “Trust Administration?”
Regardless of the type of trust created by the Settlor (the person who establishes a trust), a Trustee must be appointed. The Trustee’s job is to oversee the administration of the trust. Trust administration encompasses a number of duties and responsibilities; however, in general it refers to the Trustee’s duty to manage and invest the trust assets and to follow the terms of the trust with regard to the distribution of those assets to the beneficiaries named in the trust. If you are the Trustee of a trust, pay careful attention to the following five things you need to know about administering a trust:
- A Trustee has a fiduciary duty – A fiduciary duty is a legal duty to act solely in another party’s interests. The duties of a fiduciary include loyalty and reasonable care of the assets within custody. All of the fiduciary’s actions are performed for the advantage of the beneficiary. Fiduciaries may not profit from their relationship with their principals unless they have the principals’ express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients. In short, everything you do with regard to administering the trust must be for the benefit of the beneficiaries.
- A Trustee must use the “prudent investor standard” at all times – as the Trustee of a trust you will likely be required to invest assets owned by the trust. If so, you must use the “prudent investor standard” when doing so. The “prudent investor standard” is a guideline that requires a fiduciary to invest trust assets as if they were his own. The managing investor should consider the needs of the trust’s beneficiaries, the provision of regular income, and the preservation of trust assets and should avoid investments that are excessively risky. The prudent investor rule states that the decision-making process must follow certain guidelines.
- A Trustee must act in the best interest of both current and future beneficiaries – sometimes a trust contains both current and future beneficiaries. For example, a charitable lead or charitable remainder trust allows the Settlor to provide for a charity for a specific period of time and then disburse the remainder of the trust assets to a non-charitable beneficiary or vice versa. When this is the case, trust administration requires that you consider what is in the best interest of both the charitable beneficiary and the non-charitable beneficiary.
- A Trustee can be held personally liable – Trustees are often confused or misled about their personal liability while administering a trust. Contrary to popular belief, a Trustee’s liability is not necessarily limited to the trust assets. Trustees act personally. This means that a trustee is personally liable for any debt incurred when acting as a trustee, regardless of whether the trustee can benefit personally from the trust.
- A trust is a separate legal entity – this means that the trust can own property, buy and sell assets, and – most importantly – owes taxes. As the Trustee of a trust, one of your most important responsibilities when administering the trust is to make sure that the trust taxes are paid.
If you find yourself in the position of administering a trust for the first time, it is in your best interest to consult with an experienced estate planning attorney to ensure that you not make costly mistakes.
For additional information, please join us for an upcoming free seminar. If you have additional questions or concerns regarding trust administration, contact the experienced New York estate planning attorneys at The Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.