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 trustee can be a huge honor--but it's also a major responsibility. The job entails a wide array of complex duties, and trustees are both ethically and legally required to effectively execute those functions. If they don't, they can face significant liability.
Before agreeing to accept the position, you should thoroughly understand exactly what your role as trustee requires. 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 all trust assets. Then these assets must be inventoried and valued. 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’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 the estate is extensive, gathering those assets can be a major undertaking. So if you’re serving as a trustee, contact us for help reviewing the trust and determining 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 that regularly scheduled payments are promptly paid. These include things like mortgages, property taxes, and insurance. If trustees do this, they 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. However, since the estate tax exemption recently doubled to approximately $11.2 million, very few estates will be impacted. But keep in mind, this new exemption is only valid through 2025, when it will return to $5.6 million if not extended.
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 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 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’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. And if you need help understanding what the trust says, don’t hesitate to reach out to us for support.
Clear communication with beneficiaries
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 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 is taxed on income earned by the trust.
Entitled to reasonable fees for services rendered
Given such extensive duties and responsibilities, trustees are normally 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’s 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’s “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’s 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, 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.
In either case, you can rely on us 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.