When someone creates a trust, the trustee becomes responsible for managing assets and distributing them according to trust terms. Trust administration involves significant duties and potential personal liability. Understanding trustee responsibilities helps trustees fulfill their roles properly.
When Trust Administration Begins
For revocable living trusts, active administration typically begins when the grantor dies or becomes incapacitated. The successor trustee steps into the role and must manage and eventually distribute trust assets.
Irrevocable trusts may have ongoing administration during the grantor's lifetime, depending on their structure.
Core Fiduciary Duties
Trustees are fiduciaries—they must put beneficiaries' interests above their own. Fiduciary duties include the duty of loyalty (no self-dealing or conflicts of interest), duty of prudence (managing assets reasonably), duty of impartiality (treating beneficiaries fairly), and duty to inform (keeping beneficiaries reasonably informed).
Violating fiduciary duties can result in personal liability.
Initial Steps After Taking Over
New trustees should review the trust document thoroughly, identify and secure all trust assets, notify beneficiaries of their interest in the trust, obtain a taxpayer ID number for the trust, and set up proper record-keeping systems.
If the grantor died, you'll also need to coordinate with probate proceedings (if any) and handle the deceased's final affairs.
Investment Responsibilities
Trustees must invest trust assets prudently, following the prudent investor rule. This requires diversification, matching investments to trust purposes, and considering risk tolerance. You don't need to be an investment expert—delegating to professionals is acceptable and often advisable.
Document your investment decisions and rationale.
Record Keeping and Accounting
Maintain detailed records of all trust transactions—income received, expenses paid, investments made, and distributions to beneficiaries. Beneficiaries have the right to accountings, and courts may require them.
Formal accountings should show beginning assets, receipts, disbursements, and ending assets, usually categorized by principal and income.
Trust Distributions
Distribute assets according to trust terms. Some trusts specify exact distributions; others give trustees discretion. Discretionary distributions require exercising judgment about when and how much to distribute.
When making discretionary distributions, consider the beneficiary's needs, other resources available, and the trust's purposes. Document your reasoning.
Tax Obligations
Trusts have tax obligations. File annual trust income tax returns (Form 1041 for federal). Provide K-1s to beneficiaries showing their share of trust income. Pay estimated taxes if required.
Trust taxation is complex—consider working with a CPA or tax attorney.
Communicating With Beneficiaries
Keep beneficiaries reasonably informed about the trust. Provide regular accountings (many trusts require annual accountings). Respond to reasonable requests for information. Maintain professional relationships even when family dynamics are difficult.
Trustee Compensation
Trustees are entitled to reasonable compensation for their services. The trust document may specify compensation; otherwise, state law provides guidelines. Family member trustees sometimes waive compensation; professional trustees always charge fees.
When to Seek Help
Trustees aren't expected to be experts in everything. Delegating to professionals—attorneys, accountants, investment advisors—is appropriate and often required by prudent administration. Just ensure you're hiring qualified professionals and monitoring their work.
Liability and Protection
Trustees can be personally liable for breaches of fiduciary duty. Protect yourself by following trust terms, documenting decisions, maintaining proper records, and seeking professional advice when needed. Some trustees obtain trustee liability insurance.
Terminating the Trust
When trust purposes are fulfilled, distribute remaining assets and terminate the trust. Obtain releases from beneficiaries acknowledging they received their distributions. File final tax returns.
Getting Legal Help
Trust administration attorneys guide trustees through their responsibilities. They help with legal requirements, tax filings, and beneficiary disputes. Given the complexity and personal liability risk, professional guidance is often essential.