What is a Trustee?
A trustee is a person or company responsible for managing the benefits of a trust for the benefit of the trust’s beneficiary (or beneficiaries).
When someone establishes a trust, they provide funds for the benefit of a third party, whether it be a relative, friend, charity, or someone else. A person or entity benefiting from a trust is called a beneficiary. The trustee is the individual in charge of managing funds on a beneficiary’s behalf. The trustee’s goal is to handle the funds in the best interests of the fund’s recipient. Trustees can be individuals or groups. For example, a law firm or a bank may serve as a trustee. The specific duties of the trustee vary based on the structure of the trust.
Imagine two parents want to provide for the care of a disabled child after they pass away, but they know that the child cannot handle his or her finances. The parents in this example use their will to establish a trust, naming their child as the beneficiary and a trusted aunt as the trustee. This designation means the aunt has control over the money in the fund but cannot legally use the money for her own benefit — She must use the money to care for the child. The money, in this case, will be used for the child’s care, but the child does not control it. The trustee does.
A trustee is like a trusted family member holding a key to your safe deposit box…
You’re not giving them the contents of the box. They have the key so that if you’re incapacitated — or deceased — they can take control of the valuable things inside and see that they are handled with care.
A trustee manages assets for another person’s or entity's benefit. In the case of a trust, the trustee manages all of the available assets and works with the beneficiary to ensure the funds are used for the beneficiary’s benefit, within the trust’s stated rules. Trustees have a fiduciary duty (a requirement to act in the best interest of the beneficiary) and cannot work for their own benefit.
Trustees can be individuals or entities, such as a law firm or a bank. The person establishing a trust is in charge of naming the trustee (in documents that form the trust) and outlining its rules. Groups like charities or retirement plans, like pensions, can also appoint trustees in some cases. In many bankruptcy cases, the government will appoint a bankruptcy trustee to make certain decisions about the assets of the person going through bankruptcy.
Trustees are responsible for managing the assets of a trust and following the rules set down during the creation of the trust. What that means is that the trustee’s role will vary from trust to trust. For example, a trustee of a trust that holds real estate will have very different requirements and tasks from a trustee of a trust that holds stocks, bonds, and cash.
A trustee who works with real estate may have to deal with managing the real estate, maintaining it, finding renters, collecting rent, and so on. A trustee who manages a trust that holds a portfolio of stocks and bonds needs to pay required taxes, and work with the brokerage companies holding the trust’s assets.
Because trusts can hold all sorts of assets, the precise role and duties of a trustee can be hard to name. What is true for almost all trustees is that they have a fiduciary duty to the trust’s beneficiary — Even if the beneficiary wants the trustee to do something, the trustee must only agree if it is in the beneficiary’s best interest. In this way, they work like many financial advisors, helping the recipient manage their money.
For example, if a parent leaves money in a trust for a child and that child wants to use the funds to buy an expensive luxury car, the trustee may have to deny the request if buying the car isn’t truly in the beneficiary’s best interest. The trustee relies on the rules of the trust and their own experience and judgment to make sure their actions concerning the management of the trust benefit the beneficiary.
Trustees are usually appointed in the documents that establish the trust. If someone creates a trust in their will, the will would typically specify the assets that pass into the trust and the person who should be named the trustee.
In some cases, the same trust can have multiple trustees. Having two or more trustees forces checks and balances on each individual trustee’s powers. It’s also useful if, for example, two parents serve as the trustee for a trust benefiting their child.
In some scenarios, a grantor might make himself or herself the trustee of the trust that they established. This is allowed in many cases — so long as the grantor/trustee is not also the named beneficiary. When the grantor is no longer capable of managing the trust, the role of trustee can transfer to someone else.
For example, an older person may want to form a charitable trust to benefit their favorite charities and philanthropic organizations. When they pass away, their will can name the person who should replace them as the trustee to carry on their goal of giving. The trustee then becomes responsible for managing the trust’s assets and determining the charities that should receive donations.
Managing a trust can be easy if the trust is small or doesn’t hold complicated assets. It can also be incredibly complicated. Imagine having to manage a trust that owns real estate in different countries and the amount of paperwork that would be involved.
Because being a trustee can be hard work, trustees can be compensated for their work — But they’re not always. Whether they’re compensated or not, and how much they receive, is based on the documents that established the trust.
If the grantor (or the settlor) of the trust specified the amount that the trustee should be paid, the trustee receives that amount. In some cases, the trust documents specify that the trustee should accept a “reasonable fee” for their services. What qualifies as a reasonable fee varies with the complexity of the trust.
Many states offer guidelines and case law that you can use to determine a reasonable level of compensation. From there, the trustee should track the hours that they work to manage the trust and use that to determine the compensation they’re owed.
In some cases, even if the trust specifies the trustee’s pay, the trustee can petition to increase or reduce their compensation. For example, Massachusetts allows changes to trustee compensation if the trustee’s duties change substantially or if the pay specified in the trust is deemed unreasonable.
The beneficiary of a trust is the person who benefits from the assets in the fund. The trustee is the person in charge of managing the assets on behalf of the beneficiary. This means that the beneficiary who receives the benefits of the trust does not have full control over the money or other assets in it.
People establish trusts that keep assets out of the beneficiary’s control for many reasons. One is parents using trusts to give money to their children, who may not be emotionally or mentally prepared to manage large sums of money.
Another example is a spendthrift trust, which is designed for people who have trouble controlling their spending. The person who can’t control their spending benefits from the funds in the trust, but the trustee can act as a check against unnecessary expenditures.
Estate planning is another popular reason for establishing a trust. It gives the trustee a way to relinquish ownership of their funds to reduce their estate taxes while making sure the beneficiary does not have free access to the trust assets. Trusts that are established while the trustee is alive are also known as living trusts.
Executors help to manage the estate of a person who passes away. Trustees manage trusts that people establish either while alive or through their will.
In many ways, the role of an executor and trustee are similar. Both manage assets that aren’t necessarily theirs for the benefit of another person or group of people. The most significant difference is that executors' primary responsibilities are dealing with a decedent’s estate according to local law and following out the requests set out in a will. The trustee’s primary responsibilities are following the terms set out in the trust documents and working for the benefit of the beneficiary.
In some cases, the executor of a will can also be the trustee of a trust formed by the will. One way to think about it is to remember that a trust can be formed at any time, so you can name someone as a trustee any time you establish a trust. Executors only come into play when someone passes away, and their descendants are dealing with their estate.
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