A Trustee’s Role, Responsibilities, and Authority

Gabriel Katzner - March 8, 2024 - Trust Administration

If you establish a revocable living trust, you will probably serve as your own trustee. However, you will need a successor trustee to manage your trust upon your death. A trustee is the person or firm you choose to manage and administer your trust according to your trust instructions and state law.

A grantor gives the trustee the legal title to an asset or group of assets to hold in the trust for the benefit of the trust’s beneficiaries.

A trustee is held to a higher standard of care because they owe certain duties to the beneficiaries. Since they are considered fiduciaries, trustees must protect the trust’s investments and act in the best interests of the beneficiaries according to the trust’s terms.

Trustees have a legal obligation to fulfill their role in accordance with the law. They can be held liable if they mismanage trust assets or if they breach their fiduciary duties.

Trustees are responsible for preparing and maintaining accurate accounting records for the trust, keeping detailed records of all transactions, distributions, and results of decisions they make while acting as trustees. They must also prepare any tax-related forms for the trust. These records should be transparent to the beneficiaries and must be kept up-to-date.

To meet the financial needs of the trust, trustees may also need to liquidate or sell some of the trust’s accounts or property.

Trustees may need to liquidate trust assets

In order to fulfill the instructions in the trust documents, a trustee may need to sell trust assets such as stocks, bonds, or real estate to get the necessary funds to meet the financial requirements for the trust.

Examples of reasons a trustee may need to sell trust assets include:

  • Paying state and federal taxes, mortgage payments, and insurance premiums.
  • Covering the fees for trust administration, such as legal or accounting services.
  • Making distributions to beneficiaries.
  • Enabling trustees to take advantage of market opportunities or mitigate unexpected financial challenges.

Decisions on when to sell and how much to sell an asset for should be based on standard investor principles and be in the best interests of the beneficiaries. Typically, trustees do not need permission from the beneficiaries to sell trust assets, but they may seek approval to reduce potential litigation if the beneficiaries do not agree with their decisions.

Trustees cannot sell trust assets for their own benefit unless the trustee is also a trust beneficiary.

Trustees may need to make investments

Factors such as changing economic conditions, increased financial risk, or changes in a beneficiary’s circumstances may require the trustee to modify the trust’s investment strategy.

As the economy changes over time, the trustee must evaluate the impact of these changes on the trust investments by following market trends and the performance of the trust assets in the market. If the current investment strategy no longer meets the needs of the trust, the trustee has a fiduciary responsibility to make adjustments.

To maximize investments and minimize financial risk, a trustee may need to periodically rebalance the trust portfolio to ensure a more balanced level of risk versus return or to prioritize long-term growth.

The trust documents may instruct the trustee to make changes in the trust investment strategy to meet the needs of a beneficiary. For example, if a beneficiary has increased education or healthcare expenses that the trust is designed to cover, the trustee may need to liquidate trust assets to make the necessary payments.

Trustees make distributions to beneficiaries

When a grantor establishes and funds a trust, they must write precise instructions that specify how the trustee will distribute money or property to the beneficiaries. Since the trustee is required to follow these instructions exactly, it is important to anticipate any extenuating circumstances that may impact the amount and timing of a distribution. Grantors will commonly use timelines such as the beneficiary’s age or events such as marriage or graduation to trigger a distribution.

When these conditions are met, the trustee is obligated to make the distribution, unless it is illegal or against public policy to do so.

Grantors can control the sale of a trust’s assets

As a grantor, you can control the sale of the trust’s assets by providing guidelines in the trust instructions when establishing the trust. This can be important if you have sentimental assets or ones that you would like to preserve for future generations.

Restricting or placing limitations on the sale of trust assets can be important, but it is equally important to give the trustee the flexibility they need to manage the trust appropriately. If the trust instructions tie the hands of the trustee too much, they will be unable to respond to changing market conditions or if there are changes in tax laws, economic conditions, or family dynamics.

Communication is key when selling trust assets

The trustee should, and in most cases is required to, maintain open communication about the trust’s current status and any decisions they have made with the beneficiaries and any co-trustees. Trustees can better manage expectations and answer questions if they keep detailed records. Thorough and accurate record-keeping can demonstrate compliance with trust terms and laws and can be used to protect the trustee from litigation.

Your estate attorney can help you create an estate plan. If your plans include establishing a trust, your estate attorney can craft a comprehensive trust agreement that ensures that the trust is in compliance with applicable laws and that it protects the interests of the trust and its beneficiaries.

If you are a trustee and are unsure about the trust terms relating to the management or sale of assets in the trust, we can assist you in understanding your role and responsibilities.

If you need help with drafting trust agreements that strike a balance between preserving valuable assets and granting the trustee the flexibility they need to manage the trust successfully, contact us and schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.

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