Gifts + Estate Planning

How to Be An Effective Trustee

BY Tia Lee | CFP®, CTFA, Director of Wealth Planning | Aug 15, 2022

What is a Trust?

A trust is a legal relationship between the Settlor (the person that creates the trust), the trustee (the person responsible for managing the trust), and the beneficiary (the person or persons that benefit from the trust).  A trust can be created during a person’s life, referred to as a living trust, or in a last will and testament at death.  The trust document outlines who will be the trustee and beneficiary.

Being named trustee is an honor and indicates someone believes you have the skills to carry out their wishes.  If you find yourself named as trustee, your mission, if you choose to accept it, is to follow the terms of the document, federal and state trust laws, and IRS rules.  How hard can that be?  Let’s dig a little deeper.

What are the duties of a Trustee?

The trust document is the road map of what the settlor wants the trustee to do, so understanding the trust terms is job one.  In addition to understanding the trust document, our legal system has specific laws that outline the trustee’s duties or legal obligations to the beneficiary.  There are four broad categories of duties listed below:

  • Duty of care- means you manage the assets prudently
  • Duty of loyalty – means your decisions are in the best interest of the beneficiary and only the beneficiary
  • Duty of impartiality- means your investment and distribution decisions consider all beneficiaries.
  • Duty to inform- means you provide the beneficiaries with the information they need to protect their interests.

The trustee is also responsible for filing annual income tax returns.  This responsibility falls under the duties above, but I believe it merits a special mention.  A trustee is personally liable if they fail in any of these areas.  For some individuals, the responsibilities can be mentally and emotionally taxing, but there are best practices to make the job manageable.

Trustee’s Best Practices

Chances are you were appointed as the trustee because of your position in or relationship to the family, not because you are an experienced trustee.  Here are four best practices to help you be effective.

  1. Assemble experts to be on your team

You don’t have to be an expert.  Professional trustees have trust and estate attorneys, tax departments, and portfolio managers on staff.  You can assemble experts in these fields to be on your team.  With the right team members in place, you should be able to fulfill your trustee duties.

                Your team should include:

  • An experienced estate planning attorney.  The attorney that drafted the trust document should be your first choice.  They will help you understand the trust terms, navigate sticky situations with the beneficiary and keep you up-to-date on legal matters.
  • A CPA with trust income tax experience.  They will prepare the annual tax returns and help your investment professional manage the assets tax efficiently.
  • An experienced investment manager.  They will create an investment strategy aligned with the trust’s purpose.  Many investment professionals can also provide the beneficiary with reports that fulfill the trustee’s duty to inform.  You fulfill your duty of care by choosing a professional that manages assets under a fiduciary standard of care.  Registered investment advisors and trust departments operate under a fiduciary standard.
  • Document, Document, Document

Documentation is the area that gets most individuals and some professional trustees in trouble.  You could be the world’s best trustee, but you need documentation if you are ever asked to prove it.  This means documenting regular meetings with the beneficiary and team members, retaining correspondence with the beneficiary and team members, and keeping records regarding your discretionary distributions decisions.  Then there is the ever annoying income tax record keeping.  Let’s stop there.  That is enough for now.  

  • Facilitate a productive relationship with all beneficiaries

Most conflict comes from the beneficiary’s unmet expectations, and regular communication can help the trustee set reasonable expectations.  The trustee should be open to and encourage beneficiary questions.  When the trustee follows up with clear, timely responses to the beneficiary inquiries, they build a lasting bond.  I am a firm believer the best defense against litigation is communication.

  • Educate the beneficiary

The trustee sometimes falls into the proxy parent role, which rarely ends well.  A better position is that of an educator.  Trusts are complicated with lots of rules which can frustrate beneficiaries.  They also offer tremendous opportunities to support family members and build generational wealth.  Most trustee-beneficiary relationships flourish when the trustee focuses on the settlor’s intentions and education of the beneficiaries.

Spectrum Wealth Management understands that many people want a familiar face to play a key role in managing their family’s financial future.  For this reason, we offer Advisor to the Trustee services to help nonprofessional trustees manage their duties and build strong relationships with trust beneficiaries.

Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.