Trustees: Understanding Their Role in Estate Planning

What is a trustee and how is a trust defined? How much do you need to know about estate planning – and which category do you fall under: trustor vs. trustee, or successor? As you might imagine, understanding the part that a trustee plays in overseeing a trust is important – and critical in estate planning.

Bearing this in mind – and that estate planning is an activity that everyone (not just high-net-worth individuals) should consider – it pays to know what a trustee is and how they can help. Here, we’ll discuss in greater depth what a trustee does to ensure that your assets are distributed according to your wishes.

What Is A Trust?

Think of a trust as a form of legal arrangement under which a person’s financial, physical, and intellectual property assets can be designated to be distributed to certain beneficiaries. When you create a trust you’ll effectively specify that your assets will go to certain individuals or entities. Likewise, your assets will be placed into the trust and under the oversight of a third-party (the trustee). The trustee is effectively authorized and tasked with administering these assets and their ultimate use or distribution, per the trust creator’s wishes.

A few points to note here:

• Trusts are not just for rich folks. A trust can help you better manage and more cost-effectively dispose of various financial assets of all valuations.
• Trusts create fiduciary relationships that involve three parties: a trustor (who creates the trust), a trustee (who administers the trust), and a beneficiary (who benefits as a recipient of assets controlled by the trust).
• There are six categories of trusts that you can opt to create: living, testamentary, funded, unfunded, revocable, and irrevocable.
• The purpose and goal of a trust is to safeguard the way in which your assets are distributed to a single individual or multiple beneficiaries.

Diving Deeper: What Is A Trustee?

Effectively the legal owner of a trust’s assets, a trustee oversees their use and distribution. For example, a trustee may be asked to weigh in on topics like where the trust’s money will be invested, if someone can withdraw funds or use the funds in a certain way.

Any individual or organization (corporation, association, etc.) who holds legal title to the trust can serve as a trustee. Under the terms of a trust, the trustor (who initially owns assets and property) grants the trustee the right to hold the title to these assets, with an eye towards responsibly managing them for the benefit of their designated beneficiaries. Trusts are commonly created as a way to create legal protections for a trustor’s assets, and make sure that these assets are properly disposed of in the event of their death or indisposition. A trustee effectively serves as a vehicle for executing the trustor’s wishes. Bearing this in mind, it’s common for friends, family members, lawyers, and even trust companies to play the role of trustee at times.

A trustee’s role in administering a trust may also be defined both by the trustor and types of assets that they are administering. For example: When a trust contains several real estate holdings, the trustee will often be tasked with ensuring that all mortgages are paid, maintenance on properties is upheld, and that annual property taxes are handled properly. Trustees may also find themselves having to manage and oversee significant holdings such as investment and financial accounts as well.

Powers and responsibilities held by a trustee, as well as potential liabilities and qualifications, will be defined by the trustor when the trust is made. Benefits of being a trustee often involve some form of payment (defined as reasonable compensation) and some latitude to manage the trust in such a way as to provide maximum benefit for beneficiaries. However, being a trustee often comes with significant responsibilities, and may come with significant time commitments and decision-making needs attached.

Trustor Vs. Trustee: Understanding The Difference

For purposes of clarity, a trustor establishes a trust as part of their estate planning efforts and typically provides the assets contained within the trust. A trustee is the individual or organization who is then tasked with managing, overseeing, and handling the upkeep and maintenance of the trust. In some cases, the trustor and trustee can be the same person.

However, more often than not, a trustee is another party or entity who is given the responsibility to oversee a trust in the event that the trustor cannot. Appointing a trustee to help manage your assets is, for instance, a common practice when a parent wishes to leave significant financial assets to a minor child who may lack the knowledge and understanding needed to effectively manage them. Alternately, a trustee can help you care for your disabled dependents in the event that you yourself become indisposed at some future point.

Perhaps a simple way to think of the role of the trustee is as the administrator of the trust – and the representative of the trustor in the event that the trustor can’t be around to help manage things themselves. A trustee essentially serves as the trustor’s right-hand man or woman, and the person or organization whose role it is to help ensure that the trustor’s wishes are followed. As a result, a trustee holds significant responsibilities when it comes to the practice of estate planning. Noting this, it’s important to devote considerable care and thought to whom you wish to appoint as a trustee, given that they’re often responsible for children and loved ones’ ongoing welfare.

Again – you don’t have to be rich to benefit from forming a trust, and you don’t have to be wealthy to enjoy the upsides of naming a trustee to help oversee your affairs. A trustee basically serves as your stand-in when administering your assets. They’re the party that you’ll look to for assistance when it comes to overseeing the management of your trust and property for weeks, months, or years to come.

Be advised as well: All trustees will be given guidelines and responsibilities to follow. But they’re often afforded considerable legal latitude in how they go about doing so – and often serve as a day-to-day authority when it comes to interpreting and administering trust agreements. By way of illustration, if your trust provides money for the education of your child, it may be up to the trustee to decide if covered expenses include books and tuition only, or on-campus housing and semester abroad programs. So while trustees will perform routine maintenance such as filing tax returns and financial statements and are expected to stay in regular communication with trust beneficiaries, don’t forget. They’ll also have considerable decision-making power, especially in areas where the trust leaves clauses and stipulations open for debate and interpretation.

As a result, before establishing a trust and deciding whom you’ll appoint to be a trustee, it’s important to think through the particulars of your scenario and the terms of the trust agreement.

Successor Trustee: Why It’s Worth Considering One

A successor trustee stands second in the line to serve as a trustee and oversee your assets. In effect, if the initially-named trustee cannot or will not perform the duties with which they have been imbued, the successor trustee may have the opportunity to step in and replace them. It’s often important to name a successor trustee so you have multiple layers of backup in place as a safeguard that can help ensure the health of the trust (and your beneficiaries’ well-being) for decades to come.

Note that it’s not uncommon to see the individual who created a trust (again, the trustor), serve as the trustee of a trust for the duration of their lifetime until they pass away or until such time as they become incapacitated. Upon death or incapacitation, oversight of the trust then passes to the successor trustee, who can seamlessly step in to fill the void. Over time though, for personal or business reasons, don’t forget that even successor trustees may be unwilling or unable to serve in the role that you’ve designated for them as well. Meaning that, as before, you’ll want to have an alternate or two trustee(s) named as a backup just in case an unforeseen circumstance arises or something inadvertent happens.

Note that successor trustees are different from executors, whose roles are more specifically related to the execution of wills.

The Bottom Line: The Importance Of A Trustee

So in the end, what is a trustee, and what role do they serve in the practice of estate planning? Like we discussed, a trustee administers the assets of a trust with an eye towards supporting the health and well-being of various beneficiaries who stand to benefit from the trust. That means not only having to oversee and maintain assets held by the trust (investment accounts, savings, real estate properties, etc.) and file requisite forms and paperwork. It also means having to interpret trust terms, communicate with beneficiaries regularly, and think about how the assets of the trust will be disbursed or utilized.

A trustee effectively serves as a trustor’s eyes, ears, and boots on the ground when the trust creator can’t be there to stand in for the role of administrator themselves, often due to death or incapacitation. As a trusted advisor, it’s the trustee’s role (in exchange for reasonable fees or compensation) to make sure that the trust creator’s wishes are respected, and that assets are managed in a responsible fashion. In other words, individuals such as grandparents looking to leave an inheritance to their children, or parents hoping to ensure that elderly dependents or minors are well cared for in their absence will often look to a trustee’s help.

But again, a trustee enjoys significant powers and privileges, and – unless directed otherwise by the rules of the trust – may operate with a large degree of impunity. It’s up to you to think long, hard, and in-depth about what roles and responsibilities they should fulfill, how much latitude you’d like to give them, and who you trust to best represent your personal interests.

Interested in learning more about estate planning? Be sure to visit the Rocket HQ^SM Learning Center for more information about planning your future.'[