Over the years, I’ve become more and more a proponent of the use of trusts. I even wrote a book on the topic, The Baby Boomers Guide to Trusts: Your All-Purpose Estate Planning Tool. They can be used to avoid probate, save on taxes, and protect assets being passed to future generations. In addition, they often work better than durable powers of attorney for financial management in the event of incapacity.
One of the challenges of trusts, however, is finding an appropriate trustee. Many clients are reluctant to appoint professional trustees — banks, trust companies or attorneys — due both to the cost and the resulting loss of privacy and control. But they may not have family members or friends on whom they can rely to take on the role on a responsible, disinterested, and ongoing basis.
If you have been asked to serve as trustee, it’s a terrific vote of confidence in your abilities and judgment. It can be hard to say no, since the person asking you to serve needs your assistance. But before agreeing, consider what the role entails. Here’s a quick tutorial:
Paying Bills and Other Distributions
You will be responsible for making distributions to or on behalf of beneficiaries. You must start by reading the terms of the trust to understand the rules governing such payments. In deciding on distributions, you will need to balance both the current and future needs of beneficiaries and potentially the interests of multiple beneficiaries, both current and future.
Beneficiary Communication
You will need to communicate with beneficiaries to understand their situation and needs. It’s a good idea to schedule meetings, whether in person or by Zoom, at least annually. If you are responsible for a beneficiary’s well being, you should visit them at home to make sure you have an understanding of their circumstances.
Accounting
Your requirement to account to beneficiaries is governed both by state law and the terms of the trust. The Uniform Trust Law requires that you provide accounts to current beneficiaries. This can usually be satisfied by sending them a copy of year-end statements from the financial institutions in which trust assets are held, as well as a checkbook register or other account showing how distributions were made.
Make sure the trust does not include other accounting requirements or that you provide information to other individuals.
Investments
You will be responsible for investing trust assets “prudently.” This means not taking undue risk, but you also can’t leave all the money in a bank account earning minimal interest. Typically, trust assets are invested in a diversified portfolio of stocks and bonds. If you are not an investment professional yourself, it’s usually advisable to hire a financial advisor unless the trust is quite small (but keep an eye on their fees).
Even if you do hire an outside investment advisor, you are responsible for keeping an eye on what they do. You can do so by reviewing the monthly statements, but you should also meet with the advisor on a quarterly or semiannual basis.
In general, you will not be held responsible for investment results as long as you have taken due care, meaning hiring appropriate advisors and monitoring their actions.
Taxes
Unless the trust is revocable, in which case it will use the grantor’s Social Security number, it will have its own tax identification number and, as trustee, you will have to file a 1041 income tax return for the trust. In most cases, trusts don’t pay taxes because the income passes through to the beneficiaries in the form of distributions. As part of the process, you will issue K-1s to the beneficiaries providing them with the information they must report on their own tax returns.
Fees
If you are going to charge a fee for your services, discuss it with the grantor and charge them on a regular basis. All too often, non-professional trustees don’t charge fees until they are about to terminate the trust and distribute all the trust assets. At that time, they reflect on how much work they have done over the years and feel they are entitled to be compensated.
This can raise a lot of problems. By not charging a fee all along, the trustee has created an expectation. To charge a large fee all at once may be seen as gouging by the beneficiaries, even if it may be less than the cumulative annual fees would have been over time.
In determining a reasonable fee, you might consider what a professional trustee would have charged, but probably should charge less since the grantor might have chosen a professional had they been aware that there would be no difference in cost. Also, consider other trust expenses, such as those for investment management or, perhaps, management or rental property. Your combined fees should not be too high.
Special Issues
Special issues arise with respect to some trusts. For instance, a trust may own real estate, which must be maintained and, perhaps, rented out. It may hold shares in a family business, meaning the trust may become involved in its management. The beneficiary may have special needs, which can involve making sure they maintain their eligibility for public benefits.
When these special issues arise, it’s appropriate for the trustee to engage outside assistance, whether that’s a rental management company, special needs counsel, or an expert on succession planning for family businesses.
Once you have considered all these issues and discussed them with the grantor, you will be better able to determine whether you want to take on the honor and responsibility of serving as trustee for a friend or family member’s trust.