If you have been named as the trustee of a trust, you may be wondering what your responsibilities are and how you can fulfill them. This article offers an overview of trustee duties and highlights the legal risks of serving as a trustee.

A few basic trust definitions

A trust is a rulebook for handling a person’s assets. Administering a trust is the process of putting those rules into action, and that is the role of the person called the trustee. The trustee has a fiduciary duty to the beneficiaries, meaning that the trustee has a relationship of special confidence. To summarize these responsibilities, the trustee must treat the trust beneficiaries just like they would treat themselves.

What is trust administration?

Trust administration begins with an event that triggers a provision in your estate plan, such as incapacity or death. The plan then becomes executory. This means that the individuals you designated in your plan documents must step into action and execute according to your instructions.

What are the duties of a trustee?

To put it simply, the duties of a trustee are the collection, management, investment, and distribution of trust assets. The principal source of trustee powers and duties is the trust agreement itself, so the trustee needs to be familiar with the terms of the trust. Trustees must also keep detailed records of their actions in carrying out their duties.

Another important set of trustee duties relates to tax matters. Depending on the situation, it is often necessary for the trustee to prepare a federal estate tax return (Form 706) and possibly a tax return for the trust itself (Form 1041). It is always necessary for the trustee to prepare a final income tax return (Form 1040).

Why is it important to retain a lawyer to help with the trust administration process?

Given the complexities of administering an estate, trustees should consider working with legal counsel. There are a number of risks involved in administering a trust.

For example, if a trustee does not pay the necessary taxes or the incorrect amount of taxes, the trustee is personally liable. There are many instances when the trustee files all of the tax returns and distributes all of the money only to find out that the estate owes more tax. It is very difficult to collect money from beneficiaries to pay taxes. More often than not, the trustee winds up paying the tax.

Another issue occurs when trustees exceed their powers. If the trustee goes beyond the powers delegated to them, they may be held liable for loss or damages to the trust estate.

A trustee must carry out all trustee activities personally; however, they may hire attorneys, accountants, investment advisers, and others to consult with concerning trust administration. Such advisors are usually paid through the trust assets, so there are normally no out-of-pocket costs to the trustee. Sometimes a trust includes terms that pay the trustee, but trustees can at least usually reimburse themselves for any expenses of trust administration.

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