Serving as a Trustee:
What you need to know
If you are considering creating a trust, or if someone has asked you to be the Trustee of a trust, you may be wondering: what exactly are the responsibilities and potential liabilities of a Trustee? Whether the trust being administered is a testamentary trust (a trust created under a Will) or an inter vivos trust (a trust created under a separate trust agreement during the creator’s lifetime), a Trustee’s duties and powers will be determined by the provisions in the trust document and the applicable State’s statutory law. For purposes of this article, we will be referencing the New Jersey Uniform Trust Code (the “Trust Code”), which would apply if the trust were created under the laws of the State of New Jersey.
Duties and Responsibilities
A Trustee is a fiduciary, which means that he, she or they are bound to administer the trust with undivided loyalty to, and solely in the best interests of, the beneficiaries. This also means that a Trustee must not engage in self-dealing and must keep trust property separate from the Trustee's own property. Beneficiaries of a trust include the current beneficiaries and any remainder or contingent beneficiaries. If a trust has two or more beneficiaries, the Trustee must act impartially in investing, managing, and distributing the trust property, giving due regard to each beneficiaries' respective interests. Additionally, the Trustee is required to comply with the right of the beneficiaries to be informed about the goings on of the trust administration.
According to the Trust Code, a Trustee must reasonably administer the trust in good faith by considering the trust’s purpose, terms, distribution requirements, and other circumstances of the trust as created by the person who made the trust (sometimes referred to as the Grantor or Settlor). In satisfying this standard, the Trustee must exercise reasonable care, skill, and caution. To properly discharge these responsibilities, a Trustee has the authority to retain professional advisors such as accountants, lawyers and financial advisors when the Trustee himself is not capable of providing such advice. A Trustee is required to take reasonable steps to take control of and protect the trust property and to keep detailed records of the administration of the trust. A Trustee must also take reasonable steps to enforce claims of the trust and to defend claims against the trust.
A revocable trust is a testamentary substitute that is established by the Grantor for the benefit of the Grantor during his, her or their lifetime, and distributes trust assets upon the Grantor’s death. An irrevocable trust is created by a Grantor for the benefit of trust beneficiaries who are individuals other than the Grantor. Generally speaking, an irrevocable trust is a separate tax paying entity, except in some instances where the Grantor continues to pay the income taxes on the trust assets (a “grantor trust”). The Trustee should obtain a taxpayer identification number for an irrevocable trust that is not a grantor trust. Typically, an annual income tax return must be filed for a trust with a certain amount of gross income. It is the Trustee’s responsibility to make certain that all necessary income tax returns are filed for the trust.
A trust may be structured so that each beneficiary holds a limited power of withdrawal, meaning that the beneficiary can withdraw contributions made to the trust each year. If so, the Trustee must provide notice of such contribution to each beneficiary (sometimes referred to as “Crummey notices”) in order to make certain that the terms and gift and estate tax goals of the trust are met.
In addition to the above, the Trustee has a responsibility to administer the trust assets as a “prudent investor” would. In New Jersey, the Prudent Investor Act provides that the Trustee must manage and invest the trust assets as a prudent investor would, considering among other things, the purposes, terms, distribution requirements and other circumstances of the trust as well as tax implications, the diversity of the trust’s portfolio, general economic conditions, and inflation.
Powers and Abilities
Generally, the powers of a Trustee are broad. Absent any express restrictions, a Trustee may exercise all powers conferred upon the Trustee by the trust document, as well as all powers which a competent owner has over his or her own individual property. It is important that the trust document makes specific reference to the intent and purpose of the trust to give the Trustee guidance on how the trust funds should be distributed, for what purposes, and under what circumstances, particularly if the trust is created for a specific purpose, such as education costs of the beneficiary.
One of the most important powers of the Trustee is the discretion to make income and principal distributions to the trust beneficiaries in accordance with the terms of the trust. Depending on the trust, some distributions may be mandatory, such as a direction that all of the income be paid over to the beneficiary or that a set dollar amount or percentage be distributed to the beneficiary on a monthly, quarterly, or annual basis. Aside from mandatory distributions, there will be many times that a Trustee will have to use judgment in making decisions regarding discretionary distributions, those permitted but not mandated by the trust. Depending on the direction in the trust document, discretionary distributions may be made bearing in mind the terms and purpose of the trust, the circumstances of the beneficiary, and any possible income, estate or generation skipping transfer taxes, as may be relevant.
As compensation for taking on the responsibilities and powers outlined herein, the Trustee is entitled to statutory commissions that may be taken on an annual basis.
If you are considering creating a trust and appointing a Trustee, or accepting an appointment to serve as a Trustee and want to further discuss a Trustee’s powers and obligations, please reach out to one of the knowledgeable attorneys in our Trust and Estate Group who work with Grantors and Trustees alike on a regular basis.