What Is a Trustee?
Trustees are often used to oversee trusts used in estate planning, but a trustee may be named in many situations. Nearly all of those situations involve naming a trustee to hold and administer property for the benefit of another person or organization. In addition to managing trusts, trustees are used in bankruptcy, oversee investments, and manage a charity's assets.
Trusts are often used in estate planning, and the trustee plays a crucial role in managing the trust's assets on behalf of its beneficiaries. The beneficiaries are the individuals or organizations for whose benefit the trust was established by the trust's creator, known as its “grantor."
If the trustee fails to do their job correctly, the trust may lose its assets and be unable to help its beneficiaries. Additionally, trustees may be held financially liable for any damages to the trust or its assets caused by their actions.
Types of Trustees
As the name entails, a trustee usually manages the assets of a trust. However, they can play a role in other situations. Other common types of trustees include:
- Bankruptcy trustees: These trustees are appointed by the U.S. Bankruptcy Court to oversee and administer the assets of a person or business that has declared bankruptcy.
- Charitable trustees: These trustees manage assets held in a charitable trust and distribute them as directed by the trust creator.
- Investment trustees: These manage the day-to-day operations of an investment portfolio or account.
- Successor trustees: These trustees step in to manage revocable living trusts when the person who created the trust dies or becomes incapacitated.
- Corporate trustees: These are departments at financial institutions or investment firms that build and manage trusts on behalf of their clients.
What Is a Trust?
To understand the role of a trustee in the estate planning process, you must know what a trust is and how they are used. A trust is essentially a legal arrangement where the creator passes legal title to their property to a trust that a third-party trustee manages on behalf of its beneficiaries. The trustee acts in a fiduciary role, which means they are responsible for administering the trust for the sole benefit of the named beneficiaries under the terms of the trust agreement.
Trusts are often used in estate planning because they can be arranged to lay out how assets and property pass to the grantor's beneficiaries. While you could do the same thing with a will, trusts avoid the probate process and let your beneficiaries get faster access to your assets after you die.
Duties of a Trustee
Trustees have a general fiduciary duty to act in the best interests of the trust's beneficiaries. But their full responsibilities are laid out in the document that created the trust, which could be either a trust agreement or a will. The trustee's powers are usually limited to those laid out in the document.
In most cases, trustees control both distributions from the trust to its beneficiaries and how those assets are invested. But sometimes, a trust may allow a trustee to make uneven distributions to beneficiaries. Since these skewed distributions can create conflicts between the trustee and some beneficiaries, the trustee should be aware of any discretion they will have over distributions before agreeing to be a trustee.
Trustees are also responsible for developing investment strategies, overseeing investments, paying the trust's bills, and insuring any property it owns. Finally, a trustee is responsible for paying the federal income tax on behalf of the trust. Any income earned by the trust that exceeds the value of its distributions to beneficiaries is usually subject to income tax.
Are Trustees Paid?
Many people who've volunteered as trustees for estates did so as favors to family or friends. These trustees typically don't spend more than a few hours a year on their duties. However, most trustees are entitled to compensation for managing the trust and distributing its assets. Some state laws and many trust documents specifically provide for payments to trustees.
Trustees are usually compensated based on an hourly fee or a percentage of the trust assets being managed. Professional trustee companies will often charge a fee of between 1% and 1.5% of the assets they are managing each year. The hourly rates charged by trust administrators generally run from $25 to $35 an hour, but attorneys who are serving as trustees generally charge much more.
How Are Trusts Used in Estate Planning?
Until recently, trusts were commonly used in estate planning as a way to minimize estate taxes. The grantor would transfer some of their valuable assets into a trust created to benefit the beneficiaries. Since the trust exists as a separate taxpaying entity from its creator, any assets passed to the trust avoid the inheritance tax. Trusts are still used for this purpose today, but recent changes to how the estate tax is administered have made it less of a necessity for high net-worth individuals.
When people started using trusts to avoid the estate tax, it applied to far more people than today. For example, in 1997, the estate tax was assessed against every estate valued at over $600,000, and the top tax rate was 55%. By 2021 the estate tax only applied to estates of more than $11.7 million, and the maximum rate was 40%.
There is a chance the rate will be reduced to $5.5 million in January 2026 when the Tax Cuts and Jobs Act of 2017 expires. The act increased the estate tax exemption from $5.5 million to its present level, but when the act expires at the end of 2025, it will return to $5.5 million (but be adjusted for inflation). However, there is a strong chance Congress will step in and pass new legislation to keep that from happening.
While recent increases in the estate tax exemption have reduced the need for trusts to minimize the estate taxes for most Americans, they still play a role in many estate plans. The two most common types used in estate plans are revocable trusts and irrevocable trusts.
Revocable trusts are often called “living trusts" because they are set up during the lifetime of the person creating the trust and can be modified by the creator while they are still alive. After the grantor has transferred their assets to the trust, they then serve as its initial trustee. That means, while the trust technically holds the assets, the creator retains the right to alter the trust, remove property from the trust, or revoke it entirely during their lifetime.
Since the grantor's property was transferred to the trust before they died, revocable trusts avoid the probate process because the trust is the legal owner of the assets and not the creator.
It is important to note that while the revocable trust's grantor is still alive and serving as its trustee, it provides minimal asset protection. That's because the trustee is free to move assets in and out of the trust. Creditors and others that are owed money can ask a court for access to the assets.
Once the grantor (and initial trustee) dies, the trust usually becomes an irrevocable trust.
Once created, an irrevocable trust can't be changed or otherwise modified. That means that assets moved to the irrevocable trust must remain there, even if the trust creator is still alive and agrees to the proposed changes.
While they lack flexibility, irrevocable trusts are great tools for protecting assets. Since an irrevocable trust can't be altered once it has been created, the trust creator's creditors can't seize its assets for unpaid bills and other obligations. However, a court can undo the transfer of assets to an irrevocable trust if it finds that the transfer was an attempt to defraud creditors.
After an irrevocable trust has been created, the trustee will be responsible for implementing its terms and managing it on behalf of its beneficiaries.
Additional Questions? Speak With an Attorney
The responsibilities of a trustee overseeing the assets of an estate are usually laid out in the will or trust documents that established the trust. Since the trustee's powers are limited almost entirely to those established in the documents, it is recommended that anyone creating a trust talk to a local estate planning attorney to ensure it has been set up correctly. If you are thinking about serving as a trustee for someone else, it is often a good idea to meet with an attorney to make certain you aren't taking on more responsibility than you'd planned.
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