BY RONALD A. FATOULLAH, Esq.
and YAN LIAN KUANG-MAOGA, Esq.
A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds the legal title to property for another person, called a “beneficiary.” If a person is appointed as the trustee of a trust, this is a strong vote of confidence in his/her judgment and integrity. Unfortunately, it is also a major responsibility. The following is a brief overview of the duties of a trustee:
1. Fiduciary Responsibility. A trustee stands in a “fiduciary” role with respect to the beneficiaries of the trust, both the current beneficiaries and any “remaindermen” named to receive trust assets upon the death of those presently entitled to income or principal. As a fiduciary, the standards are very high, meaning that deliberate attention must be paid to the trust investments and disbursements.
2. The Trust’s Terms. The actual trust agreement should be read carefully, both at the time of its creation and when any questions arise. The trust is the road map providing all the direction necessary to follow, whether about when and how to distribute income and principal or what reports need to be made to beneficiaries.
3. Investment Standards. The investments must be prudent, meaning that speculative or risky investments should not be made. In addition, investments must take into account the interests of both current and future beneficiaries. For instance, a current beneficiary may be entitled to income from the trust. He or she would be best off in most cases if the investments of the trust fund generate as much income as possible. However, this may be detrimental to the interest of later beneficiaries who would be happiest if investments were made for long term growth. In addition to balancing the interests of the various beneficiaries, consideration of their future financial needs should be considered. Does a trust beneficiary anticipate buying a house or going to school? Will he/she be depending on the trust income for retirement in 15 years? All of these questions need to be considered in determining an investment plan for the trust. Only then can a trustee start considering the propriety of individual investments.
4. Distributions. A trustee has discretion on whether or not to make distributions to a beneficiary. Evaluation of his/her current needs, his/her future needs, his/her other sources of income and the responsibilities to other beneficiaries must be considered before making a decision. And all of these considerations must be made in light of the size of the trust. Often the most important role of a trustee is the ability to say “no” and set limits on the use of the trust assets. This can be difficult when the need for current assistance is readily apparent.
5. Accounting. Other jobs as trustee include keeping track of all income to, distributions from and expenditures by the trust. Generally, an account of this information is provided to the beneficiaries on an annual basis, though the terms of the trust should be checked to be sure. In strict trust accounting, tracking of and reporting on principal and income are done separately.
6. Taxes. Depending on whether the trust is revocable or irrevocable and whether it is considered a “grantor” trust for tax purposes, the trustee will have to file an annual tax return and may have to pay taxes. In many cases, the trust will act as a pass through with the income being taxed to the beneficiary. In any event, maintaining good records and having an accountant prepare any returns should not create a problem.
7. Delegation. While a trustee cannot delegate his/her responsibility as trustee, functions of the job can be delegated. Financial advisors may be hired to make investments, accountants to handle bookkeeping and taxes for the trust and lawyers to advise on questions of interpretation. With such professional assistance, the job of trustee need not be difficult. However, trustees must be sure to communicate with those hired and be the final arbiter in making any discretionary decisions, such as when to make distributions of principal from the trust to one or more beneficiaries.
8. Fees. Trustees are entitled to reasonable fees for their services. Family members often do not accept fees, though that can depend on the work involved in a particular case, the relationship of the family member and whether the family member trustee has been chosen due to his or her professional expertise. Determining what is reasonable can be difficult. Banks, trust companies and law firms typically charge a percentage of the funds under management. Others may charge for their time. In general, what is reasonable depends on the work involved, the amount of funds in the trust, other expenses paid out by the trust, the professional experience of the trustee and the overall expenses for the trust’s administration. For instance, if the trustee has hired an outside firm for investment purposes, that expense would suggest the trustee taking a somewhat smaller fee. In any case, it is prudent to consult with a professional experienced with trust work who can guide you on what would be normal fees considering all of the circumstances.
In short, acting as trustee affords a person a wonderful opportunity to provide a great service to the trust’s beneficiaries. The work can be very gratifying. One must be sure to keep an eye on the responsibilities described above to make sure everything is in order so no one has grounds to question his/her actions at a later date. It is strongly recommended that an individual consult an attorney for advice before entering into the responsibilities of a trustee.
Ronald Fatoullah is a leading expert in the fields of elder law & estate planning. He is the founder and managing attorney of Ronald Fatoullah & Associates, a law firm concentrating in elder law, estate planning, Medicaid eligibility, special needs, trusts, guardianships, & probate. He is certified as an elder law attorney by the National Elder Law Foundation, and he is the current Legal Committee Chair of the Long Island Alzheimer’s Association. The firm’s offices are conveniently located in: Long Island, Queens, Manhattan & Brooklyn and can be reached at: 1-877-Elder Law 1-877-Estates. This article was written with the assistance of Lian Kuang, Esq., an elder law attorney with the firm. Kuang speaks Mandarin and Cantonese and also assists with Ronald Fatoullah & Associate’s Chinese speaking clients.
