SO YOU WANT TO BE A TRUSTEE???

Parents are sometimes concerned about making children trustees. And children get upset if they are left out. But oftentimes, children don’t have the time or expertise to be a trustee -- or are too far away -- and parents make decisions to appoint third persons. Before parents make their decisions and children get their noses out of joint, let’s explore the responsibilities.

Being chosen as a trustee makes you a fiduciary. Appointment is by a written document – either a trust that is effective during life or created by a will. Generally, a trustee assumes responsibility for the acquisition, investment and reinvestment, sale, and/or management of money and/or property that belongs to another person.

Depending on the wording of the document, a trustee can be liable to not only the income beneficiary, but also the remainder beneficiaries for breach of fiduciary duties.

Here are a few questions by which you can test your knowledge of what it takes to be a trustee:

HOW MANY OF THESE QUESTIONS CAN YOU AS A
TRUSTEE OR PROPOSED TRUSTEE) ANSWER?
1. If you have read the trust agreement, do you understand it, and can you explain it to the beneficiaries of the trust? If you have not read it, when do you think you should have access to the document to prepare yourself? Are you ready to ask your parents to share their estate plan with you?

2. If there is a beneficiary who is to get income for life, how do you figure out how much to pay and when to pay? Are there times you may be required to distribute principal to an income beneficiary? If so, how do you determine the amount of principal to be distributed and when?

3. Is the income beneficiary entitled to distributions of principal based on your discretion? If so, what are the standards by which you are to use your discretion, and do you understand them? What does the trust agreement provide about making discretionary principal distributions? Do you understand the standards in the trust agreement for making principal distributions, and should you be aware and consider the effect of principal distributions on beneficiaries who are to receive the balance of the trust after the income beneficiary dies?

4. Who are the remainder beneficiaries, and do all of them automatically get the balance in the trust at some time? If not, what are the contingencies?

5. Is there a Principal and Income Act in your state? If so, or if not, do you understand how to decide if a deposit into the trust is principal or income, or maybe part of each? If so, how do you allocate between principal and interest? How do you decide if an expense should be paid from principal or income or allocated between them? Is there a Prudent Investor Rule in your state? If so – and if not – how will this affect you?

6. How do you make your annual – or more frequent – accountings? Can you get by with sending out a brokerage or bank statement in lieu of a fiduciary accounting?

7. Who is supposed to get copies of the accountings? What will happen if a person who should have received the accounting does not get it?

8. How do you allocate a stock portfolio that is in compliance with the Prudent Investor Rule in your state? If you have farm or woodlands, how do you make them produce income for the lifetime beneficiary?

9. How do you determine the cost basis for income taxes of each trust asset? And why do you need it?

10. When and which tax returns do you file as a trustee?

A TRUSTEE’S GENERAL DUTIES AND RESPONSIBILITIES

You will be required to administer the trust according to the laws of your state of residence and the wording of the document. If you are given discretion, you must use it reasonably.
When you administer, you must do it impartially and to the benefit of both the current and ultimate beneficiaries. You will be charged with the protection and preservation of trust assets while producing the most income you can if there is a lifetime beneficiary. You are required to make sure that trust assets are invested in proper fashion, and you must avoid benefiting yourself as this would be a conflict of interest. If you don’t perform property, you may be sued.

WHAT ARE YOUR RESPONSIBILITIES AS A TRUSTEE?

First, make sure you understand the document and your duties. Then notify all beneficiaries that you are the trustee, get a federal tax identification number, and prepare an initial inventory of trust assets.

Then get in touch with financial institutions involved of your position, change the address, and give them the tax identification number. Place all assets in the name of the trust or in your name as trustee.

Locate and determine the title to all trust assets, and make a list. Make sure to the market value as of the relevant date – for example, if the trust was created by a will, the date of death of the grantor in order to establish the cost basis of the assets for tax purposes.

Keep the trust assets in separate accounts, and do not combine with non-trust assets. When you collect sums due to the trust, you must determine if the funds receive dare principal or income.
Make sure to keep records of checks written (date, amount, name of payee, and purpose), and of all deposits received (source of funds, purpose, amount, and whether income or principal).

When you pay creditors and expenses or make distributions, find out if you are spending principal or income. You must familiarize yourself with whether or not to keep assets liquid, to sell assets, or to borrow money for trust to meet distribution and administration expenses, not to mention taxes.

You must keep good and available records and send accountings to all beneficiaries at least annually. You are also responsible for preparing tax returns and paying taxes.

Send annual accountings of trust activities to the beneficiaries, and don’t forget to prepare and file all required tax returns. If you don’t, you may be responsible for the taxes personally. And remember that you must file tax returns even if no taxes are due. So think about hiring a certified public accountant who understands the in’s and out’s of trust tax returns and accounting.

Some states require a certain percentage be paid to income beneficiaries. Sometimes, trust call for “total return” distributions.

Make investment decisions that are appropriate based on such issues as the economy, rate of inflation, tax consequences, anticipated return, and your obligation to each class of beneficiary. You are responsible for determining the impact of investments on each class of beneficiary because it is the beneficiaries who are generally taxed, not the trust.

You may delegate some duties by hiring investment experts but be careful in your selection, and give the investment expert the trust's investment objectives and guidelines. And if you delegate, you have the responsibility to use reasonable care. If you delegate, you are required to let the current beneficiaries know in writing.

In summary, while creation of trust documents is important, choosing a trustee to implement the plan is vital to the success of the plan. That’s why more individuals are choosing trust departments and other third persons to act. And if they do, there should be limitations in the documents.

© 2004, NextSteps®