Creating a comprehensive estate plan that addresses all of your estate planning goals and objectives requires you to utilize a variety of estate planning tools and strategies. Among the most popular of those estate planning tools is a trust. If you decide to incorporate a trust into your estate plan, one of the most important decisions you will need to make when creating your trust is who to appoint as the Trustee of the trust. A Trustee has a wide variety of duties and responsibilities that are best handled by someone with a legal and/or financial background. In any event, before you decide on your Trustee, it is important that you have at least a basic understanding of what is required of a Trustee during trust administration. Toward that end, the estate planning attorneys at The Mendel Law Firm, L.P provide answers to some frequently asked questions about trust administration. If you have additional questions or concerns, please feel free to contact our office to schedule an appointment.
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At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also referred to as a Grantor or Maker, who transfers property to a Trustee. The Trustee holds that property for the trust's beneficiaries. Trusts have evolved to the point where there is a specialized trust to help further almost any estate planning goal; however, all trusts require the same five elements for creation, including:
- Settlor – the person who creates the trust. A Settlor may also be referred to as the Grantor or Maker of the trust.
- Trustee – an individual or entity that administers the trust terms as well as manages and invests the trust assets.
- Beneficiary – a beneficiary is the person, entity, or even family pet that receives the benefit of the trust assets. A trust may have both current and future beneficiaries.
- Terms – created by the Settlor and may be anything that is not illegal or unconscionable.
- Funding – almost anything of value can be used to a fund a trust, including cash, securities, and real property.
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All trusts are can be broadly divided into two categories – testamentary and living trusts. A testamentary trust is one that does not become active until the death of the Settlor and which is typically triggered by a provision in the Settlor’s Last Will and Testament. A living trust, also referred to as an “inter vivos” trust, activates when all formalities of creation are complete and the trust is funded. Living trusts can be further divided into revocable and irrevocable trusts. A revocable living trust can be revoked or terminated by the Settlor at any time and for any reason whereas an irrevocable living trust cannot be revoked or terminated by the Settlor for any reason. Because a testamentary trust is triggered by a provision in a Will, and a Will can always be revoked up to the point of death of the Testator, a testamentary trust can always be revoked as well.
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The Settlor of the trust may appoint anyone to be the Trustee of the trust. This often leads to one of the most common mistakes related to trusts – appointing the wrong person as Trustee. A settlor frequently appoints someone close to him or her, such as a spouse, close friend or family member, without taking the time to evaluate the individual’s suitability as Trustee. People often think that appointing someone they trust to be the Trustee of their trust is all that is needed. While the Trustee certainly should be trustworthy, there is more to the job of Trustee than that. Ideally, the individual should really have a legal background as well as some experience in finance given the types of duties the Trustee will have when administering the trust. In fact, for larger, more complex, trusts, it is often best to appoint a professional Trustee.
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The overall job of a Trustee is to administer the trust. Administering a trust, however, typically involves a wide range of duties and responsibilities that require legal and/or financial experience, skills and/or knowledge. Examples of some duties and responsibilities a Trustee has include:
- Following all trust terms unless they are illegal, impossible to fulfill, or unconscionable.
- Understanding an furthering the trust purpose as stated by the Settlor.
- Communicating with beneficiaries.
- Mediating conflicts among beneficiaries.
- Investing trust assets using the “prudent investor” standard.
- Managing trust assets.
- Distributing trust assets according to the trust terms.
- Making discretionary decisions, if applicable.
- Keeping trust records.
- Preparing and filing trust taxes.
- Defending the trust against legal challenges.
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Once a trust is established and active, the Trustee is responsible for administering the trust until he/she resigns or is removed or until the trust terminates. The manner in which a trust terminates depends, in part, on the type of trust. The Settlor of a revocable trust may terminate the trust at any time without providing a reason for the termination. If the trust is an irrevocable living trust, the Settlor cannot terminate the trust. In that case, the trust terms may grant the power to terminate the trust to the beneficiaries, to the Trustee, or to a specific person – or to a combination of people. The trust itself may also include a term that sets a date when the trust will terminate or that sets forth an event that must occur to trigger the termination of the trust, such as a child reaching the age of majority. Finally, anyone involved in the trust may turn to a court in an effort to terminate the trust. A judge may order the termination of a trust for reasons such as the trust purpose has been achieved, the trust has insufficient assets left to warrant continuation, or everyone involved agrees that termination is in their best interest.
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