Managing assets can be a daunting task, especially when it’s related to estate planning. Trusts are an essential part of this process, offering a flexible way to distribute assets to benefit an individual’s chosen beneficiaries.
The administration of a trust involves many complicated duties and responsibilities. In this blog post, we break down trust administration into a comprehensive guide to give you a deeper look at how a trustee oversees and manages a trust. We also provide information on trust administration services and how a lawyer with experience in estate planning can help with navigating the complexities of trust creation and administration.
What Is a Trust?
Before delving into trust administration, it’s essential to understand what a trust is.
A trust is a legal arrangement that ensures that a person’s assets go to their intended beneficiary or beneficiaries. The person who creates the trust places their assets in a trust account and grants another party the authority to manage and administer said assets. It may be helpful to picture a trust as a legal document that serves as a “container” for assets.
Initiating a trust has many advantages. This includes:
- Avoiding the costly and time-consuming probate process
- More control over assets managed during your lifetime and distributed after the grantor’s passing
- Flexible distribution options for beneficiaries
- Potentially reduced estate taxes
Key Participants in a Trust
The following are the main players involved in a trust:
- Grantor: Also called a settlor, the grantor is the party that places property or some other form of transferable assets, like cash, investment accounts and life insurance policies, into a trust account.
- Trustee: This party is an individual or organization that administers the trust. Trustees can be friends, family members, boards, brokerages and providers of trust management services, attorneys, or CPAs.
- Beneficiary: This party is an individual or organization intended to receive either income from the trust or the assets themselves, depending on the terms of the trust.
It’s important to note that these roles may overlap. For instance, the grantor can also serve as the initial trustee in revocable trusts.
When the grantor transfers assets to the trust, the assets legally belong to the trust. However, trustees are not free to do whatever they like with these assets.
Trustees have a legal duty to manage the assets productively for the benefit of the beneficiaries while following the conditions of the trust. This means the trustee must manage trust assets with care and diligence as well as avoid conflicts of interest. To do otherwise would result in a breach of fiduciary duty and serious legal consequences for the trustee.
A trustee may receive payment to compensate them for their work in managing and administering a trust. Depending on the terms of the trust, the sum may or may not come from the trust account’s income.
What Is Trust Administration?
Trust administration refers to managing and distributing assets held in a trust. As discussed previously, the trustee is responsible for trust administration, which involves overseeing the trust and ensuring that assets are managed and distributed following the terms of the trust document and applicable laws.
Understanding the trust administration process is crucial to ensure it is properly maintained and administered. Here are some of the critical aspects of administering a trust:
Inventorying Trust Assets
When initiating a trust, it’s essential to list all property, financial accounts and other assets included in the trust. Inventorying them helps ensure an accurate record for transparency as well as for documentation and legal purposes.
Additionally, ensuring the trust assets are held by appropriate custodians is crucial to the administration process. This might involve titling property in the name of the trust or opening accounts under the trust’s name.
Managing Assets
The trustee must make sound investment decisions with the trust’s assets to protect and grow their value. This includes considering the beneficiaries’ needs and risk tolerance while adhering to the trust’s long-term objectives.
Complying With Trust Terms and Provisions
The trustee must thoroughly understand and comply with the trust’s terms and provisions, including any restrictions on asset management, the specific needs and goals of the beneficiaries and any required distributions.
Making Trust Distributions
The trustee is responsible for making distributions in compliance with the trust’s terms. This may involve setting up:
- Ongoing income distributions to beneficiaries
- Distributions for specific purposes, like healthcare and education expenses
- Distributions that meet certain age or event conditions
Ensuring Tax Compliance
Trust administration involves keeping up with and managing the trust’s required tax filings. The trustee is responsible for ensuring that the trust abides by all applicable tax laws, including paying necessary taxes based on income and allowable deductions.
Keeping Records
Accurate and timely record keeping is essential to maintain the integrity and efficiency of the trust. The trustee must keep financial records for the trust, including account statements, invoices, receipts, tax documents and any other documentation related to the trust’s assets and transactions. Good record keeping helps ensure transparency between the trustee and beneficiaries and simplifies the process of satisfying legal requirements.
Tracking Progress
To monitor the performance of the investments and ensure the trust’s goals are met, the trustee should track the progress of the trust’s assets regularly. This includes monitoring the growth of investments and determining if changes need to be made to meet the beneficiaries’ needs or the trust’s objectives.
Documenting Changes or Transfers
In case of an amendment to the trust or a change in trustee, the trustee must properly document these changes. Doing so helps ensure all parties involved in the trust are updated on any modifications made within it.
Performing Fiduciary Duties
A trustee is legally obligated to act on behalf of the beneficiaries, which requires good faith, honesty, loyalty, and diligence – all of which fall within the trustee’s fiduciary duties. These duties include the following:
Duty of Loyalty
As the entrusted party, the trustee’s actions must prioritize the best interests of the beneficiaries above all else.
Duty of Prudence
When managing trust assets, a trustee must exercise the same level of care, skill and prudence that a reasonable individual would under similar circumstances. This includes diversifying investments and seeking professional advice when needed.
Duty to Inform and Report
Trustees must keep beneficiaries up to date on their activities and maintain transparency in managing the trust. This may include providing regular updates or accountings and promptly responding to inquiries from beneficiaries.
Avoiding Self-Dealing and Conflicts of Interest
In addition to their general fiduciary duties, trustees are strictly prohibited from engaging in “self-dealing” or transactions that may benefit them personally.
Self-dealing occurs when a trustee uses their position for personal gain, directly or indirectly, at the expense of the trust and its beneficiaries. Examples may include purchasing trust-owned property for personal use, borrowing from trust funds or arranging personal investments through the trust.
Trustees found guilty of self-dealing may face civil or criminal penalties and could be required to reimburse the trust for any losses incurred due to their actions. The court may also remove the trustee and appoint a successor to ensure the trust’s proper administration.
Trust Administration Challenges and Potential Issues
Trust administration is a complex process, and it can be even more challenging due to situations such as the following:
Disputes Between Beneficiaries
Dealing with disagreements between beneficiaries is a common challenge in trust administration. The trustee should encourage conversations and help find a solution that upholds the trust’s intentions while preserving beneficiary relationships.
To resolve these disputes, the trustee must keep lines open with all beneficiaries and encourage dialogue. Good communication and interpersonal skills, as well as patience and empathy, are essential for trustees to mediate conflicts effectively.
Sometimes, beneficiary disputes may lead to legal action. When this happens, the trustee must collaborate with attorneys to ensure the trust’s best interests are represented in court. This means that trustees need to have a solid understanding of trust, estate and tax laws as well as the fiduciary duties associated with trust administration.
While trustees should try to avoid legal action whenever possible, they must be prepared to navigate the legal process if disputes cannot be resolved amicably. This may involve gathering necessary documentation, providing expert testimony and closely collaborating with legal counsel.
Changes in Circumstances
While a trust is typically designed with specific objectives in mind, adjustments may be required over time to ensure the trust continues to meet the beneficiaries’ needs. Trust modification allows trustees to adjust the trust’s provisions in these situations.
When circumstances change, the trustee must decide whether a trust modification is called for and whether it’s in the best interests of the beneficiaries. In some cases, this may involve obtaining court approval or agreement from all or most beneficiaries.
Once a trust has served its intended purpose, the trustee must distribute all assets to beneficiaries and address any outstanding obligations. These may include final income tax preparation, liquidation of assets, payment of taxes or debts and obtaining required legal releases from beneficiaries. The trustee must ensure that all legal and fiduciary obligations associated with the trust are fulfilled before the termination is complete.
Choosing a Trustee
As the previous sections have shown, the role of a trustee is vital, as they are responsible for safeguarding the trust’s integrity and ensuring its success. The trustee significantly impacts the trust’s ability to grow its assets and achieve its goals as laid out by the grantor.
For this reason, special care must be taken when choosing a trustee. Generally, however, most people choose friends or family members they see as trustworthy, responsible and willing to take on the responsibility.
Generally, however, the average person does not have extensive experience in financial management, legal matters or the tax implications of trusts. Professional guidance–such as from trust administration companies and trust administration lawyers–can help ease the burden for people who find themselves in the role of trustees.
The Benefits of Hiring a Lawyer for Trust Administration Services
Whether you choose a family member, friend, or professional as your trustee, there are many advantages to hiring a trust administration lawyer. Here are three key benefits:
Supporting the Trustee
Trust administration can be time-consuming and complex, especially for individuals not well-versed in the process. A trust administration lawyer can help to guide your trustee through the legal and financial responsibilities associated with the role, ensuring that they effectively administer your trust.
Ensuring Compliance with Laws and Regulations
Trustees must adhere to a variety of federal and state laws and regulations. A trust administration lawyer can help your trustee navigate these complex rules and ensure your trust is administered according to the latest legal requirements.
Protection from Personal Liability
Trustees are held to a high standard of care and can be held personally liable for mistakes or mismanagement. Hiring a trust administration lawyer can provide your trustee with valuable guidance and protection, helping minimize potential risks or liabilities.
Get Guidance From an Experienced Estate Planning Attorney
Trust administration is a complex process that requires a thorough understanding of trust law, tax implications and financial management. Wiles Law is here to help.
Our full-service estate, tax and trust planning law firm has a team of attorneys with extensive experience in trust administration matters. Whether you’re a newly named trustee or an individual considering initiating a trust, you can rely on us to provide you with the information, resources and guidance you need to navigate the complexities of trust administration confidently.
Learn more about our trust administration services.
Get in touch with us for a consultation today.