What Are the Duties and Responsibilities of a Trustee?
This blog answers several questions that I am asked all the time by trustees when I am representing them about the duties and responsibilities of a trustee. It also gives a checklist of the important steps that trustees need to take to properly administer a trust. Finally, it discusses some pointers about how best to deal with beneficiaries in a trust administration.
What Are the General Duties and Responsibilities of a Trustee in Administering a Trust?
The trustee has several duties and powers outlined in the trust document itself and in the Arizona statutes. For instance, the trustee has a duty to administer the trust in good faith, in accordance with the terms and purposes of the trust and in the best interests of the beneficiaries. The trustee also has a duty of loyalty, requiring him/her to administer the trust solely in the interests of the beneficiaries. Next, if a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust properly, giving due regard to the beneficiaries’ respective interests. Moreover, a trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust, while, at the same time, exercising reasonable care, skill, and caution. Further, the trustee shall take reasonable steps to take control of and to protect the trust property while keeping adequate records of such property. Finally, the trustee has the duty to do an accounting for the beneficiaries and to keep the beneficiaries reasonably informed about the administration of the trust (Note: This duty will be discussed in more detail below.)
What Are the Key Steps of a Trust Administration?
After the settlor (i.e., the creator of the trust) passes away, there are several things that need to be done to make sure that the settlor’s trust is administered properly. First, I recommend that the trustee meet with a qualified attorney as soon as possible after the settlor passes away. Depending on the type of trust that you are dealing with, there may be deadlines to make certain tax and other elections that need to occur within a certain time frame after the settlor’s death. If possible, I generally recommend scheduling this meeting within 30-60 days after the settlor’s death.
Below is a list of the key steps that the trustee should take in the administration of a trust:
- Review Trust Documents and Related Documents. First, the trustee will need to review the trust itself, and any amendments, carefully to determine who the trustee is, what the distribution provisions state, and if there are any other important provisions in the trust that affect the administration of the trust. In addition, the trustee will need to review the will to make sure that it is a “pour-over” will that works in conjunction with the trust.
- Understand Your Fiduciary Responsibilities. As is discussed above, the trustee acts in a fiduciary capacity for the benefit of all the beneficiaries of the trust and cannot act to benefit any one beneficiary or group of beneficiaries to the detriment of other beneficiaries. The trustee also has the responsibility to make sure that valid debts of the trust are paid by the trust if there are sufficient funds to do so. Finally, unless there is an agreement to the contrary, the trustee is required to follow the terms of the trust, including any amendments, exactly as written.
- Determine Assets and Liabilities. The trustee also needs to compile a list of all the assets and liabilities of the settlor and of the trust. The list should include all the assets owned by the settlor at the date of death, how these assets are titled, and the date of death value for these assets. For bank accounts and investment accounts, the trustee will need to determine if there are any payable-on-death (“P.O.D.”) designations. For 401(k)’s, IRA’s, annuities, and life insurance policies, the trustee will also need to determine if there are beneficiaries named. Next, for all assets, you the trustee will need an account statement, deed, certificate of title, or other ownership document to show how such assets are titled. Finally, for any of the settlor’s liabilities, including mortgages, car loans, credit cards, or other debts, the trustee will need to locate the latest statements to have a clear picture on the liability side too.
- Understand the Tax Filings Required. Next, the trustee will need to understand the tax liabilities and obtain the assistance of a qualified tax professional to handle any tax filings. There may be estate tax issues, income tax issues, and gift tax issues from gifts made prior to the settlor’s death. The scope of these issues is beyond the scope of today’s blog.
- Understand the Notices Required and General Trust Administration Process. Finally, the trustee will need to understand the notices required to be given and the timeline for the trust administration process. Below is a checklist of the key things that need to be done in a trust administration:
- After the initial meeting with a qualified attorney, the trustee will need to obtain a Tax ID number for the trust and open a trust checking account. To do this, banks often ask for an Affidavit of Successor Trustee or Acceptance of Successor Trustee, and a copy of the trust itself, to confirm that they are dealing with the right person on behalf of the trust.
- The successor trustee will also need to complete an initial Asset Chart to make sure that he/she is dealing with all the assets of the trust appropriately. As is discussed in above, the date-of-death valuation is important for determining whether the trust is subject to federal estate taxes, establishing the new stepped-up income tax basis for the asset, and assisting the trustee in the distribution process.
- In addition, the trustee must send notice to the beneficiaries of the trust pursuant to A.R.S. § 14-10813, which needs to be done within 60 days of the trustee’s appointment if the trust has become irrevocable.
- Further, the trustee must publish a notice to creditors to start a 4-month creditor’s claim period clock for creditors to submit claims. The trustee must also address creditor claim issues as they come up, deciding whether to allow them or disallow them as claims are submitted.
- Next, the trustee must administer the assets of the trust according to the terms of the trust. If mom or dad had a house that needs to be sold, then the trustee can list the house and sell it. If mom or dad had an investment account that needs to be liquidated, then it can be liquidated and deposited into the trust checking account. If an asset, such as a car, is in mom or dad’s name and needs to be transferred into the trust, it can be transferred though opening a probate case or a small estate affidavit, and then it can be sold.
- After the 4-month creditor’s claim period has ended, so long as all assets in the trust have been administered, the trustee will prepare a trust accounting from the settlor’s date of death until the date of the proposed distribution. The accounting should list all the administrative expenses and taxes that have been paid, and all the anticipated administrative expenses and taxes yet to be paid and will typically include a “holdback amount” to take care of final expenses. R.S. § 14-10817 provides that a trustee may send out a proposal for distribution and give the beneficiaries 30 days to object to same, or such beneficiaries waive their objection. If there are no objections to the proposed distribution, then the trustee can make the proposed distributions to the beneficiaries, making sure to retain the “hold back amount” for final expenses. As a practical matter, all beneficiaries should sign a Receipt and Release document before receiving their distribution.
- Finally, after all taxes and expenses have been paid, and all distributions have been made to the beneficiaries, the trustee will sign a Termination of Trust document at the end of the trust administration process.
How Does the Trustee Communicate with Trust Beneficiaries?
A.R.S. §14-10813 lays out the basic requirements for a trustee to keep the beneficiaries of a trust reasonably informed about the administration of the trust. First, Section 14-10813(A) states that the trustee has a duty to keep the qualified beneficiaries reasonably informed. In general, “qualified beneficiaries” are the current beneficiaries and any contingent beneficiaries who would take if the current beneficiaries predecease the settlor. Next, under the same section, the trustee has a duty to respond promptly to a reasonable inquiry by any beneficiary, not just the qualified beneficiaries. Any beneficiary would also include more remote beneficiaries as well. In addition, within 60 days of appointment as trustee of an irrevocable trust, the trustee is required to notify the qualified beneficiaries of the acceptance as trustee and the trustee’s name, address, and telephone number. Moreover, upon the request of a beneficiary, the trustee shall promptly furnish a copy of the portions of the trust instrument necessary to describe the beneficiary’s interest. Finally, at least annually and at the termination of the trust, the trustee shall send the distributees or permissible distributees (i.e., those persons who received or may receive distributions from the trust) of the trust income or principal and to the other beneficiaries who request it, a report of the trust property, liabilities, receipts, and distributions, including the source and amount of the trustee’s compensation, a listing of the trusts’ assets, and, if feasible, their respective market values.
As a practical matter, I recommend giving the beneficiaries two notices, one at the beginning of the trust administration (i.e., within 60 days of appointment) that satisfies the requirements of A.R.S. §14-10813(B), and one at the end of the trust administration, which satisfies the requirements of A.R.S. §14-10813(C) and includes a full accounting and a proposal for distribution. Occasionally, when a trust administration takes longer than one year, I also recommend sending out a status report to keep the trust beneficiaries adequately informed. Transparency in the process is always key, so that the beneficiaries know exactly what is going on in the administration of the trust.
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