What Is a Trustee?
Trustees are often used to oversee trusts used in estate planning, but a trustee may be named in many situations. Nearly all of those situations involve naming a trustee to hold and administer property for the benefit of another person or organization. In addition to managing trusts, trustees are used in bankruptcy, overseeing investments, and managing a charity's assets.
Trustees are often put in place to oversee trusts used in estate planning. Trustees also serve in other contexts, including the following situations:
- Overseeing investments
- Managing a charity's assets
Nearly all situations involve naming a trustee to hold and administer property. The trustee holds the property for the benefit of another person or organization.
Trusts in estate planning are common. The trustee plays a crucial role in managing the trust's assets on behalf of its beneficiaries. The trust's creator is known as its "trustor," "grantor," or "settlor." Trusts can be used for minor children or those with special needs.
If the trustee fails to do their job correctly for the benefit of the trust's beneficiaries, the trust may lose its assets. In such cases, the trust may be unable to help its beneficiaries. Trustees can also be held financially liable for any damages to the trust or its assets caused by their actions.
Types of Trustees
As the name suggests, a trustee usually manages the assets of a trust. When a trustor appoints multiple trustees to manage a trust, they are called co-trustees. Trustees can play a role in other situations. Other common types include:
- Bankruptcy trustees: The U.S. Bankruptcy Court appoints trustees to oversee and administer the assets of a person or business that has declared bankruptcy.
- Charitable trustees: These trustees manage assets held in a charitable trust and distribute them as the trustor instructs.
- Investment trustees: These manage the day-to-day operations of an investment portfolio or account.
- Successor trustees: These trustees step in to manage revocable living trusts when the person who created the trust dies or becomes incapacitated.
- Corporate trustees: These are departments at financial institutions or investment firms that build and manage trusts on behalf of their clients.
What Is a Trust?
To understand the role of a trustee in the estate planning process, you should understand what a trust is and how it is used. A trust is a legal arrangement. The creator passes legal title to their property to a trust that a third party, the trustee, manages on behalf of its beneficiaries. The trustee acts in a fiduciary role, meaning they are required to act in your best interest, and they administer the trust. This person should work for the sole benefit of the named beneficiaries under the terms of the trust agreement.
Trusts are often used in estate planning because they outline how assets and property pass to the grantor's beneficiaries. You could do the same thing with a last will and testament. A personal representative could oversee the distribution of assets under a will, but trusts avoid the probate process and let your beneficiaries get faster access to your assets after you die.
A trust also allows you to maintain privacy because trusts are not handled through a probate court and don't appear on the public record. Your family members and loved ones can maintain privacy about assets transferred.
Duties of a Trustee
Trustees have a general fiduciary duty to act in the best interests of the trust's beneficiaries. Their full responsibilities are laid out in the document that creates the trust, which could be either a trust agreement or a will. The trustee's powers are usually limited to those in the document.
Sometimes a trust may allow a trustee to make uneven distributions to beneficiaries. These skewed amounts of money or other property can create conflicts. The trustee and some beneficiaries could be at odds. Before agreeing to be a trustee, a person should be aware of any discretion they will have over distributions.
Trustees are also responsible for setting investment strategies, overseeing investments, managing the trust's bank accounts, paying the trust's bills, and insuring any property it owns. Finally, a trustee is responsible for filing tax returns and paying any federal income tax due on the trust's behalf. Any income earned by the trust that exceeds the value of what it passes to beneficiaries is usually subject to income tax.
Are Trustees Paid?
Many people who volunteer as trustees for estates do so as favors to family or friends. These trustees typically don't spend more than a few hours a year on their duties. A trust company may also manage a trust. A trust company provides professional trust management services.
Most trustees are entitled to compensation for managing the trust and distributing its assets. Some state laws and many trust documents clearly provide for payments to trustees.
Trustees are usually compensated based on an hourly fee or a percentage of the trust assets managed. Professional trustee companies often charge a fee between 1% and 1.5% of the assets they handle each year. The hourly rates charged by trust administrators generally run from $25 to $35 an hour. Attorneys serving as trustees usually charge much more.
How Are Trusts Used in Estate Planning?
Until recently, trusts were commonly used in estate planning to minimize estate taxes. The grantor would transfer some of their valuable assets into a trust created to benefit certain people, called the beneficiaries. Since the trust exists as a separate taxpaying entity from its creator, any assets passed to the trust avoid the inheritance tax. Trusts are still used for this purpose today, but recent changes to U.S. estate tax laws have made it less of a necessity for high-net-worth people.
When people started using trusts to avoid the estate tax, it applied to far more estates than today. For example, in 1997, the estate tax affected every estate valued at over $600,000, and the top tax rate was 55%. For 2023, the federal tax law requires the IRS to apply an estate tax to estates of more than $12.92 million. The maximum rate as of 2023 is 40%.
The tax rate may be reduced to $5.5 million in January 2026 when the Tax Cuts and Jobs Act of 2017 expires. The act increased the estate tax exemption from $5.5 million to $12.92 million, but when the act expires at the end of 2025, it will return to $5.5 million before being adjusted for inflation. However, there is a strong chance Congress will step in and pass new legislation to prevent that from happening.
Recent increases in the estate tax exemption have reduced the need for trusts to minimize estate taxes for most Americans, but they still play a role in many estate plans. The two most common types used in estate plans are revocable trusts and irrevocable trusts.
Revocable trusts are often called “living trusts." They are set up during the person's lifetime. The creator can modify a living trust while they are still alive. The grantor can transfer assets into the trust, including:
- Real property, such as real estate
- Insurance policies without beneficiary designations to other individuals, including life insurance
- Bank accounts
- Stocks, bonds, and other investment assets
- Tangible personal property
After the property moves into the trust, the creator can serve as its initial trustee. While the trust technically holds the assets, the creator retains the right to alter the trust, remove property from the trust, or revoke it entirely during their lifetime.
Because the grantor transfers property into the trust before they die, a revocable trust avoids the probate process because the trust is the legal owner of the assets, not the creator.
It is important to note that the revocable trust's grantor is still alive and serving as its trustee. It provides minimal asset protection, as the trustee can move assets in and out of the trust. Creditors and others owed money can ask a court to access assets. Once the grantor (and initial trustee) dies, the trust becomes an irrevocable trust.
Once created, an irrevocable trust can't be changed or otherwise modified. Also, assets moved to the irrevocable trust must remain there. This is the case even if the trust creator is still alive and agrees to the proposed changes.
While they lack flexibility, irrevocable trusts are effective tools for protecting assets. An irrevocable trust can't be altered once created. The trust creator's creditors can't seize its assets for unpaid bills and other obligations. However, a court can undo the transfer of assets to an irrevocable trust if it finds that the transfer was an attempt to defraud creditors.
After creating an irrevocable trust, the trustee will be responsible for implementing its terms. The trustee is also responsible for managing it on behalf of its beneficiaries.
Additional Questions? Speak With an Attorney
The will explains the responsibilities of a trustee overseeing the trust's assets. The documents establishing the trust can also explain the trustee's duties. The trustee's powers are limited almost entirely to those specified in the documents.
Anyone considering a trust should discuss this option with a local estate planning attorney. This can help you ensure that the trust is sound. You can be confident that your trust is set up correctly and properly funded.
If you are considering serving as a trustee for someone else, it is often a good idea to meet with an attorney, too. It's wise to ensure you take on only what you intended.
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