Frequently Asked Questions

What is a Trustee?

A trust is a legal relationship in which one or more persons or entities (the "trustee") is empowered by the grantor (also known as the "trustor" or "settlor") to hold legal title to property in a fiduciary capacity and manage it for the benefit of one or more persons or charities (the "beneficiaries"). In a declaration of trust, the grantor also acts as the trustee. Probate is typical in this situation.

The basic duties of a trustee involve the collection, management and investment of trust assets and the accumulation and distribution of income and principal to beneficiaries, all pursuant to the terms of the trust agreement. The duties of a trustee will vary based on each trust's facts and circumstances. These duties are defined both in the trust agreement and by law (see 760 ILCS 5/ Trusts and Trustees Act). A trustee can be held personally liable to the grantor and the beneficiaries for his or her failure to reasonably comply with these duties.

Choosing a Trustee

Choosing a trustee requires thought and consideration. The responsibility given a trustee can be heavy and last for many years. The trustee plays a critical role in the management of the trust assets. The trustee's job includes focusing on accounting, financial and tax matters. The trustee must evaluate the needs of the beneficiaries, exercise good judgment to hire the right advisors, and follow the terms of the trust agreement.

All trusts require at least one trustee. Depending on the type of trust involved, the grantor may also initially act as his or her own trustee (as is common in a Revocable Trust). At death, the surviving spouse, children, a trusted friend or a professional entity (such as a bank or trust company) may serve as successor trustee. One of the most important decisions in choosing a trustee is whether to use an individual or a professional entity.

Many people choose a family member, such as a surviving spouse, child, or other relative, to serve as trustee. The benefit is that the family member typically has a personal stake in seeing the trust succeed and grow. A family member is more likely to know the beneficiaries and be able to make personable decisions. Furthermore, family members often serve without charging a fee for acting as trustee. However, family members may lack the financial acumen to manage trust assets and may need the services of financial advisors, accountants and attorneys in carrying out trustee duties. This may offset or exceed the savings derived from choosing a family member in the first place. Furthermore, family members may not be able to distance themselves so as to act as an impartial trustee.

The complexity of the trust may also effect one=s decision in choosing a trustee. Some trusts require a high level of expertise to manage the trust assets or require a lot of time to deal with the beneficiaries, accountants, financial advisors and other individuals. Other trusts are relatively straight-forward and may not require such expertise or substantial time. If a trust is anticipated to last for a long time, it is important to choose a number of successor trustees or to appoint people who can name successor trustees, in the event any of them cannot act. A corporate trustee can usually serve for generations.

There is also the option of choosing multiple trustees, both family members and/or professional entities, to handle trustee duties. Especially if a particular duty will be difficult for one person to handle. Each trustee should then be able to compliment the other, perhaps with one trustee handling trust investments and financial or tax issues and another dealing with the beneficiaries, including present or potential conflicts between family members and other beneficiaries. If one chooses multiple trustees, it is critical that a mechanism is available in the trust agreement to resolve disputes between the various trustees.

General Duties of a Trustee

The duties of a trustee vary depending on the laws of the state in which the trust is situated and the extent of the trustee's powers provided for in the trust agreement. The type of trust, its purpose, and particular nuances of the trust agreement can also effect the role that trustees play in managing the trust assets and dealing with beneficiaries. Below is a list of some of the typical duties prescribed by trust agreements and state law:

Duty to Administer the Trust by Its Terms

The trustee has the duty to administer the trust and manage the trust assets in strict accordance with the terms of the trust. To the extent possible, the trustee should follow the terms of the trust as it's written on its face without attempting to interpret the language. In the event of ambiguity, the trustee should seek the advice of legal counsel.

Duty of Skill and Care

Trustees are held to a high standard of performance in administering the trust. Most states (such as Illinois) require that the trustee exercise reasonable care, skill, and caution in managing trust assets.

Duty to Give Proper Notice

Different trusts have different notice requirements. The trustee should review the trust agreement carefully to ensure he or she has a complete understanding at which point notice must be given to beneficiaries, to co- or successor trustees or to others. Most trusts require notice to beneficiaries if there is a change in the acting trustee or the delegation of trustee powers or the appointment of a co-trustee. Some trusts provide beneficiaries with the right to withdraw interest or principal from the trust upon the occurrence of a particular event or upon the beneficiary attaining a particular age.

Duty to Communicate

The trustee has a duty to keep the beneficiaries informed of the various activities of the trust, including the trust's current investments, investment performance, and other information regarding the administration of the assets. This may include providing each beneficiary with a copy of the trust agreement.

Duty to Account

Most state laws require the trustee to provide (at least annually) a current accounting of the trust assets, liabilities, receipts, and disbursements to the trust beneficiaries. In doing so, the trustee should distinguish between expenditures of income and principal. If the trustee receives compensation, then this should also be clearly identified in the accounting.

Duty of Loyalty and Impartiality

The trustee's fiduciary duty is to the trust's beneficiaries. The trustee may not act in any manner that puts its personal interests or that of a 3rd party ahead of the trust beneficiaries. The trustee's loyalty should be to all of the beneficiaries and not to a particular individual or group (unless otherwise provided for in the trust agreement). The trustee should be aware of the different types of beneficiaries in making decisions with respect to trust assets. In making investment and distribution decisions, for example, it is necessary that the trustee balance the interest of both the lifetime beneficiaries and the remainder beneficiaries.

Duty to Invest Prudently

Some states (such as Illinois) have adopted the Prudent Investor Rule which requires the trustee to invest and manage trust assets as a prudent investor would considering the purposes, terms, distribution requirements, and other circumstances of the trust. This duty includes properly diversifying the trust assets, the retention and disposition of existing investments, and the pursuit of an investment strategy that provides for a reasonable stream of income and safety of principal. The Prudent Investment Rule may be expanded, restricted or eliminated by express provisions of the trust agreement. It may behoove the trustee to seek a professional investment advisor when dealing with the Prudent Investment Rule.

Duty Not to Commingle Funds

The trustee has an absolute duty not to commingle personal assets with trust assets. Trust property must be kept separate in various bank accounts and other financial institutions and properly designated as trust property.

Duty to Pay, Enforce and Defend Claims

The trustee must evaluate all claims presented and pay all valid claims against the trust. Such claims may include administrative fees, fees for professional services rendered on behalf of the trust beneficiaries and fees incurred in maintaining trust assets. In some instances, the trustee is also responsible for pursing claims of the trust against 3rd parties and defending claims brought by 3rd parties against the trust. Depending on the particular situation, it may be necessary for the trustee to settle or even abandon a claim.

Duty of Confidentiality

The trustee should keep trust matters confidential unless otherwise required by the trust agreement or by law. The trustee should ensure that any information about the beneficiaries be kept confidential.

Duty Not to Delegate

The trustee has a duty not to delegate trustee functions that could otherwise be performed by the trustee, particular those duties that require the judgment and discretion of the trustee. It may be necessary, especially in the context of prudent investing, to employ certain agents to assist with the investment decisions of the trust. Some states, such as Illinois, require that the trustee provide notice to the beneficiaries if delegating investment functions to a 3rd party.

Conclusion

The trust administration process does take time and effort from the day the trustee assumes his or her duties until the beneficiaries have received all of the trust assets and the trust has been terminated. Acting as trustee is a substantial responsibility and in that regard, the trustee should not hesitate to seek professional investment, accounting or legal assistance, when necessary. It is critical that the trustee communicate with the beneficiaries and keep adequate records of all actions taken on behalf of the trust beneficiaries.

Portions of this article were taken from the ACTEC Journal A, What it Means to Be a Trustee: A Guide for Clients (Volume 31, No. 1, Summer 2005).