A well thought out estate plan will typically include more than just a Last Will and Testament. Although every estate plan is as unique as the individual who created the plan, a common addition found in many plans is a trust agreement. Trusts are frequently used in estate planning because of their flexibility and because of the numerous and varied estate planning goals that can be served using a trust. If you decide to include a trust in your estate plan, one of the most important decisions you will need to make during the creation of your trust is who to appoint as the Trustee of your trust. The Trustee of a trust is responsible for administering the trust as well as managing and investing trust assets. To help ensure that you appoint the right Trustee for your trust, the Phoenix trust attorneys at Morris Hall PLLC explain some trust administration basics.
The Importance of Appointing the Right Trustee
One of the most common mistakes a Settlor (the creator of a trust) can make is to appoint the wrong person as Trustee. This often happens when a Settlor appoints someone close to them, such as a spouse, close friend, or relative as the Trustee based solely on their relationship to the individual instead of on the individual’s ability to perform the job of Trustee well. Ultimately, this can lead to the failure of the trust if the Trustee ends up in over his/her head and doesn’t seek the help and guidance of a professional in time. To avoid making this common mistake, make sure you have a firm understanding of what is expected of a Trustee and then take the time to choose the right person for the job.
What Is Involved in Trust Administration?
Appointing the right Trustee begins with understanding the duties and responsibilities involved in administering a trust, such as:
- Following trust terms -- the Trustee of a trust is required to abide by the terms of the trust, as created by the Settlor, unless a term is illegal, impossible, or unconscionable. This requires the Trustee to understand the terms and to have the ability to follow a term even if the Trustee doesn’t personally agree with the term.
- Managing trust assets – this could require something as simple as monitoring and filing bank statements or something as complex and time-consuming as handling the maintenance and upkeep of real property or a business.
- Investing trust assets – ideally, the assets held in a trust are income producing assets. This, however, requires the Trustee to invest those assets wisely. A Trustee must always use the “prudent investor standard” which dictates conservative investments wherein the trust principal is never at risk. Moreover, because a Trustee is in a fiduciary role, he/she must be more careful with trust assets than the Trustee would be with his/her own assets.
- Keeping detailed records – because a Trustee is managing assets intended to benefit a third party, and receives a fee for that management, very detailed records should always be kept.
- Communicating with beneficiaries – a Trustee is responsible for keeping beneficiaries informed of all trust business in a timely manner.
- Resolving conflicts – if a conflict arises the Trustee must defend the trust in any litigation. If the conflict is among beneficiaries, a Trustee should act as a mediator to try and resolve the conflict.
- Paying taxes – a trust is a separate legal entity, meaning taxes must be prepared and paid each year by the Trustee. Even if a Trustee hires a CPA to prepare the trust taxes each year, the Trustee should have sufficient financial skills to understand the tax return and any obligation the trust has for paying gift and estate taxes.
- Distributing assets – the Trustee is responsible for distributing trust assets to the designated beneficiaries according to the terms of the trust.
- Making discretionary decisions – typically, a Trustee has some degree of discretion. Some Settlors give a Trustee only a token amount of discretion in case of an emergency while others provide a Trustee with the discretion to make major trust decisions.
Contact Arizona Probate Lawyers
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about probate avoidance, contact the experienced Arizona probate lawyers at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.