Depending on the size and the purpose of a trust, the grantor (sometimes called the settlor) who established the trust may decide upon a relative or a close associate to act as the trustee of that trust. If you are chosen to handle this responsibility, you need to understand what you will be required of you before you take on this role.
The basic reason why a trust has to have a trustee is because the document that the grantor used to create the trust will convey that person’s intention(s) regarding how the assets in the trust are to be used on behalf of its beneficiaries. Some trusts are created to minimize taxes and preserves more assets to pass to the ultimate beneficiaries; the so-called “generation-skipping” trust might be used to accomplish this.
Other people may want to take care of needs of a child who has a disability which entitles the child to certain types of government assistance. However, direct payments from the trust could reduce this assistance while payments for financial or health needs might take the place of items that the government, otherwise, would have provided. To prevent these possibilities, the grantor might establish what is known as a “supplemental needs” trust for the child. Whatever the intention stated by the grantor in the trust document, the trustee must understand it, must understand how to manage the trust’s assets to carry it out, and must be willing to do so.
You generally have to follow the directions of the trust’s creator. You only have discretion to make decisions that are permitted in the trust instrument. A supplemental needs trust would give a trustee a certain amount of discretion, but you have to read the document to be sure. Other trust instruments can contain very specific criteria for the manner in which the principal and interest that comprise the trust’s assets are to be distributed. If language regarding discretionary decision making is nowhere to be found, then you have no authority to deviate from the grantor’s instructions.
In addition to the grantor’s intentions, a trustee must remember that the role always carries fiduciary duties. This means that you must act for the benefit of others, who are defined by the grantor’s intent in setting up the trust. Among those duties are good faith, candor, and loyalty.
There also is the duty to treat beneficiaries impartially (unless the trust’s language expresses a different intent), as well as a duty to balance the interests of the lifetime beneficiaries with those of the remainder persons (who would receive what remains in the trust at its termination). You have to keep beneficiaries updated periodically with an accounting of the trust’s performance. Meanwhile, as a fiduciary, you must avoid self-dealing in addition to conflicts of interest that could undermine your ability to act in the best interests of beneficiaries. Trustees can be held liable when fiduciary duties are breached.
For trusts governed by Pennsylvania law, trustees must understand the Prudent Investor Rule, which was enacted in 1999. Its general rule is as follows: “A fiduciary shall invest and manage property held in a trust as a prudent investor would, by considering the purposes, terms and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust.” The Prudent Investor Rule also defines permissible investments of a trust and considerations when making investment and management decisions.
This law does allow you to delegate investment and management decisions if someone with skills comparable to yours might do so. You will not be responsible for your agent’s investment decisions when you can show that you used reasonable care, skill, and caution in selecting the agent and you have reviewed periodically the agent’s performance and compliance with the terms of the delegated duties. Any trustee without sufficient investment experience would be wise at least to consider seeking professional advice when investing the assets of the trust so that distributions can be made and expenses can be paid while taxation of the trust is minimized to the extent possible. Obviously, the job of a trustee is not an easy one.
As you undertake these and other actions as a trustee, you generally are entitled to some compensation, defined in the trust instrument, as well as reimbursement for legitimate expenses. Again, you are a fiduciary so you must act in good faith and not inflate these expenses, for example. You always face being held accountable for your actions and could end up being ordered by a court to repay improper payments. If you go too far, the court could remove you as the trustee.
While all of these factors may make being a successful trustee an impossible task, you should remember that many trusts exist and each has, at least, one trustee. The vast majority of trustees handle the role without great difficulty. You simply must understand what is expected of you and know how to carry out your obligations. If you have doubts, you should consult with an attorney with experience in this area to discuss what you need to do to be a successful trustee.