What is it really like to be a trustee? How much time will it take? What are my legal requirements and responsibilities?
I have been in wealth management for over 25 years and have helped dozens of families with their trust planning. I have been a trustee myself for years and many of my clients are also trustees. My experience is what I draw upon for the information I am going to share with you.
Many times, throughout my career, I have been referred into cases where a new trustee was taking over the family trusts. Often, the new trustee is not prepared for what lies ahead. The purpose of this article is to give people an idea of what being a trustee is really like. First, I will go over the legal requirements and responsibilities for a trustee, then I will review how much time it takes to fulfill your obligations. In the first year you should expect to spend about 30 hours completing your trustee duties. In subsequent years, this time commitment will drop to around 18 hours a year. I will detail the approximate time it should take for each of your trustee duties, later on in this video.
Legal Requirements & Responsibilities for a Trustee are:
- Follow The Fiduciary Duty
- Impartiality
- Disclosure
- Follow the Trust Document and Intent of the Grantors
- Manage Trust Assets
- Protect & Preserve Trust Assets
- File Tax Returns
- Pay Bills
- Pay Taxes
- Distribute Income to Beneficiaries
- Maintain Records and Provide Them to Beneficiaries
Trustees are legally required to adhere to the fiduciary standard of care when managing trust assets for the trust beneficiaries. Trustees must always act in the best interests of the trust beneficiaries, putting the beneficiaries’ interests ahead of their own. Trustees must act with good faith, care and loyalty.
Trustees must be impartial when there is more than one beneficiary, treating all trust beneficiaries fairly, without bias and avoiding favoritism.
Trustees have a duty to disclose trust financial information to beneficiaries. Trustees need to maintain records and provide full transparency on assets, liabilities, income and distributions to beneficiaries.
Trustees must strictly follow the terms and instructions of the trust.
Trustees must manage the trust assets with prudence and care making sure that trust assets are preserved and protected.
Failure to adhere to the fiduciary duty can result in the trustee being sued for breach of fiduciary duty. Penalties can range from being removed as trustee to financial penalties and personal liability for losses of trust assets.
How Much Time Does it Take?
Approximately 30 hours in the first year. Subsequent years may be around 18 hours a year.
How much time it takes you to fulfill your trustee responsibilities depends on several factors:
- Reading and understanding the terms of the trust document.
- Obtaining a tax ID number
- Opening brokerage accounts, bank accounts & transferring assets.
- The nature of trust assets.
- The number of trust accounts or private investments.
- The complexity of the tax return.
- The need for estimated tax payments
- The needs of the beneficiaries.
- The number of beneficiaries.
Reading and Understanding the Trust Document
Understanding the Trust document is a complicated task, especially for a first-time trustee or someone who is not an attorney! You will want to pay attention to the distribution provision section of the trust document. This section discusses how trust assets are to be distributed to beneficiaries. Expect to spend 3 – 5 hours to fully understand and research questions you may have regarding the trust document. Note that as the years go by, you may need to periodically revisit the trust document as the beneficiaries’ lives evolve.
Obtaining a Tax ID Number
While the grantor is alive, their trust is revocable and uses their social security number for tax reporting. After the death of the grantor, the trust becomes irrevocable and the trust will need a separate tax ID number that the trustee obtains from the IRS. This is an easy task that should not take more than 30 minutes.
Opening Brokerage Accounts, Bank Accounts & Transferring Assets
Once the new tax ID number has been obtained, the trustee will use this new tax id number to open brokerage accounts and bank accounts for the irrevocable trusts. Once the irrevocable trust accounts are open, the trustee can begin to transfer assets from the grantor’s probate estate, if one exists, or from the grantor’s revocable trust, if the revocable trust was properly funded while the grantor was alive. This administrative task can be very time consuming depending upon the situation. If the grantor’s assets need to pass through probate, if there are a lot of assets with many different custodians or if there are a number of private investments then a trustee could easily spend 10 hours or more on this administrative work.
Trust Assets
If the trust assets are traditional investments like stocks, bonds and ETFs held with a brokerage firm, monitoring the trust assets will be easier. You should plan to spend a minimum of two hours every quarter, reviewing statements and monitoring the trust assets held in a brokerage account. If the trust owns private investments like real estate or limited partnerships, plan to spend significantly more time with these assets. Trust owned real estate, such as a building or rental property can be especially time consuming. As the trustee, you have a fiduciary duty to protect and preserve these assets. Trust owned real estate will require you to pay taxes, pay insurance, collect rent, perform maintenance, etc. Limited partnership investments in private equity, venture capital, minerals or private credit, will require that you read the private placement memorandum for each investment, evaluate the investments, collect the K-1s, collect distributions, monitor the partnership reporting, track your basis, on and on. Like real estate, limited partnerships present large time demands.
Number of Accounts
The more accounts you have, the more statements you will need to review. If you have a lot of private investments, you can anticipate spending significantly more time reviewing the investments. As a fiduciary, this is your job. More accounts also means more 1099s and K-1s that you will need to collect to file the tax return.
Complexity of The Tax Return
An irrevocable trust has a tax ID number and is required to file a tax return. Plan to spend a minimum of 2 hours per year gathering tax documents and reviewing the tax return before the CPA files the return. If the trust has a complex return, you could find yourself spending ten hours or more collecting tax documents and reviewing the tax return. The easiest trust tax return will be a single, trust brokerage account invested in stocks, bonds and ETFs held at one custodian. You will receive one 1099 and filing the tax return will be straightforward. If the trust has several limited partnership investments or real estate investments, the tax return will be much more complex. Limited partnership investments distribute form K-1 to the limited partners. Frequently, there are delays in receiving form K-1 from general partners and as a result, limited partnership investors sometimes do not receive their form K-1 until after April 15th, possibly as late as September 15th. When you start adding K-1s to the tax return, the tax return automatically becomes more complicated and takes more time and expense to prepare. The more private investments the trust has, the more time you will need to spend on this compliance task.
Estimated Tax Payments
Most likely you will need to make estimated tax payments for the trust. This task can consume 1 – 2 hours per year.
The Needs of Beneficiaries
Trusts generally allow a trustee to make distributions to beneficiaries for health, education, maintenance and support (also known as “HEMS”). Here is where your judgement comes into play. Income beneficiaries to a trust are often in that position because they cannot manage their own financial affairs. The trust grantor selected you to make sure the beneficiaries are protected. When the beneficiaries ask you for additional money, and they always do, you need to ask yourself the following questions:
- Am I following the trust?
- Am I acting in the best interests of the beneficiaries?
- Will the requested distribution harm the trust’s ability to continue providing income?
- Does the distribution request fall under HEMS?
- Does the beneficiary have access to other available assets (i.e. personal bank cash, investments, IRA, etc.) that may be used?
Some beneficiaries may need to meet or talk with you much more frequently than others. Plan on 1 – 3 hours per year to address the needs of beneficiaries.
The Number of Beneficiaries
When you have more than one beneficiary, your time commitment grows. Add at least 1 hour per year for each additional beneficiary.
Ethan S. Braid, CFA
President
HighPass Asset Management
Denver, Colorado