5 Things to Know about Trust Administration
After a Last Will and Testament, a trust is one of the most commonly used estate planning tools. In fact, many people elect to use a trust as their primary instrument for the distribution of their estate assets because assets held in a trust bypass the probate process altogether.
A Trust Has 5 ElementsTrusts have evolved to the point where there is a specialized trust to fit almost any estate planning goal or need. All trusts, however, require the same five elements for creation, including:
• Settlor – the person who creates the trust. A Settlor may also be referred to as the Grantor or Maker of the trust.
• Trustee – an individual or entity that administers the trust terms as well as manages and invests the trust assets.
• Beneficiary – a beneficiary is the person, entity, or even family pet that receives the benefit of the trust assets.
• Terms – created by the Settlor and may be anything that is not illegal or unconscionable.
• Funding – almost anything of value can be used to a fund a trust, including cash, securities, and real property.
How Is a Trustee Chosen?The Settlor of a trust chooses the Trustee. This often results in a common mistake – appointing a friend, family member, or spouse as the Trustee of a trust when that person is not really qualified to be the Trustee. Understandably, people often think that appointing someone they trust to be the Trustee of their trust makes sense. While you certainly should trust the person you appoint as your Trustee, the individual should really have a legal background as well as some experience in finance given the types of duties the Trustee will have when administering the trust. In fact, for larger, more complex, trusts, it is often best to appoint a professional Trustee.
What Does It Mean to “Administer” a Trust?The terms of a trust, which are created by the Settlor, are reduced to writing in the form of a trust agreement. Once the trust is active, someone must make sure those terms are followed and make sure the trust assets are safe. All of that is part of trust administration. Administering a trust can be a fairly easy job if the trust is simple and the trust assets minimal; however, a moderate to large trust, or one with very complex trust terms
What Does a Trustee Do?The duties and responsibilities of a Trustee can be wide ranging and will differ from one trust to another; however, there are some common duties and responsibilities most Trustees have, including:
• Investing trust assets using the “prudent investor” standard.
• Managing trust assets.
• Distributing trust assets.
• Keeping trust records.
• Preparing and filing trust taxes.
• Defending the trust against legal challenges.
When Does Trust Administration End?Trust administration ends when the trust terminates or is revoked. The trust will terminate on a date specified by the Settlor or upon the occurrence of a specific event as specified by the Settlor. If the trust is a revocable trust, the trust may terminate at any time if the Settlor decides to terminate it as well. It may also be possible for the beneficiaries and/or Trustee to terminate a trust if everyone agrees to do so. Finally, a court always has the legal authority to terminate a trust; however, as a general rule, a court will only terminate an irrevocable trust upon the showing of good cause, such as the trust purpose has become impossible.