Nothing can replace the peace of mind that comes with creating a comprehensive Estate Plan. But, you need to make sure the right person is in charge of the implementation. If your Estate Plan includes the creation of a Trust, there are specific fiduciary duties the Trustee will be responsible for.
It is crucial to understand the full scope of these responsibilities, that way you can ensure your wishes are executed according to plan. After all, a Trustee will typically be in charge of managing your investments and assets. The information below will outline fiduciary duties specifically related to Trust management in Estate Planning:
What is a Fiduciary Trust?
A Fiduciary Trust is used to describe the relationship and responsibilities of a Trustee, or person in charge of directing a Trust. Because Trusts contain investments and assets, the role of a Trustee involves fiduciary responsibilities.
When creating a Trust, the Trustor (or Grantor) transfers ownership of various financial assets into the new legal entity. The Trustee is then tasked with managing those assets as part of their fiduciary duty -- or responsibility to act on behalf of the Trustee.
How Does a Fiduciary Trust Work?
A Fiduciary Trust works by holding assets on behalf of the Trustor, as a new legal entity. The Trust is then managed by a Fiduciary, called a Trustee, who acts according to the terms of the Trust. The exact fiduciary responsibilities will vary depending on the goal and structure of the Trust.
Trusts can be utilized for a number of financial purposes while an individual is still alive, for example, to protect assets from creditors or provide long-term financial support to a child. Similarly, Trusts can also be used as part of an Estate Plan to help designate inheritances, set aside charitable contributions, or more.
Who is the Fiduciary of a Trust?
The Fiduciary of a Trust is the Trustee, who is tasked with overseeing the management of property and assets within the Trust. Simply put, a Fiduciary is someone who acts on behalf of another person, often in a legal or financial capacity. In the case of a Trust, this involves following the wishes of the Trustor and acting in the best interest of the Beneficiary.
A Fiduciary role is often associated with a certain level of responsibility and care. The individual in this role is required to put the best interest of the client, which in this case would be the Trustor, before their own interests.
There are numerous fiduciary roles involved in Estate Planning, such as an Executor of Estate. The Executor fiduciary duty to beneficiaries is to follow the terms laid out in the Last Will and Testament. By acting on behalf of the deceased, the Executor upholds a fiduciary responsibility. Read our outline of a Fiduciary vs Executor of Estate to learn more about this role.
Can a Fiduciary be a Beneficiary?
A Fiduciary can be a beneficiary, though this is not always recommended. This situation typically occurs when a parent names an adult child as a Trustee, but also sets aside an inheritance for them. The child typically must fulfill their responsibilities as a Fiduciary before receiving their final inheritance.
When a Fiduciary is named as a Beneficiary, difficulties may arise. If there is discontent within the family over inheritances, other family members may challenge the Estate Plan or the Fiduciary. Family members may also intervene if the Fiduciary is thought to be increasing their inheritance.
While a Beneficiary can serve as a Fiduciary effectively, and with no issues this arrangement is not for everyone. Another option is to work with a Professional Fiduciary, which you can learn more about by reading our outline.
Fiduciary Responsibilities in Trusts of an Estate
Fiduciaries are held to high professional standards when acting on behalf of a Trustor, or anyone else. Below are some general Fiduciary responsibilities in Trusts of an Estate:
Follow all directions laid out in Declaration of Trust
Invest Trust assets conservatively, with minimal risk
Maintain accurate financial records for tax purposes and Beneficiaries
Avoid mixing personal interest with business interests
Never use assets for personal gain or to favor specific Beneficiaries
Report to Trustor or Beneficiaries as laid out in Trust documents
Fiduciary Duties of a Trustee
The exact role of a Trustee can vary slightly depending on the type of Trust and the assets involved. Although, there are certain fiduciary duties that can be expected when serving as a Trustee:
Managing Assets: Trustees are tasked with managing the assets held by a Trust on a regular basis. The Trustee can consult with a financial advisor for assistance with investment management.
Evaluating Markets: Occasionally, the Trustee may notice the investment allocation does not match the objectives of the Trust. It is the Trustee’s job to evaluate investment markets and ensure the assets held by the Trust remain in line with the overall goals.
Funding Inheritances: The Trustee is in charge of funding inheritances, per the instructions laid out in the Estate Plan. This means selecting distribution strategies that minimize the Estate tax burden and maximize the overall benefits included in inheritances.
Paying Taxes and Fees: Trustees file taxes, oversee tax returns, and coordinate any communications with the IRS. The Trustee must ensure that all documentation meets state and federal requirements.
Maintaining Accounts: Any additional financial responsibilities, such as regular accounting procedures, are the responsibility of the Trustee. These must be balanced appropriately, especially as inheritances are distributed or investments are reallocated.
Delegating Tasks: If the above tasks are ever outside the scope of a Trustee’s skills, it is normal practice to delegate certain responsibilities. For example, Trustees can decide to consult with financial advisors or attorneys when necessary to best manage the Trust.
Other Fiduciary Duties in Estate Planning
As previously mentioned, there are numerous fiduciary roles within Estate Planning. Anytime an individual acts on behalf of another person, whether that be for legal, financial, or personal purposes, a fiduciary role is being assumed.
For example, a Guardian, Conservator, and Executor of Estate are all considered fiduciary duties in Estate Planning. While these roles may not involve the same type of expertise as a Trustee, they all demand a certain level of care to be handled correctly. For more in-depth information, read our guide on “Fiduciary Duties in Estate Planning.”
Create Your Estate Plan Today & Designate Fiduciary Duty Today
There are numerous moving parts involved in creating and implementing an Estate Plan. While Fiduciaries are always responsible for acting in your best interest, it is still important to select someone you trust for the role.
The various duties associated with a Fiduciary in Trust can be complicated at first glance. However, whether you are helping a family with their Estate Plan or thinking about creating one for yourself, our team is here to help.
At Trust & Will, we can walk you through the benefits of creating a Trust, identify the right type for your situation, and guide you through the selection process of naming a Trustee. Each of these tasks can help you create a stable plan for the future and protect yourself and your loved ones along the way.
An Estate Plan is a great way to secure your future plans, solidify finances, and reduce overall tax burdens. Though, many of these benefits are closely associated with the role of the Trustee. Review the various fiduciary duties listed above before selecting an individual for this role, after all, it involves a significant level of responsibility.
Is there a question here we didn’t answer? Reach out to us today or chat with a live member support representative!