The Successor Trustee’s Role
Presented by Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC®:
A successor trustee is a person or institution who takes control of the trust assets when the original trustee dies, resigns, or becomes incapacitated. A successor trustee’s primary objective is to properly administer the trust assets according to the trust’s terms and in keeping with fiduciary standards.
You should consider the successor trustee’s responsibilities carefully before accepting the role. If you have any reservations, it is best to decline the position. Keep in mind that any change in trustee should be documented in writing.
Rules of Thumb for Successor Trustees
- Understand the trust’s purpose and follow its provisions to the best of your ability.
- Be mindful of your fiduciary duties.
- Keep accurate records of all transactions, which will help in preparing accountings and tax filings. Check out a good rule-of-thumb on records retention.
- Maintain well-organized files, including notes from meetings with beneficiaries and information you used to make decisions.
- Retain professional advisors to assist you, if necessary, and keep any communication with these advisors in your files.
- Always explicitly act in your trustee role, rather than in an individual capacity. (For example, add “Trustee” after your name when signing for the trust.)
- Treat each beneficiary with respect.
What Is a Trust?
A trust is a legal arrangement under which a person, called the grantor or settlor, transfers assets to a trustee, who manages those assets for the benefit of others, the beneficiaries. The arrangement is typically set out in a formal written document, the trust agreement. Although trust agreements can be structured in many ways to accomplish a variety of planning goals, they all fall into one of two major categories: revocable (the grantor can revoke or amend the trust) or irrevocable (the grantor cannot revoke or amend the trust). Particularly with a revocable trust—the more common of the two types—it is not unusual for the grantor of the trust and the initial trustee to be the same person.
Basic trust facts
- A trust is a legal entity. The tax ID of the trust is often the grantor’s social security number. An irrevocable trust may have its own tax ID.
- The typical assets held in a trust are real estate, bank and brokerage accounts, personal property, and life insurance. Assets such as IRAs, 401(k)s, and annuities generally are not owned by trusts because of the potential tax implications. A business asset may be owned by a trust with the proper provisions in place.
- Assets owned in the trust are titled in the trust’s name. For real estate, the deeds likely will be held by the trustee for the trust. Personal property or accounts generally list the account owner as the trust (e.g., The Sam and Sarah Sample Revocable Trust, dated December 15, 2022).
In their fiduciary role, successor trustees have several fundamental duties:
Duty of loyalty. A trustee has a legal obligation to the trust beneficiaries. The duty of loyalty is the most basic fiduciary duty, and it requires the trustee to administer the trust solely in the beneficiaries’ interests. Trustees should not enter into a transaction that personally benefits them, much less one that benefits them at the expense of the trust. A trustee who is also a beneficiary must be particularly cautious. Conflicts may arise between a trustee’s personal interests and the trust, or between the trust and third parties, but the trustee should always put the trust’s interests first.
Duty of general prudence. A trustee must deal with the trust assets as a “prudent person” would handle the property of another. A trustee’s actions will be judged based on what a reasonable person might have done under similar circumstances, given the same limitations and information. Trustees will be held to a higher standard of care than if they were simply investing their own funds. A trustee with relevant education or experience may be held to an even higher standard of care.
Duty regarding investments. Within a reasonable time of accepting the role, a successor trustee should review the retention and distribution of trust assets to ensure that the investment strategy reflects the trust’s terms and purpose. Generally, investment decisions should consider the needs of both the current income beneficiaries who receive payment from the trust for a certain period and the remainder beneficiaries, who receive the assets left in the trust when the payment term has ended. The Uniform Prudent Investor Act and the Uniform Principal and Income Act, which have been adopted by most states, also provide guidance on trust investment strategy.
Trustees are strongly encouraged to employ an investment advisor to assist them in this duty and to help prepare an investment policy statement to support investment decisions. Asset management remains actively litigious, and an investment advisor can help trustees avoid pitfalls in managing trust assets.
Duty regarding distributions. The trust will dictate when and how the trust assets are distributed. Common formulas include:
- Outright distributions
- Specific percentages in specific intervals (frequently by age)
- An ascertainable standard (health, maintenance, and welfare)
- Specific needs, such as education or healthcare
- Complete trustee discretion to determine the time and nature of distributions
When discretion is involved, trustees should carefully evaluate the beneficiary’s needs, other sources of income, and the reasonableness of the request. Often, trustees must balance the income beneficiaries’ needs with the remainder beneficiaries’ interests. Thus, it is important for trustees to carefully document their distribution decisions and the reasons supporting them.
Duty to render accounts and other reporting requirements. The trustee is responsible for ensuring that the trust’s annual federal and state tax returns are filed, along with any other filings required by state agencies or the courts. Again, trustees may want to employ professional advisors to help with these filings.
In addition, beneficiaries are generally entitled to receive an annual accounting of trust assets. (In accordance with state law or the trust agreement, beneficiaries may be entitled to more frequent accountings.) To prepare these accountings and tax filings, trustees should keep detailed records that reflect annual income, expenses, investment gains or losses, and distributions. Accuracy is important!
Trustees should also review state law to determine other reporting obligations. Some states have adopted the Uniform Trust Code (UTC), which requires trustees to fulfill very specific reporting obligations, such as providing copies of the trust to the beneficiaries; other states have modified the UTC’s reporting requirements. In addition, some states may require trustees to provide other notices to beneficiaries, such as notification of a change in trustee or a change in trustee compensation.
Duty to keep property separate. Trust property should be kept separately from the trustee’s personal property. This is a commonsense duty that trustees disregard with surprising frequency, paving the way for liability.
Duty not to delegate. Fiduciary obligations cannot be delegated to a third person. If a trustee lacks specialized skills or knowledge, it is prudent to employ professional advisors, such as an investment advisor, attorney, or accountant. The trustee must still exercise a fiduciary role in supervising advisors employed by the trust.
Understanding the trust’s purpose will help keep the trustee from running afoul of the grantor’s intentions. Common purposes include protecting assets for special needs beneficiaries and protecting assets from taxation. For example, many tax-planning trusts have very specific distribution requirements designed to protect the trust assets from estate taxation. An improper distribution by the trustee could cause these otherwise protected assets to become subject to tax.
Upon appointment, a successor trustee must take these initial steps:
- Obtain a copy of the trust agreement and review it.
- Inventory the trust assets.
- Notify any banks or brokerage firms of his or her appointment.
- Obtain a new tax ID number for the trust, if necessary (e.g., if a revocable grantor trust becomes irrevocable).
Depending upon the reason behind transferring management of the trust to a successor trustee, you should follow these basic checklists:
Successor trustee checklist: Trusteeship as a result of incapacitation
- Obtain a note of incapacitation from the grantor’s physicians.
- Gather the grantor’s financial information and identify trust assets.
- Manage and control the assets in accordance with the trust provisions and the grantor’s best interest.
- Provide support to the grantor’s dependents in accordance with the trust. A court may appoint a guardian for minor children, if necessary.
- Keep detailed records of all bills, medical expenses, and other payments made from trust assets.
- Ensure that tax returns are prepared and filed and that all taxes related to trust property are paid (e.g., property taxes on property owned by the trust). Your role ends when the grantor is healthy again.
Successor trustee checklist: Trusteeship as a result of death
- Gather and identify all trust assets. If probate is needed, work with the executor to inventory assets, transfer the designated assets to the trust, and allocate debt and tax liability in accordance with the will and trust.
- Begin administrative work, including ordering death certificates and paying debts, final medical bills, and possible funeral expenses.
- Read the trust. If you have difficulty understanding or interpreting the trust, seek legal counsel.
- Collect payouts on assets where the trust is listed as the beneficiary.
- Contact the beneficiaries and provide them with a copy of the trust agreement, as required by law, or if requested by a beneficiary.
- Identify and implement an investment strategy for assets to be retained by the trust. Employ an investment advisor to assist with this responsibility.
- Once liabilities are accounted for and paid, make distributions required by the trust. Be sure that you understand the trust’s distribution requirements (e.g., by age, specific need, or ascertainable standard).
- Upon receipt of accountings, ask the beneficiaries to review, approve, and sign them.
- Upon making final distributions, ask the beneficiaries to approve the final accounting and agree to pay any trust expenses that may arise after they have received trust assets and the trust is terminated.
Annual accounting checklist
There are several annual steps a successor trustee should take. These include:
- Inventory all trust assets, noting any changes in status and the fair market value of each asset.
- Prepare a detailed accounting of trust bank accounts, including bank statements.
- Review all investments and keep accurate and complete documentation for all investment decisions.
- Inventory all types of insurance in force for the trust’s assets or the trust’s beneficiaries, including premium amounts and due date information.
- Document all trust expenditures and ongoing liabilities, including the identity of creditors and the nature of any liabilities.
- Document all disbursements to beneficiaries, including to whom each disbursement was made, when it was made, and whether it was from principal or income.
- Document any claims you are aware of, including the claimant’s identity, the nature of the claim, and any action you have taken concerning the claim.
- Prepare a statement reporting your compensation as trustee.
- Prepare a statement reporting all tax and regulatory filings, court filings, and tax and filing fees paid.
The trust agreement will explain how the trust assets are to be invested, how the assets are to be distributed to the beneficiaries, the powers granted to the trustee, and other administrative matters. Because state law also governs trust administration, the trustee should become familiar with its requirements. If the trust is difficult to understand, the trustee should seek legal counsel to help interpret it.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at firstname.lastname@example.org.
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