What Is a Trustee in Estate Planning?

A trustee is the person or institution appointed to manage a trust on behalf of beneficiaries of the trust.

Being a trustee is a significant responsibility. Those serving in this role must always act in the best interests of beneficiaries when carrying out their trust management duties, which include locating and protecting trust assets, investing assets prudently, distributing assets to beneficiaries, keeping track of income and expenditures, and filing taxes.

When a trustee does not fulfill their duties, beneficiaries have the right to file a lawsuit against them. Trust litigation can have significant financial and emotional consequences, draining estate assets and damaging the relationships between the parties involved.

While a family member is often the first choice to serve in this position, to avoid potential conflicts of interest and disputes among heirs, a professional, independent trustee might be a better choice.

Trust Fundamentals

Most people have heard of trusts and have a basic idea of how they work. The inner workings of a trust, however, are complex and may not be as well understood.

Trusts are created by a document called a trust agreement (aka a trust deed or trust instrument). Some trusts are also created by a person’s will. There are three parties to a trust:

• The grantor is the person who establishes the trust, funds it, and provides instructions about how to administer it in the trust document.
• The trustee is the person the grantor names in the trust document to administer the trust. They can be an individual, such as a trusted family member, or an organization, such as a law firm or a financial institution. The trustee must voluntarily accept their position.
• The beneficiary is the individual (or entity, such as a charity) whom the grantor specifies to receive assets from the trust. Trusts can have multiple beneficiaries.

Trusts can hold many types of assets, including financial assets like cash, stocks, bonds, and bank accounts, as well as real estate, life insurance, retirement accounts, personal property, and even things like business interests and digital assets.

The assets that are transferred into the trust become the property of the trust — they no longer belong to the grantor.

Trust property is subject to the trustee’s management and control, but the trustee doesn’t own the assets, either. Rather, they hold and administer trust property/assets for the benefit of a third party (the beneficiary/beneficiaries). A beneficiary only owns a trust asset once the trustee distributes it to them from the trust.

Duties and Responsibilities of a Trustee

Because trust assets do not belong to the trustee, they are not free to do whatever they want with the assets. They must follow the terms that the grantor specifies in the trust document, as well as certain trust laws.

Fulfilling the Grantor’s Wishes

Trusts are highly flexible and can contain detailed provisions about how to distribute assets to beneficiaries. For example, the grantor may provide instructions to only provide assets when a beneficiary reaches an age, educational, or career milestone.

The conditions the grantor can place on distributions are virtually limitless. But whatever condition the grantor sets, unless the condition is illegal, uncertain, or against public policy, the trustee must follow it.

Enforcing a conditional gift from a trust can place a greater burden on the trustee because they will have to determine whether the beneficiary has satisfied a condition necessary to receive a gift.

If there is any uncertainty about a condition being met, this could cause tension between the trustee and the beneficiary. Anyone using trust-based conditional gifting should therefore make sure the trustee is up to the potential challenges of conditional gifting and other detailed trust instructions.

Fulfilling Fiduciary Duties

Although their duties are specific to the trust document, the types of assets held in the trust, and the trust’s purpose, a trustee also has what’s known as “fiduciary duties.”

These are legal duties that they must follow when managing a trust for the trust’s beneficiaries. They include the duties of care, loyalty, good faith, and neutrality.

Fiduciary duties require the trustee to manage the trust in a reasonable, good faith manner. They must put the interests of the trust and its beneficiaries above their personal interests.

Fulfilling Administrative Responsibilities

The most basic job of a trustee is to manage and administer trust assets, in accordance with the trust’s terms and purposes and in the interests of the beneficiaries. Typically, this includes the following responsibilities:

• Identifying, collecting, and valuing trust assets
• Managing investments of trust assets
• Protecting the value of trust property
• Distributing assets/payments to beneficiaries
• Paying debts and taxes
• Preparing and filing financial reports
• Keeping a record of all transactions
• Communicating with beneficiaries, answering their questions, and disclosing information to them
• Making decisions as needed to fulfill the trust’s provisions

On this last point, many grantors give a trustee some degree of discretionary powers, such as the option to enforce a conditional gift provision.

While authorizing a trustee to use their discretion gives them some leeway to decide what to do — or not do — the trustee must not violate their duties or beneficiaries’ rights when making such decisions.

Failure to Fulfill Duties and Trust Litigation

Anyone who accepts the position of trustee needs to understand its significant responsibilities. Once they accept their position, they usually cannot step aside without the beneficiaries agreeing to remove or replace them. Often, trust agreements further stipulate that a trustee can only be removed for cause.

There could be grounds for removal if a beneficiary (or multiple beneficiaries) believes the trustee is not upholding their legal responsibilities. For example, they might suspect that the trustee is not making distributions per the grantor’s instructions, not disclosing information about trust assets, using trust assets to enrich themselves, or mismanaging assets.

If a beneficiary suspects that a trustee has not met their legal obligations — whether those obligations are imposed by a trust document or under the law — the beneficiary could sue them.

Trust litigation can result in a trustee being held personally liable and ordered to pay back beneficiaries for financial harm. They can also be ordered to provide a full accounting of all trust assets and removed from their trustee position.

Types of Trustees and Whom to Choose

A close friend or family member, a third-party professional, or an independent trust company are commonly named as trustees. Co-trustees are also possible.

It is recommended that the grantor additionally name a successor, or backup, trustee. If a trustee is removed and no successor is named, the court could appoint someone new to the role.

Individual Child or Family Member

On the surface, an adult child who is responsible, trusted, and knows the family dynamics is a good choice for trustee. But a child — or any family member — may in practice not be the most appropriate person.

Being close to the family is a double-edged sword. Family relationships are complicated, and those complications could spill over into trust administration, especially in cases where trust beneficiaries are members of a blended family encompassing children from multiple marriages.

A person could be too close to make objective decisions, and even if they are acting objectively, their actions could be perceived as unfair or illegal, particularly if they are both the trustee and a beneficiary of the trust. And real or imagined wrongdoing on the part of a trustee can have the same outcome: trust litigation.

A Cautionary Tale: The Estate of Tony Bennett

A recent lawsuit over the estate of Tony Bennett illustrates why grantors should think twice before naming a child as trustee.

After the famed crooner Bennett passed away, his tangible personal property was supposed to be equally distributed among Bennetts’ four children from the family trust, with Danny, his oldest son from his first marriage, serving as trustee.

However, Bennett’s daughters from his second marriage, Antonia and Johnanna, filed a trust lawsuit accusing Danny of mismanaging their late father’s assets, withholding information from them, and personally benefiting from the estate.

Antonia and Johanna requested a full accounting of Bennett’s assets and financial affairs. If the court finds that Danny violated his duties as trustee, the sisters could petition the court to remove Danny, and the court could replace him with an independent trustee.

Consider a Private or Professional Trustee

Bennett likely chose Danny as trustee because Danny had served as his longtime manager and was money savvy. Yet the lawsuit over the Bennett family trust shows how a parent might not fully think through the implications of one child acting as trustee for another child or children.

Nothing can bring out family disputes quite like money matters. The Bennett situation is a case study in how an independent trustee is sometimes a better option from the start.

An independent trustee that specializes in trust fund management, such as an attorney, advisor, or accountant, a private fiduciary from an independent trust company, or a corporate trustee from a financial institution like a bank, can bring an unbiased, outside perspective that helps to avoid family discord.

Grantors also need to consider that a child or other family member might have the right skill set to serve in this role but lack the necessary practical experience. In some instances, it might make sense to appoint co-trustees — one family member and one professional.

At a minimum, a trustee chosen from within the family should have a relationship with an estate planning attorney who can help them perform trust management competently, fairly, and legally.