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Trustee definition: A person or entity that holds and administers assets for the benefit of a third party. 

You may have heard the term “trustee” across a wide variety of contexts—from estate planning to bankruptcy. While the overarching idea behind a trustee is the same, a trustee’s role can be very different depending on the context. 

What Is a Trustee?

Although a trustee does not have to be created by a trust document, most are. In general, the trust document will set out the rights, obligations, and duties that a trustee has in relation to the assets that the trust holds. 

How does a trustee work? 

The trustee never has legal title or ownership over the property that they administer. Instead, they hold the assets for someone else, often on behalf of another person. The trust assets may help pay for the trustee’s services, but they never become the trustee’s property. 

What is the role of the trustee?

A trustee is entrusted with the power to make decisions about trust assets. These decisions are supposed to be in the best interests of those who benefit from the trust, the “beneficiaries.” 

That person or entity who fulfills the role of a trustee must be honest and trustworthy. Because assets are put under their charge, it will be tempting to use those assets for their own purposes. Trustees are not permitted to use trust assets for themselves—and that kind of misappropriation can lead to civil litigation and money damage awards. 

Trustees vs. Executors

An executor is someone who is appointed through a will to administer a deceased person’s estate. The executor takes an inventory of all the decedent’s assets, liquidates them if necessary, pays creditors, and pays beneficiaries according to the rules set out in the will. 

An executor’s role is similar to a trustee’s, but there are a few significant differences. 

Trust Document v. Will

What is a trustee in a will? 

First, the executor’s role arises from a will. The trustee’s role is developed through a trust document. 

Technically, wills do not have trustees. However, a will can develop a trust, creating a trustee. In fact, the executor and the trustee of this newly created trust can sometimes be the same person. However, even though there is some overlap, the estate property and the trustee property may not all be the same. 

Trust Property v. All Estate Property

The trustee also only administers and takes care of the property that the trust owns. The executor, on the other hand, administers any and all property that a decedent owns. As a result, the executor will often administer a much wider variety of property and assets. 

Continued Care v. Distribution

A trustee may be in charge of liquidating assets, but that is not often the case. Instead, a trustee is often charged with holding and maintaining the property for a longer period of time. In many cases, the trustee decides when to distribute property or only distributes property when certain conditions are met. The role of a trustee can last for decades in some cases.

Conversely, an executor has just one goal: distributing the estate assets after all creditors are paid. Once that distribution has been made, the executor’s role is finished. In some cases, the role of the executor can only last a few months. In other cases, particularly where there are will contests or other issues, the executor may still be in their role for a period of a few years.

Powers Designated by the Trust v. Collection and Distribution

Trustees can have a wide variety of duties based on the trust document. For example, the trustee’s role might be to maintain property or assets and make distributions as they see fit. There is sometimes flexibility and creativity built into the trustee’s role.

On the other hand, an executor always has the same roles—he or she gathers assets, pays creditors, and makes a distribution. 

Trustee Responsibilities

The trustee is required to administer the trust according to the trust document. That role requires the trustee to fulfill certain duties. They must often do more specific tasks as well. In some cases, being a trustee can be a huge responsibility for a long timeline. 

Examples of responsibilities that a trustee may need to complete include:

  • Maintain documents to show ownership of trust property (titles, stock certificates, etc.)
  • Create proper procedures to maintain and account for the trust property over time
  • Keep accurate accounting
  • Do a valuation of trust property from time to time
  • Do taxes and complete required forms to meet state and federal government requirements
  • Transfer trust assets into the name of the trust
  • Pay expenses related to maintaining trust assets
  • Hold periodic meetings with other trustees if more than one trustee is named
  • Distribute assets or funds to the trust beneficiaries
  • Create and maintain a separate bank account for the trust
  • Maintain proper and adequate insurance for trust assets

In many cases, someone creates a trust to pass along some of these administrative headaches to another person, often for a fee. 

Banks, trained professionals, and representatives of other financial institutions will often serve as a trustee for a fee. That fee is sometimes based on a flat number or a percentage value of the trust. 

Does the trustee have to follow the trust? 

Yes. The only reason that the trustee exists is because of the trust document. The trustee only has powers that the trust document gives them. If the trustee oversteps or does not fulfill their responsibilities, then they run the risk of being removed as the trustee. 

Pros and Cons of Creating a Trust and Using a Trustee

The benefits and drawbacks of creating a trust and using a trustee will depend on the type of trust that you create. For example, the biggest advantage of creating an irrevocable trust (one that cannot be altered after it is created) is that you can shield the assets in the trust from creditors. A revocable living trust cannot do the same thing, but it has another big advantage—helping your loved ones avoid the cost and time associated with probate after you pass. 

Another advantage is that you can pass along the duties related to maintaining certain assets to another person, but you can still get the benefits of that asset in the future (such as a stream of income from a rental property). 

One drawback that reaches all types of trusts is that you lose control of the asset when you move it into a trust in most circumstances. While you can be a beneficiary of your own trust, you lose some of the “say” in how the property is maintained and distributed when you hand those responsibilities over to someone else. 

It often also costs money to create and maintain a trust. Paying the trustee can also be costly in some situations as well. 

Types of Trustees

Although trust documents create trustees, some trustees have slightly different roles. While their duties are similar, they are different from a “run-of-the-mill” trustee in several ways. 

Investment Trustees

An investment trustee will administer investments on behalf of another person. There can be a trust document associated with this relationship, but this fiduciary role can be created through a simple investor relationship with a broker or other investment professional. 

The goal of this person will vary based on your investment goals. Some common examples of goals include:

  • Maintaining the trust res (the amount that you have invested)
  • Growing the value of the trust
  • Keeping the trust res intact as long as possible
  • Generating income from the trust

The investment trustee should have a good handle on the overall goals of the relationship before they start investing on your behalf.

Successor Trustees

A successor trustee is simply a “back up” that you name if your first trustee refuses to do their job as trustee or becomes incapacitated or passes away. The successor trustee can step in to take the first trustee’s place without having to change the trust document. 

Bankruptcy Trustee

A bankruptcy trustee is not your average trustee. Instead, this person is appointed by the court to administer a debtor’s bankruptcy estate. For example, in Chapter 7 bankruptcy cases, the trustee will help gather assets and liquidate any assets that are not exempt based on state or federal law. 

The U.S. Trustee oversees all bankruptcy cases to watch for fraud and abuse of process.

Charitable Trustees

A charitable trustee is someone who has been entrusted with gifted funds or property to administer on behalf of a charitable cause. This type of trustee can be created from a trust document, but that is not always the case. 

Duties of a Trustee

Trustees have fiduciary responsibilities that must be met as they carry out their roles. While these duties vary, they have one generalized theme: act in the best interests of the beneficiaries. Examples of these duties include:

  • Duty of loyalty. The trustee must not take any action that would benefit him or herself to the detriment of the trust itself or its beneficiaries. 
  • Duty of care. The trustee must take good care of the trust property, whether that means carrying the right type of insurance or making good investment choices. 
  • Duty of accounting. The trustee must provide information about the value of the trust assets if the beneficiaries request that information. 

Other duties may arise as well, but they will depend on the goals of the trust and the required duties that the trustee must fulfill. 

Can Anyone Be a Trustee?

Not quite. A trustee can be almost anyone, but a trustee must be physically and mentally capable of carrying out their trust duties. They must also be over the age of majority (18 in most states). 

Summary and Conclusion

The term “trustee” is broad. It touches on many potential individuals, but they all have the same underlying theme—they administer property on behalf of someone else.

A trustee carries out their duties as set out by the trust document. The trust document describes what the trustee should do and how to do it. However, several types of “trustees” are not quite the same as this generalized role. 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Dechtman Wealth Management, LLC [“DWM”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from DWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. DWM is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the DWM’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.dechtmanwealth.com.

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