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A trust is a legal agreement that allows you to appoint someone (the “Trustee”) to manage and protect assets intended to benefit a third party, such as your spouse or minor children. A trust can activate during your lifetime or after your death. The former is referred to as a “living trust” while the latter is a “testamentary trust” and is created using a provision in your Last Will and Testament. A living trust can also be revocable or irrevocable. The person who creates a trust is referred to as the Grantor, Settlor, or Trustor.
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A Trustee is an individual or entity (such as a bank, professional trust company, or law firm) appointed by the Grantor to manage and administer a trust according to the terms set forth in the trust agreement. The Grantor has the authority to appoint anyone as the Trustee and may even appoint two or more people/entities to be Co-Trustees.
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A Trustee is responsible for administering the trust pursuant to the trust terms created by the Grantor. The law imposes several important duties on a Trustee, including the:
- Fiduciary Duty: A Trustee holds a fiduciary duty that requires the Trustee to always act in the best interests of the beneficiaries.
- Duty of Loyalty: The Trustee must administer the trust solely for the benefit of the beneficiaries.
- Duty of Prudence: The Trustee must manage the trust assets with care, skill, and caution and must always guard the trust principal when investing trust assets.
- Duty to Inform and Report: The Trustee must keep the beneficiaries reasonably informed about the trust and its administration.
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While people often think first of appointing a family member or friend to be the Trustee of a trust they created, it is wise to consider appointing a professional Trustee, such as a bank, trust company, or attorney for several reasons. Managing complex and/or sophisticated investments may require specialized knowledge that friends and family members do not have. In addition, navigating the various laws, regulations, and procedures applicable to trust administration can be difficult, often making a professional Trustee a better choice. Finally, a professional Trustee can act impartially, reducing potential conflicts among beneficiaries.
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The trust agreement often includes specific instructions for the Trustee regarding the management and investment of trust assets. The Trustee is required to manage assets according to the terms of the trust, keeping in mind relevant laws. Investments should be made using the “prudent investor” standard, effectively requiring the Trustee to not make risky investments. Accurate records of all transactions should be kept by the Trustee and trust assets should only be used to further the purpose stated in the trust agreement.
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Yes. A Trustee can delegate certain responsibilities during the administration of the trust. In fact, proper administration often requires a Trustee to utilize professionals such as financial advisors, attorneys, and accountants; however, the Trustee must oversee these professionals because the Trustee is ultimately liable for mistakes made during trust administration.
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The Trustee is responsible for distributing trust assets to the beneficiaries according to the terms of the trust. This may include making regular distributions of income earned by the trust, making pre-determined distributions each year, or making a one-time lump sum distribution. The trust agreement may provide a Trustee with discretionary authority to make distributions when a beneficiary makes a request or when the trust earnings exceed what was anticipated.
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The Trustee of any trust is responsible for ensuring that the trust complies with all tax obligations which may include state and federal income taxes. The type of trust as well as the terms of the trust will significantly contribute to what type of taxation applies to the trust.
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Yes. A Trustee can face personal liability for errors or mistakes made while administering a trust. Breaching the fiduciary duty owed to beneficiaries and self-dealing are two common reasons for a Trustee to face personal liability.
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Yes. A Trustee can be removed during the administration of a trust. Sometimes, the trust agreement will specify who can remove a Trustee and outline the process for removing a Trustee. If the trust agreement is silent on the matter, a beneficiary can petition the court for removal if they believe the Trustee is not acting in their best interests. If the Trustee is removed, the person or entity named as the successor Trustee in the trust agreement will take over the administration of the trust or the court will appoint a new Trustee.
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If you have additional questions about the problem with DIY estate planning, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule your appointment today.
