A trust is a legal arrangement whereby one person (or an institution, such as a bank or a law firm), the “trustee”, holds legal title to property for another person, the “beneficiary.” Trustees are bestowed a hefty responsibility that one should not take lightly, as failing to perform their duties appropriately could have substantial personal consequences. The following are some of the essentials of being a trustee.
1) Understand Responsibilities. Before accepting the role of trustee, a person should read the rules of the trust in their entirety. As documents of this nature are generally written in legalese, a person should consult a lawyer if they do not fully understand the terms presented within the document. Once accepting the duty, the trustee should refer to the document whenever questions arise as to how to discern a course of action when questions or problems arise. A trustee should read the document at least once a year to ensure that he or she has not forgotten to perform one of their duties. Often, lawyers will provide the trustee with a summary of the trust instrument in lay terms for easier reference.
Trust documents are often silent when it comes to particular situations. If this is the case, the trustee must then look to state law to determine how to proceed. The trustee should be familiar with these situations as well.
A trustee should be aware of which acts are discretionary and which are mandatory.
2) Invest Wisely. In South Carolina, when the trust instrument is silent concerning how to invest trust assets, the trustee is required to operate under the “Prudent Investor Rule.” Under this rule, the trustee should invest the assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. The law requires the trustee to use reasonable care, skill, and caution. The trustee can be held personally liable if he or she places trust money in careless or speculative investments or if the assets are unproductive. The trustee must also balance the interests of current and future beneficiaries. For instance, if an investment produces immediate income, but little or no appreciation in value, it may favor remainder beneficiaries. However, if the investment is one that appreciates but pays no current income, the interest of current beneficiaries may be neglected.
3) Be Impartial. The trustee must not favor one beneficiary over another. When a trustee has the discretion on whether or not to make distributions, the trustee must weigh the beneficiary’s current needs, future needs, and other sources of income, against the needs of other current and future beneficiaries of the trust. A trustee must have the ability to say “no” in order to protect all parties.
4) Keep Records. South Carolina law requires that a trustee must provide an accounting of trust activity and balances to the trust beneficiaries at least annually. At request, the trustee must be able to prove that the activities reported in the accounting actually occurred. Good recordkeeping is essential to being a trustee. The trustee may consider hiring an accountant or bookkeeper to maintain this accounting for them.
5) Avoid Comingling. The trustee should not mix his or her personal assets with those belonging to the trust. The trustee also should never loan trust assets or use trust assets as collateral for a loan.
6) File Tax Returns. Trusts may be required to file tax returns by April 15 to report the income earned by the trust during the previous year. Often, a trust passes taxable income or deductions to the beneficiaries. The trustee is required to furnish a Schedule K-1 to the beneficiaries in time for them to report this income on their personal returns.
7) Delegate Responsibility. While the responsibility for adhering to the rules of the trust ultimately lies with the trustee, the trustee can delegate responsibility for most actions of the trust. Trustees may choose to rely on attorneys experienced in trust law in assisting them to understand their duties, accountants to help with tax returns and accounting, and investment advisors to help wisely invest trust assets.
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