A trust agreement is a complex relationship, and many people ask who is the trustee of a trust. A trustee of a trust is the legal owner of trust properties who manages the properties for the benefit of named beneficiaries.
Let’s take an example of the living trust, which is used as an alternative to the will in order to avoid probate. John Smith creates a trust. He is, thus, the grantor. He names himself as trustee and beneficiary. According to the terms of the trust agreement, John Smith, as beneficiary, is entitled to all the income arising from the trust property. John Smith, as the trustee, has discretion to dispose of the trust property for education, medical, and all other miscellaneous needs of John Smith, the beneficiary. Under the terms of the trust agreement, John Smith, as trustee, manages the trust properties for his own benefit because he is the beneficiary. When the trustor, trustee, and beneficiary are one and the same, it produces the same effect as owning the trust property. In this case, what properties does John Smith manage for the trust?
In the example above, suppose that John Smith has a co-op in Manhattan, a house in Staten Island, and a bank account worth $50,000. All are under his name. He established a trust, but did not transfer any of the properties in the trust. In that case, John Smith, as trustee, is not managing any properties for the trust. When he dies, all his properties have to go through probate and are disposed of by will.
Assuming now that John Smith transferred his co-op in Manhattan and bank account in the name of John Smith, as trustee of the John Smith Trust. In this case, John Smith is now managing the co-op and bank account for himself, as the named beneficiary. When he dies, only the house in Staten Island goes through probate and is distributed through his will (or intestate if he dies without a will). His co-op and bank account will be transferred to his named successor trustee in the trust agreement, which will be managed (or distributed, depending on the terms of the trust agreement) to his successor beneficiaries.
In the case above, in the trust agreement, John has a provision naming his brother, Adam, as successor trustee, and his three children, Linda, Michael, and Jenny, as his successor trustees, upon his death. When John dies, the co-op and bank account will be transferred to his brother, Adam Smith, as the successor trustee of the John Smith Trust. Adam now has the responsibility of managing the trust properties for the benefit of the beneficiary. In the trust agreement, John Smith can name several successor trustees who can serve, in case his brother has predeceased, has renounced, or is incapacitated in any way to serve as trustee. In the same way, John Smith can name several contingent beneficiaries who can succeed the successor beneficiaries, in case the successor beneficiaries have predeceased or have renounced their rights to the trust.
Generally, in the living trust where John Smith is the grantor, trustee, and beneficiary, the trust agreement is revocable. Once John Smith dies, the trust agreement becomes irrevocable. In the trust agreement, John Smith can provide that, upon his death, the trustee should immediately distribute the trust properties to the beneficiaries, or John Smith can state that the trustee can manage the trust properties for the beneficiaries, where the beneficiaries receive only the income until the beneficiaries turn 30, upon which the trust principal will be distributed to them. John Smith can be creative and unlimited in the trust provisions, and for this reason, the living trust has been used as a suitable alternative to a will.
Responsibilities of a Trustee
In this case when the trustee is different from the grantor, it becomes more apparent that the trustee has a big responsibility to act for the benefit of the beneficiaries. Because the trustee is the legal owner of the trust properties, one might think that the trustee can squander the trust properties. This is true, and that is why laws and jurisprudence provide for a fiduciary relationship between the trustee and the beneficiaries. The trustee is mandated to always act in the best interest of the beneficiaries. In case there is conflict of interest between the trustee’s interests and the beneficiaries’ interests, the trustee is mandated to always choose the beneficiaries’ interests. In case the trustee chooses his own interests over the beneficiaries, it could be considered self-dealing, and the trustee is not only liable for the amount that was lost in the trust, but also for legal fees, costs of suit, punitive damages, and damages for mental anguish.
In the example above, in case the successor trustee, Adam Smith, withdraws $30,000 from the bank account and uses it for his personal benefit and not for the beneficiaries, the beneficiaries, Linda, Michael, and Jenny, can file a case against their uncle, Adam, for self-dealing and breach of trust. By then, however, Adam had already used the money, and both parties are embroiled in a legal battle that could cost more than the amount that was squandered. For these reasons, when establishing a trust, ‘who is the trustee of the trust’ can be one of the most important questions that need to be considered to ensure the effective implementation of the trust.
Choices of Trustee
Choosing a trustee is one of the most important decisions in establishing a trust. Some choose a trusted family member. Others choose a corporate trustee. Some choose two trustees – a corporate trustee plus a family member – and both have to agree on certain financial disbursements. Although a corporate trustee is a safer choice in avoiding self-dealing transactions, their fees to administer the trust can be hefty and they normally only manage large trusts. Other choices would be a family member and an accountant, or a family member and an attorney. Since accountants and attorneys are professionally bound by a code of ethics, risks of self-dealing and conflicts of interest can also be minimized. In making a choice of ‘who will be a trustee,’ it’s important to remember that trustees who are not family members will always have to be compensated, and their fees should be considered when designating them as trustees.
Trustees in Irrevocable Trusts
From the name itself, an irrevocable trust cannot be modified or revoked. Once property is transferred to the trustee of an irrevocable trust, the grantor generally cannot take it back anymore. The property is not considered the grantor’s property anymore, and for this reason, the property is free from the grantor’s creditors.
Still, an irrevocable trust has some disadvantages. Times and situations may change. The grantor’s relationship with the beneficiary might change, but the grantor in an irrevocable trust cannot change the beneficiary without the beneficiary’s consent anymore. The grantor’s economic condition might change, and he may need the property for something, but the grantor won’t be able to get back the property anymore.
However, high net worth individuals realize more gains in establishing an irrevocable trust, especially when the grantor’s purpose for the trust is to protect one’s assets from creditors, to minimize estate or capital gains taxes, or to become eligible for government programs, such as Medicaid. A skilled and competent lawyer will be able to draft an irrevocable trust agreement that can adequately address the different concerns of the grantor. For example, a trustee with unlimited discretion can be given the power to transfer trust assets to a second trust with more favorable terms, a method known as decanting. In some states, a grantor can give a power of appointment to a trust protector (who is not the trustee) to modify the terms of the trust. When it is carefully worded, the property can even be given back or loaned to the grantor, depending on how the trust document is written.
For this reason, ‘who is the trustee of a trust’ becomes a very important question in an irrevocable trust. Because the trust cannot be modified, the trustee in an irrevocable trust is generally given very broad powers in the trust agreement to give the trustee flexibility and more freedom to react and act in accordance with any change in the circumstances. The trustee is usually given the power to determine when to make distributions, to make a distribution of the principal, or to invest the principal. With these broad powers, the selection of a trustee in an irrevocable trust is important to the successful implementation of the trust. The grantor should choose a trustee he completely trusts, given that the trustee cannot be his ascendant, descendant, or an entity he controls.
If you are thinking of establishing a trust, we, at the law offices of Albert Goodwin, are here for you. We can review and evaluate your assets and recommend an estate plan that includes a mix of trusts and a will for just $1200. This includes an estate plan evaluation, drafting and execution of the will in accordance with state formalities, the preparation of other relevant documents to make a self-proving will, the drafting of a healthcare proxy and springing power of attorney, the preparation of the trust instrument, and transfer of initial properties to the trust. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.