What is a trustee in estate planning?

What do choosing a daycare, a housesitter, or a financial advisor all have in common? In each instance, you’re searching for someone you can count on to look after the most important things in your life. When it comes to estate planning, nominating a trustee fits right in among these important life decisions.

In estate planning, a trustee is the person legally responsible for managing the property in a trust. A trust is a legal arrangement in which one person gives another person the legal authority to manage assets for the benefit of a third party. The person who creates the trust is called the "grantor," “settlor,” or “trustor.” They assign an initial trustee to manage the trust, and a successor trustee as a “backup” to take over if their original trustee can’t complete their duties. They also name "beneficiaries" who receive the assets in the trust according to the trust terms.

There are many different types of trusts that can be used to achieve different goals. As a result, a trustee’s duties will vary depending on the type of trust they manage, and the instructions left by the trust’s creator.

What does a trustee do?

Depending on the type of trust they manage, a trustee has many important duties and responsibilities, including:

• Keeping track of and managing assets in the trust. This could include maintaining real estate property or reinvesting earnings from an investment account.

• Distributing trust assets to beneficiaries. A trustee distributes trust assets according to the instructions in the trust documents. For example, the trust’s creator may want their beneficiaries to receive trust property when they hit a certain milestone (like getting married or attending college), or after the creator passes away.

• Keeping records for all trust expenses, filing tax returns, and reporting to beneficiaries when necessary. Trustees must act in the best interest of the trust’s beneficiaries. Depending on the type of trust they manage, a trustee may communicate with beneficiaries and keep them informed about what’s happening with the trust’s property. (There are certain instances when a trustee may not communicate with beneficiaries at all. For example, a silent trust limits the amount of information trustees have to share with beneficiaries. Some beneficiaries of silent trusts don’t even know they’re beneficiaries!)

• Keeping trust property separate from their own property. Unless the trust’s creator allows it, their trustee can’t use trust assets for their own benefit. For example, a trustee can’t take money out of a bank account belonging to the trust to use for their personal expenses.

Who can be a trustee?

In the United States, a trustee should be a US citizen, a legal adult, and “of sound mind,” meaning they’re capable of understanding their actions. As long as your trustee fulfills those requirements, you can choose virtually anyone. Some popular choices for trustee include:

• A reliable friend or family member. For example, you may decide to name your close friend, sibling, or adult child as your trustee.

• An estate attorney. Naming a neutral third party as your trustee removes the possibility of a conflict of interest. Estate lawyers are also specialists in their field, and can help ensure your trust assets are distributed quickly and accurately.

• Corporate trustees. A corporate trustee is a corporate entity — like a trust department at a bank — that manages trusts for a fee. Corporate trustees have years of experience and expertise managing trusts. They can be a good option for people with large, complicated trusts. If you want to nominate a corporate trustee, it’s a good idea to speak with them first to understand their requirements for managing a trust. For example, some corporate trustees only manage trusts valued over a certain dollar amount.
• Yourself! If you create a revocable living trust — which is a trust you establish during your lifetime — you have the option to name yourself as the initial trustee. This lets you continue to have full control over your assets. Then, if your health declines or you pass away, your successor trustee will take over your duties.

Whoever you choose to act as your trustee, they should be:

• Honest and dependable
• Organized and detail-oriented
• Able to get along well with others — especially your family members and beneficiaries
• Willing to serve as your trustee

How much should you pay a trustee?

Managing a trust and distributing assets can be a lot of work, so trustees are often compensated for their time and effort.

• If you hire a corporate trustee (like a bank), they’ll likely set their own fees. Corporate trustees are typically paid around 1-2% of the value of your trust’s assets.
• If you nominate a friend or family member as your trustee, you can specify in your trust document how much (and how often) they should be paid. Close family members often choose to waive compensation.

It’s up to you to determine how much to pay your trustee. You may want to sit down with them and work together to decide what is reasonable payment for their efforts. Here are some compensation arrangements you could consider:

• You pay your trustee an annual flat fee for every year they manage your trust.
• You pay your trustee an hourly rate for the time they spend managing your trust.
• After you pass away, you pay your trustee a percentage of the value of the trust’s assets.

If you don’t specify compensation terms in your trust document, then when your trustee assumes their duties, a local court will set their compensation based on your state’s laws.

Trustee vs. trustor vs. executor: What’s the difference?

A trustee is the person or entity legally responsible for managing the assets in a trust, and distributing the property according to the trust’s terms.

A trustor is the person who creates a trust.

An executor is the person you name in your last will and testament to carry out your wishes after you die. An executor plays a role similar to a trustee, with an important distinction: wills have to go through a process called probate, while trusts do not. As a result, an executor carries out their duties under the oversight of a local probate court.

Common questions about trustees

Can a trustee remove a beneficiary from a trust?

Generally, no — a trustee isn’t able to remove a beneficiary from a trust. When it’s possible to amend a trust document and remove a beneficiary, that can only be done by the trust’s creator.

There may be situations where a trustee has the right to withhold distributions from a beneficiary. For example, if the beneficiary has an addiction and may mishandle money, the trustee could temporarily withhold their inheritance. These restrictions have to be outlined by the trust’s creator in the trust document, and the trustee will enforce them. The trustee can’t make these judgment calls on their own.

Can a trustee also be a beneficiary?

Yes, a trustee can also be a beneficiary. For example, you could name your spouse or adult child as your trustee, and they would still be able to receive property from your trust when you pass away.

One thing to keep in mind: If you choose a beneficiary to be your trustee (and you want to pay them a fee for their efforts), those fees are subject to income tax. However, any inheritance they receive through your trust isn’t subject to income tax. Keep this in mind when determining the most tax-advantaged way to pass on your assets.

What is a successor trustee?

A successor trustee is a “backup” trustee who will take over management of your trust if your original trustee is unable or unwilling to serve. This could happen if:

• Your original trustee can no longer fulfill their duties
• You were the original trustee, and you either passed away or are unable to continue managing your own affairs

It’s a good idea to name a successor trustee in your trust document. This is especially true if you are the initial trustee — you’ll need someone to manage the trust property if you become disabled or distribute it after you pass away.

What is a co-trustee?

Co-trustees, or joint trustees, are two or more entities that are responsible for managing a trust together. Generally, co-trustees must be in agreement when making decisions, unless the trust document states otherwise.

If you’re the initial trustee of your own trust, you can have other co-trustees who manage the trust alongside you.

Create a trust to protect what matters most

Everyone should have a valid estate plan in place. Trusts are a great way to make sure your assets are managed properly during your lifetime, and then passed on to the people and organizations you care about after you die.

If you want to save money on attorney's fees, consider using FreeWill to create your living trust. In less than half an hour, you can have the ultimate peace of mind that comes from having a completed estate plan.