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Michelle K. Chun:

In our "What Is a Trustee?" video, we discuss the three parties to a trust-- the grantor, the beneficiary or beneficiaries, and the trustee or co-trustees. In this video, we'll ask a follow-up up question. What does a trustee do? We'll also touch on some best practices we believe a trustee can do to help ensure the success of the trust.

Remember, the trustee is the person or organization that the grantor has selected to carry out his or her wishes for the trust. The trustee is the legal owner of the assets in the trust, but the trustee is holding them for the benefit of the beneficiaries. It can't use those assets for itself. The trustee has seven key roles and responsibilities.

The first responsibility, the trustee must understand the terms of the trust. To carry out the grantor's wishes, the trustee needs to know what those wishes were in the first place. And to do that, it needs to know the terms of the trust inside and out. Let's say Frank is the grantor.

The trustee needs to know why Frank created the trust. Was it to fund a future business for Frank's son, Tom, or to hold a life insurance policy for the benefit of his daughter Jen? The trustee also needs to know the distribution policy of the trust, how long the trust is designed to last, and who the beneficiaries are. Responsibility number two, the trustee must make prudent investment decisions.

Most states have what are called prudent investor rules, which require the trustee to invest the assets in the trust prudently-- that is, factoring in what the money is ultimately for and then investing accordingly. That usually means the trustee can't decide to invest in whatever it wants to, but rather needs to diversify the trust's assets often through a mix of stocks, bonds, commodities, cash, and so forth so that those investments can grow over time at a manageable level of risk. Responsibility number three, a trustee must make distributions appropriately. Any time a distribution is made from the trust to a beneficiary, the trustee has to make sure that money is going to the beneficiary as the grantor intended at the right time, in the right amount, and for the right reasons.

In our example with Frank, that means every distribution decision needs to be filtered through the terms of the trust. Responsibility number four, a trustee needs to balance competing interests. Let's say that Frank has set up a trust for the benefit of his daughter, Jen, but also any future children that Jen might have. So the trust has a current beneficiary, Jen, but also future beneficiaries, her children.

Unless the trust says otherwise, the trustee needs to be impartial to all of these beneficiaries, even those that haven't been born yet. In most cases, the trustee couldn't decide to distribute 80% of the trust to Jen right now because that wouldn't be fair to her children. But it also couldn't decide to hoard the assets from Jen to keep for the grandchildren because that wouldn't be fair to Jen. It's all about balance.

The fifth responsibility, trustee needs, to understand a beneficiary's changing needs over time. If Jen's son, David, is five years old, he's not likely to need much in the way of distributions from the trust. And so the trustee can choose investments accordingly. But let's say that Dave is 45 years old.

He's got a mortgage payment, tuition for his kids, and maybe premiums for life insurance. He'll probably need more in the way of distributions. The trustee needs to be able to invest in assets likely to produce more income to meet those needs. Any good trustee tries to understand where beneficiaries are in their lives.

What are their responsibilities, roles, expenses, their biggest challenges? The trustee has an obligation to meet those needs to the extent that the terms of the trust allow. The six responsibility is trustees need to communicate well. This could include things like explaining the asset allocation of the trust, its investment performance, its distribution policy, or the process for making distribution requests.

And finally, the seventh responsibility, trustees must do all of the tasks required to administer the trust properly-- keeping trust records, providing statements and other notices to beneficiaries, paying trust expenses, and filing tax returns. To sum up, a good trustee understands the trust terms, makes prudent investments, makes appropriate distributions, balances competing interests, understands beneficiaries' changing needs, communicates well, and performs administrative tasks. By fulfilling all these duties, the trustee can help ensure the trust accomplishes its goals.

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