Trustee

What is a Trustee?

A trustee is an individual or firm that is given authority to manage property or assets for the eventual benefit of a third party.

A trustee can be appointed for various purposes that each come with different responsibilities, such as trust funds, charities, and even bankruptcies.

Trustees have a fiduciary responsibility, meaning they must act in the best interest of the beneficiaries when managing and allocating assets.

In some cases, like in a trust fund, trustees are required to prepare financial records on behalf of the trust. They include financial statements and tax returns.

In addition, trustees are considered decision-makers, meaning they make decisions based on the provisions of the outlined agreement.

Choosing the Right Trustee

Choosing the correct person to assume the role as the trustee is an extremely important decision due to the implications of the role on the individual’s trust.

When the decision is being analyzed, there are three possible routes to take. They are:

Trust Company: Hiring an organization that specializes in acting as a trustee can be an exceptionally lucrative idea due to expertise. A trust company is able to analyze an individual’s situation more effectively and provide intelligent guidance.

Contrarily, hiring a trust company to act as a trustee can become increasingly expensive.

Friends or Family: Selecting a friend or family member to be your trustee is a common route but can cause problems. Issues such as family drama, privacy, and selfishness can arise due to financial implications.

Conversely, having someone who is close to you can be beneficial due to the understanding of personal objectives and family dynamics.

Lawyer or Attorney: Appointing an impartial third party such as a lawyer can be a beneficial option due to the fact that they will have extensive legal knowledge. If an individual has a long-standing relationship with their lawyer or attorney, they will possess in-depth insight into your family situation and can effectively act as a trustee.

Similar to a trust company, hiring a lawyer or an attorney to act as a trustee can be an expensive procedure.

Duties of a Trustee

A trustee is an important individual due to the legal authority and responsibility they are given in order to manage a trustors property an asset.

With that in mind, a trustee has an extensive list of duties they may be required to oblige given the specific agreement. They are described below:

Legal Obligations: Under the law, the trustee is bound to act in accordance with the terms of the trust agreement. If the trustee breaches the contract, they must depart from the terms of the trust or face legal consequences.

Act as a Fiduciary: As previously mentioned, the trustee must act in the best interest of the beneficiaries, ensuring an advantageous outcome.

Necessary Investments: If written within the trust agreement, a trustee should invest assets with the primary goal of preserving them now and in the future.

Impartiality: The trustee must act impartially between the individual beneficiaries so that one is not treated unequally compared to the others.

Asset Administration: Once the trustor has passed, the assets within the trust must be allocated to the beneficiaries. It is up to the trustee to distribute these assets based on the terms outlined in the trust agreement.

Decision Making: The trustee is responsible for making decisions on specific items such as how and when beneficiaries receive payment and provisions of the trust.

Record Keeping: As previously mentioned, trustees are also responsible for preparing a wide assortment of documents such as tax returns, financial statements, and other financial records. These documents must be organized and filed.

Communication: The trustee is responsible for communicating with the trustor and beneficiaries if they have any questions or concerns about the trust fund.

How Does a Trustee Act in a Trust Fund?

In a trust fund, the trustee is the individual who is given the legal responsibility to manage and allocate the trustor’s assets to the eventual beneficiaries.

The trustor, in this case, is the individual who creates a trust in order to preserve their assets which are then used as inheritance for their chosen beneficiaries.

Beneficiaries are individuals that are chosen by the trustor who will benefit from the trust once the trustor has passed on. These individuals are given a portion of the trust’s assets based on the trustor’s desires which are outlined in the trust agreement.

How Does a Trustee Act in a Charity?

Although it is most common to see the term “trustee” when talking about a trust fund, trustees can also appear in a charity.

In the case of charities in the United Kingdom, a trustee is a volunteer who takes on fiduciary responsibility on behalf of the charity. These responsibilities are subject to the provisions outlined within Charity Law and the Charities Act of 1993.

In most cases, the charitable organizations are also limited liability where the directors would assume the role of the trustee. This would ensure their liability is limited.

How Does a Trustee Act in a Bankruptcy?

Similar to a trust fund and a charity, trustees can also appear in bankruptcy cases.

When a consumer or business files for bankruptcy, all property belonging to the individual or organization is created into an entity called a “bankruptcy estate.”

Once the bankruptcy estate is created, a “trustee in bankruptcy” or TIB is appointed by the United States Trustee in order to manage the property and assets of the bankruptcy estate.

Every judicial district has a permanent Chapter 13 trustee that is appointed to these bankruptcy situations. They are referred to as a “standing trustee.”

The trustee in bankruptcy ensures actions are taken to avoid the pre-bankruptcy transfer of property and to guarantee everyone complies with the duties and responsibilities under the law.

Additional Resources

Thank you for reading CFI’s guide to Trustee. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• Asset Allocation
• Named Beneficiary
• Special Needs Trust
• Trust Fund
• See all wealth management resources