Understanding How Trusts Work
It can be easy to confuse trusts with a last will and testament, as both tools allow you to decide what happens to your property once you pass away. A last will and testament is only a document, while a trust is a fiduciary relationship between a grantor and a trustee (the person nominated to be responsible for the trust property).
In a typical trust arrangement, a grantor will place assets in a trust for various purposes. The trustee is responsible for managing the contents of the trust and carrying out any duties associated with it, such as dispensing assets when certain conditions defined by the grantor are met. In many scenarios, a grantor will serve as their own trustee, managing the trust’s contents as they please and with the inherent guarantee that their wishes are being honored.
When the grantor passes away or becomes unable to manage their own affairs, however, a successor trustee will need to take over and assume responsibility for administrating the trust. Many trusts are designed to “pay out” or operate similarly to a will once the original grantor passes away. They may also serve long-term functions, including supporting loved ones with special needs or elderly family members. No matter the specifics, the successor trustee is responsible for performing the functions demanded by the trust.
The Role of the Successor Trustee and Trust Administration
You must choose the successor trustee for any trust carefully. The successor trustee must be someone who is capable of executing the terms of the trust once you are gone, meaning they will need a full understanding of what those responsibilities entail and the systems involved.
Serving as a successor trustee requires practical knowledge, time, and resources. You may be tempted to name a loved one or close friend as your successor trustee, but it should be understood that the role is not a symbolic one. In fact, placing an ill-equipped individual in the successor trustee role can harm both you and them. A successor trustee who is unable to fulfill their responsibilities can be held personally liable for a breach of fiduciary duties.
Ideally, a successor trustee should be intimately familiar with your goals and the scope of the trust. They should also have a working knowledge of estate planning law and a strong financial literacy.
For this reason, many choose to employ a professional fiduciary, such as a trust department of a bank.
Our West Des Moines trust administration attorneys can fulfill all of a successor trustee’s duties, including:
- Providing notice to beneficiaries. When a grantor passes away and their trust becomes irrevocable, heirs and beneficiaries to that trust must be promptly informed of the event and its implications. Beneficiaries have the right to request copies of the trust, which the successor trustee is responsible for distributing.
- Inventorying and appraising of trust assets. The successor trustee must consistently inventory the items placed in the trust and regularly appraise their value. Doing so is essential to both preserving the value of the assets as well as aid in their eventual distribution.
- Accounting of trust contents. Successor trustees maintain a fiduciary duty to their trusts, meaning they must not mismanage its funds or property. Beneficiaries of the trust are entitled to a full accounting of the trust’s accounting to ensure the trust has been appropriately managed.
- Filing of taxes. Though trusts are often used to avoid estate taxes, they carry complex tax implications of their own. In addition to the deceased’s personal tax filings, a successor trustee is often also responsible for filing any relevant fiduciary income returns.
- Creating and managing sub-trusts. Some trusts have provisions mandating the creation of “sub-trusts” upon the grantor’s passing. The successor trustee will be responsible for creating and administering the terms of any sub-trust associated with the parent trust.