If you’re learning about estate planning in Huntsville, AL, or have been speaking with your Huntsville attorney, you likely have an idea of your options. For example, you’ve probably been told or read that a trust can help certain assets pass outside probate court.
While the concept of a trust is easy to grasp, most people don’t understand the gravity and responsibility of choosing someone to be your trustee.
A trustee is the person or company that holds and manages trust assets for the beneficiaries, following the terms of the trust.
How Do Trusts Work?
When it comes to discussing wills and trusts, you may be wondering whether you need a trust at all. The short answer is that not everyone does. For families with real estate, a beneficiary who needs protection, or assets that should be managed over time, a trust is often the right structure.
It’s all about knowing how trusts work to understand their value in your estate plan. Generally speaking, a trust is a legal document in which you (the trustor, also referred to as the grantor) place specific assets with a trustee, who holds and manages them for your beneficiaries.
There are several different types of trusts to choose from. Here are a few of the most common types:
A testamentary trust. A testamentary trust is specified within your last will and goes into effect once you pass.
A living trust. This is a common type of trust, and you can choose between an irrevocable or revocable living trust.
An irrevocable trust is generally permanent: once you sign and fund it, you generally cannot take the assets back or change the terms alone. The trustee holds them for your beneficiaries on the terms you set.
A revocable trust is just the opposite. The assets within a revocable trust remain yours, which means you keep control over them during your lifetime. Of course, you can also end the trust or change it anytime you wish.
A marital trust. Also referred to as an “A” trust, it is a special type of trust that allows either spouse to become the beneficiary. Property left to a surviving spouse this way generally passes without federal estate tax at the first death. Tax, if any, is figured at the survivor’s death.
Charitable trusts. Charitable trusts allow you to designate certain assets to your charity of choice. For example, choose a charitable remainder trust. You’ll still be able to receive income from your assets for a certain amount of time, with any remaining income or assets going to the charity.
While there are plenty of other types of trusts to discuss, what’s more important is that every trust needs a trustee, the person who manages the assets in your trust, their distribution, and more. That can be you or someone you appoint.
The Importance and Responsibilities of a Trustee
As stated above, a trustee is chosen to act as a custodian for the assets held within the associated trust. Once appointed, this person becomes responsible for the management, administration, and distribution of the assets within the trust as per the trustor’s instructions.
A trustee’s central duty is loyalty: the trustee must manage the trust solely in the beneficiaries’ interests, not the trustee’s own. This is why it’s critical to appoint someone you can depend on and trust to carry out your instructions. Conversely, choose the wrong person and end up with someone mismanaging the trust resulting in a loss of assets and leaving your beneficiary with little to nothing.
While the ultimate goal is to carry out your instructions and protect your legacy, a trustee has several other responsibilities. This would include the following:
They must act as fiduciary. A fiduciary is someone who protects the investments and distribution of a trust. In other words, once the trust goes into effect, this person is solely responsible for managing the money or other assets within it, which requires consistent monitoring — almost like a money manager or financial advisor.
They must ensure the safety of the assets and the terms of the trust. Therefore, whoever is appointed as your trustee should know your beneficiaries to some degree and have access to any necessary records involving the assets in the trust to be able to protect them. They should also be able to understand the terms of the trust to ensure that your wishes are followed accordingly.
They must invest the assets prudently. Your trust can expand, restrict, or eliminate that duty, and you can add specific investment instructions or direct that the trustee work with an investment advisor.
They must administer the trust. Then, when the time comes — it could be upon your passing, a certain age, or milestone — your trustee will have to distribute the assets to your beneficiary as per your instructions.
They must make ongoing decisions. For the life of the trust, your trustee will have to make certain decisions. This could include how and when your beneficiaries receive their payment and decide on other provisions. Keep in mind that where your trust is silent, Alabama’s Trust Code fills in the rules, and the trustee must act in good faith.
They must keep records and prepare all tax-related forms. In managing the assets in a trust, the trustee must also take care of the tax filing and maintain any financial records and statements associated with said assets.
They must keep the beneficiaries informed. Alabama law generally requires a trustee to notify the beneficiaries within 60 days after accepting the trusteeship or after the trust becomes irrevocable, to respond promptly to reasonable requests for information, and to send current beneficiaries a report at least once a year.
It should be noted that a trustee’s duties will likely change over time, depending on the type of trust and who the beneficiaries are. For example, suppose minor children are involved. In that case, the trustee will have to manage that trust until the child reaches the age set in the trust.
Who Can I Legally Appoint as My Trustee?
Believe it or not, it’s common for the person creating the trust to name themselves as the trustee. But, of course, this is only until they can no longer fulfill the role of trustee due to death or mental incapacitation. If this is the case, it’s important to appoint a successor trustee when creating the trust to ensure there is someone who can take over should an unfortunate event occur.
However, in the state of Alabama, you can name almost any capable adult or a trust company as your trustee, but some choices have legal and tax consequences worth discussing before you decide. For example, it could be your spouse (who can also be named as your co-trustee or successor), one of your adult children, a relative, or a trusted friend. You can even designate one of your beneficiaries as a trustee, granted they’re fiscally responsible and are up to the task.
Suppose you want your assets to be invested in the future. In that case, you can entrust a corporate bank trust department or a trust company with experience in what you’re looking for.
Keep in mind that you’ll also be expected to pay your trustee reasonable compensation to perform the duties required by the trust. This money typically comes out of the trust assets, which means you should define the compensation amount within the trust document, so there are no misunderstandings.
It should be noted that naming someone as your trustee, successor, or even co-trustee doesn’t mean that you have to give up all control. This person is expected to follow through with your instructions. If you’ve created a revocable living trust, they’ll have to report back to you while the trust remains revocable.
What to Look for in a Trustee
Suffice it to say, not everyone is cut out for the trustee job — no matter how loyal a friend or family member the person may be. In truth, no court supervises a trust day to day, although Alabama law gives beneficiaries information rights and court remedies against a trustee who misbehaves.
So, keep in mind the following when narrowing down your options:
Can you trust them? Trust is arguably the most essential component of appointing a trustee. You want to make sure the person you choose is someone you can rely on to follow your instructions and protect your assets and beneficiaries in the process.
What’s their relationship with your beneficiaries? You’ll want to go with someone who can make themselves available to your heirs if they have any questions and is someone they feel comfortable reaching out to. You’ll also want to ensure that this person knows your beneficiaries well enough to have their best interests in mind. For example, suppose they know your heirs aren’t very good at managing their finances. In that case, they’ll make sure that they distribute any money accordingly to ensure it doesn’t run out quickly.
Are they financially competent? A lot of different responsibilities come with managing a trust. However, trust management involves a lot of business and financial aspects that will require knowledge and experience. For example, your trustee will need to understand how to keep detailed records, file tax returns, make investment decisions, etc.
Choosing a trustee is especially important if the beneficiary has special needs, as this can be a life-long account to manage. Regardless of the situation, whoever you choose must be someone you can trust, is up to the task, and needs minimal help to ensure that everything is done correctly and according to your instructions.
If you’re in doubt about appointing a trustee or serving as one, get in touch with us to schedule a consultation. When you are choosing a trustee for your own plan, Sarah S. Shepard can help you weigh the options. If you have been named trustee and are not sure where to start, Ty Shepard can walk you through the first steps of trust administration and what Alabama law expects of you.
Ty Shepard is a probate and trust administration attorney at Sparkman, Shepard & Shepard, LLC in Huntsville, admitted to the Alabama State Bar in 2012, with an LL.M. in Taxation. He represents executors named in a will and advises successor trustees in Huntsville and North Alabama. More about Ty Shepard.