Creating a trust is one of the most effective ways to safeguard your assets, provide for loved ones, and ensure your wishes are carried out long after you are gone. Moreover, a well-drafted trust can provide flexibility, avoid probate, and protect wealth for future generations; however, even the best trust agreement can fail if the wrong Trustee is chosen to manage it. Selecting the right person, or professional entity, to serve as Trustee is therefore one of the most significant decisions you will make in your estate plan. With that in mind, an attorney at Thompson Law explains the key responsibilities of a Trustee and offer guidance on how to choose the right Trustee for your North Dakota trust.
Understanding How a Trust Operates
At its core, a trust is a legal relationship in which one party, known as the Grantor, transfers property to another, known as the Trustee, who then manages that property for the benefit of beneficiaries. The terms of the arrangement are set forth in a written trust agreement prepared at the time the trust is created. There are two broad categories of trusts. A testamentary trust is established through provisions in a Will and does not become effective until the Grantor passes away whereas a living trust, in contrast, becomes active during the Grantor’s lifetime once all legal requirements for creation are met. Regardless of type, the trust agreement provides detailed instructions relating to the administration of the trust that the Trustee is legally obligated to follow.
The Role of a Trustee
The Trustee is the individual or entity responsible for carrying out the instructions written by the Grantor and incorporated into the trust agreement. While some assume that the position involves little more than distributing property to beneficiaries, the reality is that Trustees must carry out a broad and demanding set of duties. Mismanagement by a Trustee can result in financial losses, family disputes, or even litigation. Some of the critical duties and responsibilities of a Trustee during the administration of a trust typically include:
- Adherence to the Trust Terms: Trustees must understand and follow the instructions written within the terms of the trust agreement regardless of whether the Trustee agrees with the terms and instructions. The only exception to this strict adherence requirement can be found when a term is illegal, impossible, or contrary to public policy.
- Asset Management and Protection: Trust assets can range from bank accounts and investments to farmland, mineral rights, or real estate in North Dakota. The Trustee must safeguard these assets and ensure they are properly maintained.
- Prudent Investing: Under North Dakota law, Trustees are held to the “prudent investor standard,” which requires careful and responsible management of trust investments. The emphasis is on preservation and reasonable growth, not risky speculation.
- Communication with Beneficiaries: Beneficiaries are entitled to information about the trust agreement, including information about their rights to the trust assets. The Trustee must provide updates, respond to questions, and maintain transparency in administration.
- Discretionary Authority: Some trusts give the Trustee flexibility to decide when to make distributions and/or the discretion to decide the size or value of a distribution from the trust assets. This discretion must be used cautiously with all decisions made keeping the best interests of all beneficiaries in mind.
- Conflict Resolution: Disagreements among beneficiaries are common, especially when the beneficiaries are family members. Trustees must remain impartial and attempt to resolve disputes before they escalate into legal battles.
- Distribution of Assets: Trustees oversee distributions according to the trust instructions, ensuring timing and amounts align with the Grantor’s intent. The trust terms may strictly direct distributions or provide the Trustee with discretion to make distributions when the Trustee believes it is appropriate to do so.
- Tax Compliance: Because a trust is treated as a separate legal entity, the Trustee must file annual tax returns and ensure that all tax obligations are met throughout the life of the trust.
- Recordkeeping: Trustees must keep thorough records of transactions, including deposits, withdrawals, expenses, and communications, so they can provide an accurate accounting if asked.
- Defending the Trust: If litigation arises involving the trust, the Trustee must represent the trust’s interests and protect its validity.
Qualities to Consider When Choosing a North Dakota Trustee
The decision of who to appoint as Trustee should not be taken lightly given the important duties and responsibilities associated with the administration of a trust. A spouse, adult child, or close relative may seem like an obvious choice, but personal relationships can sometimes complicate matters during trust administration. When considering candidates for your North Dakota Trustee, consider some of these important qualities and characteristics:
- Legal Knowledge and/or Experience: A Trustee is a fiduciary, meaning they are legally bound to act with loyalty, prudence, and impartiality. Awareness of these legal obligations is critical as is knowledge regarding the state and federal laws that apply to the administration of a North Dakota trust. Even if the Trustee is not an attorney, they should be willing to seek professional guidance when needed.
- Financial Knowledge and/or Experience: Trustees must handle bank accounts, manage investments, distribute assets, and file tax returns. As such, a Trustee with financial literacy is better equipped to manage these responsibilities effectively. While a Trustee can hire accountants and financial advisors, a basic understanding of money management is an advantage.
- Impartiality: Conflicts of interest can jeopardize trust administration which makes it imperative for a Trustee to treat all beneficiaries fairly, even if family ties or friendships are involved. Objectivity is essential when making discretionary decisions or resolving disputes.
- Trustworthiness and Integrity: Above all, a Trustee must be someone who can be relied upon to act honestly because this person will have control over significant assets and must always act in the best interests of the beneficiaries. Strong ethical standards and personal integrity are essential.
- Availability and Commitment: Administering a trust can be time-consuming given that a Trustee may be required to manage assets, respond to beneficiary requests, and prepare reports for years, even decades. It is crucial to ensure that a prospective Trustee is both willing and able to dedicate the necessary time and effort.
Should I Consider a Professional Trustee?
Many people initially consider appointing a spouse, sibling, or close friend as their Trustee. While this may seem practical, it can sometimes cause problems if that family member or friend lacks the skills, time, or impartiality necessary to carry out the role effectively. It is usually wise to at least consider appointing a professional Trustee, such as a bank, trust company, or law firm, given the numerous advantages a professional Trustee can offer, such as:
- Reduced Risk of Mistakes: Trust administration is complicated, and mistakes can lead to personal liability for an individual Trustee. Professional Trustees have systems and safeguards in place to minimize errors and maximize the success of the trust.
- Expertise: Professional Trustees are experienced in asset management, investment strategies, and tax compliance and are better equipped to navigate complex trust laws and regulations.
- Neutrality: A corporate or professional Trustee is not influenced by family conflicts or personal relationships. Decisions are made objectively and based on the terms of the trust.
- Conflict Prevention: Beneficiaries may disagree about distributions or asset management, and a neutral professional Trustee can help reduce the risk of disputes escalating into litigation.
- Longevity and Continuity: A trust can last for many years, sometimes spanning multiple generations. A professional Trustee provides long-term stability, which may not be possible with an individual Trustee who could pass away, become incapacitated, or simply step down.
Are There Disadvantages to Appointing a Professional Trustee?
While professional Trustees provide many benefits, they are not without disadvantages. The most common concern is cost, as professional Trustees charge fees for their services. These fees can vary depending on the size and complexity of the trust. Despite this expense, many families find the expertise and impartiality to be well worth the cost. Another potential drawback is the lack of personal knowledge about family relationships. A family member may know the specific needs of beneficiaries in a way that a professional does not. Even so, a professional Trustee will follow the trust instructions faithfully, ensuring that the Grantor’s intent is honored.
Choosing the right Trustee is one of the most important decisions you will make when creating a trust. The right Trustee can significantly contribute to the overall success of the trust whereas the wrong choice can cause the trust to fail. Working closely with an experienced North Dakota estate planning attorney is the best way to ensure that you make the right choice of Trustee for your North Dakota trust.
Can We Help You Choose the Trustee for Your North Dakota Trust?
Please join us for an upcoming FREE seminar or webinar. If you would like assistance creating a trust agreement or choosing the Trustee for your North Dakota trust, contact a North Dakota estate planning attorney at Thompson Law by calling 605-362-9100 to schedule an appointment.
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