From time to time I’ll field a question that goes something like this: “I’m concerned that ‘Ted’ is named as a trustee in my documents and might be able to take money from the trust…” This concern is expressed to me even though Ted is not a named beneficiary.
When I hear a question like this – I am fairly certain that the person asking it doesn’t understand the difference between a trustee and a beneficiary. Today I’m going to explain what a trustee’s role is within your trust.
First off, many people who have trusts don’t quite understand what a trust is. Think of a trust as a contract. This contract is between the Settlor and the Trustee. The “Settlor” – of the trust (also called the “Grantor”) is the person who determined the terms of the trust. In other words, the “Settlor” is the trust creator. The Trustee is responsible for carrying out the terms of the trust.
If the trust were a bus route – then the Settlor is the person who designed the route. He laid out which streets the bus would travel on – which direction the bus would travel – where the bus should turn and where the bus should stop. In contrast, the trustee is responsible for driving the bus. The trustee is not allowed to take the bus outside of the bus route that the Settlor established. The trustee is only supposed to drive the bus along its route.
In a revocable living trust the Settlor not only creates the trust, but can change the trust terms by amending the trust at any time. In an irrevocable trust the Settlor cannot change the trust terms once the trust is signed. So with a revocable trust the Settlor can change the bus route and in an irrevocable trust the Settlor is not allowed to change the bus route.
As I indicated earlier, the trustee is the person (or entity – such as a bank or trust company) responsible for carrying out the terms of the trust. In a revocable living trust the Settlor might also act as the trustee during her lifetime. But once the original Settlor/trustee becomes incapacitated or dies – another person steps into her place to act as trustee.
There might be more than one trustee at any time – or there might be a series of trustees. As I just mentioned, in a typical revocable living trust the Settlor usually acts as the initial trustee. If the Settlor becomes incapacitated – then another person may act as trustee during the remainder of the Settlor’s lifetime. At the Settlor’s death, a trustee is named to administer the trust during the trust administration process – which is the period of time between the date of death and the distribution of the trust. Finally, if the trust continues on for a surviving spouse, children or other beneficiaries, a trustee may be named for that purpose.
So when you read a trust document – it may make mention of the word “trustee” several times – but who is serving as trustee will depend upon where in the timeline one happens to be. So if you are reading Sam’s trust – but Sam is dead, then obviously someone besides Sam will be playing the role of trustee at that time.
Getting back to my original question – just because someone is named in the document as a trustee does not necessarily mean that they are currently also a beneficiary. Suppose that Sam creates a revocable living trust that names himself as Trustee. The trust also states that Sam’s son Ted will serve as a successor trustee upon Sam’s incapacity or death.
When Sam becomes incapacitated – Ted steps in as trustee. Ted is not a beneficiary at this time. Ted is responsible for carrying out the terms of the trust to take care of Sam for the remainder of Sam’s life. Even if Ted is a named beneficiary upon Sam’s death, Ted should not use any of the trust funds for his own purposes. Ted has a fiduciary responsibility to carry out the terms of Sam’s trust in a neutral capacity – without regard to his own welfare.
When a trustee is also a beneficiary they are said to wear “two hats”. In other words – they have competing interests. In my example above, when Ted serves as a trustee for his father Sam, he realizes that every dollar that he spends on his father’s care is one less dollar that he may inherit in the future. This could have an adverse impact on Sam’s care if Ted decides to act in his own self-interest as opposed to the interest of his father.
But just because someone is named as a trustee doesn’t necessarily mean that they are also a beneficiary of the trust. Suppose that Sam names his brother Bob as a trustee of the trust. Bob is not a beneficiary, as Sam names his wife and children as the beneficiaries. Here, even though Bob is named as a trustee, he is not entitled to trust funds.
Bob may take a reasonable trustee’s fee for his time and efforts in conducting trust business, but isn’t obligated to do so. Bob may also reimburse himself for his out of pocket expenses when acting as a trustee. Common expenses include mail, postage, telephone and travel.
In closing – the Settlor is the person who creates the trust – and the trustee is the person responsible for carrying out the trust terms. If you have questions about your trust – don’t be afraid to ask your attorney – even if you feel that the question is basic. No question is too basic – and you should completely understand who is serving in what capacity within your legal documents.
©2011 Craig R. HerschTags: advice, attorney, beneficiary, Bonita Springs, Cape Coral, children, Craig Hersch, estate, estate plan, Estate Planning, family legacy, florida residency, Florida resident, Florida trust, Florida will, Fort Myers, gift, gift tax, grandchildren, IRS, lawyer, Naples, Port Charlotte, residency, retiree, revocable living trust, revocable trust, Sanibel, Southwest Florida, spouse, tax, trust, wealth