What are the Responsibilities and Duties of a Trustee of a Testamentary Trust?

Originally published by Rania Combs.

Wills sometimes create testamentary trusts, trusts that spring to life after the death of a testator.

When a testator includes a testamentary trust in his Will, the testator has the opportunity to designate who will manage the trust. A Trustee is a person (or persons) or an institution named to control and manage such trusts.

Who Is Qualified to be a Trustee?

The Texas statutes require that an individual Trustee have the legal capacity to hold and manage property distributed in trust, and a corporate trustee have the power to act as Trustee in the State of Texas. But there are no real qualifications listed in the statutes besides that.

For example, it is not necessary for a Trustee to be a Texas resident, and a beneficiary can even serve as a Trustee of his or her own trust if the Testator permits it.

Nevertheless, as the word implies, the person selected as Trustee should be someone you trust implicitly. Accordingly, people who have proven themselves spendthrifts or how have a penchant for dishonesty would not be good choices.

Are Trustees Restricted in How They Manage Trust Assets?

The terms of the trust dictate how the Trustee will administer it, and the Trustee is required to manage the trust and make distributions in accordance with the Testator’s instructions.

There are certain basic rules relating to the management of a trust that will apply to every trust; however, the trust document can contain specific provisions that will override the general rules so it’s very important to be familiar with the provisions in the Will that dictate the Testator’s intentions.

A Trustee cannot take any action that would frustrate the intent of the testator with respect to how the trust is managed or the rights of the beneficiaries.

What are the Duties of the Trustee?

A Trustee is a fiduciary. Because the Trustee is caring for a beneficiary’s property, the Trustee owes the beneficiary the highest degree of loyalty and full disclosure.

The Trustee cannot put his interests over that of the beneficiary. Additionally, if the trust has more than one beneficiary, the Trustee is required to act impartially, taking into account the interests of all beneficiaries of the trust, rather than favoring any one.

Unless the testator has provided otherwise, in dealing with the trust property, the Trustee should manage the assets as a prudent investor would by considering the purposes, terms, distribution requirements, and other circumstances of the trust. A trustee’s action or inaction is judged against what a reasonable person would have done under the same or similar circumstances.

The Trustee is required to maintain good financial records, including an accurate accounting of all the receipts and disbursements from the trust, and to prepare and file annual income tax returns. In some jurisdictions, Trustees are required by law to make periodic accountings. Texas does not require this. Unless contrary provisions exist in the Will, a beneficiary can demand an accounting of the trust up to once a year. A trustee who refuses can be compelled by a court to do so.

Can a Trustee Hire People to Help?

Texas statutes used to prevent Trustees from delegating investment and management functions unless the Testator specifically authorized such action; however, the statutes now gives a Trustee the ability to delegate certain duties.

A Trustee can delegate investment and management functions of the trust by employing attorneys, accountants, agents, and financial advisors. In doing so, however, the Trustee must, among other things, exercise reasonable care, skill and caution in selecting the agent, establishing the scope and terms of the delegation, and monitoring the agent’s actions.

Is a Trustee Compensated for Managing the Trust?

Serving as a Trustee can be time consuming. The statutes provide that Trustees are entitled to reasonable compensation unless the Testator has provided otherwise. The term “reasonable” is defined by what professional Trustees in the area charge for similar services. Corporate Trustees usually operate under a standard fee schedule.

Can a Trustee be Removed?

A Trustee can be removed in certain circumstances. The Testator can dictate the procedure for removing and replacing a Trustee in the Will. If the Will does not provide a procedure, an interested person can file a petition with a court to remove the Trustee in the following situations:

1. The Trustee materially violated or attempted to violate the terms of the trust, and that violation or attempted violation results in financial loss to the trust;
2. The Trustee becomes incapacitated or insolvent;
3.  The Trustee fails or make an accounting that is required by law or the terms of the trust; or
4. The court finds “other cause” for removal.

For How Long Must a Trustee Act?

While an executor’s responsibilities are short-lived and end after the estate has been settled, a Trustee’s responsibilities are more enduring. For example, a Trustee appointed to manage a trust created for an infant or a beneficiary with special needs could serve in that role for decades. Accordingly, it is important anyone appointed as Trustee understand their duties and responsibilities to ensure they are up to the task.

The person the testator designates as Trustee is not required to assume the role or may resign at some point. Therefore, it is important to name alternates in case the Testator’s first choice is unwilling or unable to act for some reason.

However, a trust will never fail for lack of a Trustee. If none of the Trustees named in the Will are willing or able to act, a Court has the discretion to appoint a Trustee it chooses.

Can a Trustee Resign?

Unless the Testator provides otherwise, a Trustee must seek permission from a court to resign; however, Wills generally provide a procedure that allows for a Trustee to resign without court intervention.

Trustees should be apprised of their duties and responsibilities to ensure that they can devote the time and attention needed to to administer the trust properly. Because acting as a Trustee is a huge responsibility, choosing the wrong Trustee can have have negative ramifications for the trust you create and its beneficiaries.

Your lawyer can provide you with good advice about factors you should consider when selecting the right Trustee.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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