As a new family trustee, one of the most important tasks you will have is reading and interpreting the trust document. This document is your blueprint as trustee, as it outlines the wishes and instructions of the person who created the trust. Understanding the trust document is your first step in fulfilling your duties and responsibilities as trustee.
In this blog, we’ll walk you through the essential aspects of deciphering the trust document, empowering you to take on this role with confidence.
Understanding the Basics of a Trust
Before diving into the intricacies of the trust document, let’s establish a foundation. A trust is a legal arrangement that allows a person (also known as the Settlor or Grantor) to transfer assets to another person or entity, i.e. a trustee, to hold and manage the assets for the benefit of beneficiaries. There are various types of trusts, each with its own purposes and requirements.
Overall, the trustee plays an essential role in ensuring the proper management and administration of the trust assets for the benefit of the beneficiaries, while also adhering to the terms of the trust and applicable laws and regulations, like the Uniform Prudent Investor Act.
Anatomy of a Trust Document
Trust documents can be complex, but breaking them down piece by piece can make it feel more manageable. Here are the important roles and responsibilities you need to know within the trust document.
Settlor/Grantor
The Settlor or Grantor is the person who establishes the trust and transfers assets into it. The Settlor determines the terms and conditions of the trust, including how the trust assets should be managed and distributed and to whom.
Depending on the type of trust, the Settlor may retain certain rights or powers, such as the ability to modify or revoke the trust and designate successor beneficiaries or trustees.
Trustee
Once the Settlor creates a trust, the trust requires a trustee to assume fiduciary duty, meaning they must act in the best interest of the beneficiaries at all times.
One of the chief responsibilities of the trustee is to manage the trust assets prudently and in accordance with the terms of the trust. This includes investing trust funds, marshaling and titling assets, and ensuring trust assets are safeguarded and preserved.
The trust document will also specify the powers granted to the trustee and detail their unique responsibilities – more on that later. Familiarize yourself with these powers and responsibilities to ensure you are acting within the scope of your authority.
Beneficiaries
Beneficiaries of a trust are individuals or entities, like a charity or educational institution, that are designated to receive benefits from the trust. Their rights and entitlements will carefully be laid out within the trust document by the Settlor.
Like a trustee, there are some responsibilities of beneficiaries, although they differ drastically. Beneficiaries are expected to cooperate with the trustee and comply with trust terms. The Settlor may include specific provisions that the beneficiaries must follow, like completing higher education or reaching a specific age before having access to an inheritance.
It is important to note that trustees may also be named as a beneficiary, especially in a family trust scenario. As both a trustee and beneficiary, conflicts of interest should be carefully avoided and the trustee should maintain their fiduciary duty to avoid any legal implications.
Assets
Now that we’ve named the key players of the trust, let’s dive into assets. Trust assets, or sometimes referred to as trust property, are items that are transferred into a trust and held by the trustee on behalf of the trust’s beneficiaries. Trust assets can encompass a wide range of property types, including:
- Cash and bank accounts
- Real estate
- Investments
- Business interests
- Intellectual property
- Life insurance policies
- Digital assets
- Other value items, like family heirlooms
The trustee is tasked with marshaling and titling assets, so it’s critical that the Settlor is clear and thorough in their wishes on how the assets should be distributed to beneficiaries. If there is any gray area or confusion in reading through the trust assets, be sure to connect with the Settlor and/or their legal counsel to amend the trust if necessary.
Terms and Conditions
The trust document will include a set of terms and conditions. These provide specific instructions, provisions, and limitations outlined by the Settlor that govern how the trust is to be administered and how its assets should be distributed.
Typical terms and conditions can include arrangements ranging from division of real estate among family members to age requirements for inheritance. The terms and conditions of the trust may also include a trust termination clause that instructs the trustee to end the trust by distributing any remaining assets and settling all other affairs.
Deciphering Trust Provisions
Now that you have an understanding of the bones of the trust document, it’s time to fully grasp its contents. Beyond reading through the trust document, you also have to understand it.
At the heart of any trust document lies its provisions. Understanding these provisions is essential for executing your duties effectively. Take time to read through and comprehend the trust’s goals and objectives, distribution provisions, and the powers and duties required of you as trustee.
Objective of the Trust
The trust document typically begins by stating the purpose and objectives of the trust. This will likely include the Settlor’s intentions for the trust assets, charitable giving, or achieving specific estate planning goals.
Objectives of a trust vary by Settlor, however, there are several common reasons why someone would want to create a trust, including:
- Asset management and protection
- Facilitate the transfer of assets upon death
- Asset preservation for future generations
- Avoiding the lengthy probate process
- Charitable giving
- Optimize tax efficiencies
- Maintaining estate privacy
Distribution Provisions
Pay close attention to the provisions regarding trust distributions. This section will outline how and when trust assets are to be distributed to the beneficiaries and will likely provide guidelines for making distributions of income or principal.
The distribution provisions are created by the Settlor and may include specific timelines, frequency, ages, or other purposes for distributions. An example of a distribution provision might be that the grandchildren of the Settlor cannot receive distributions until they have graduated from a 4-year college or reached the age of 21, whichever occurs first.
If you are the trustee of a discretionary trust, the trustee has discretion over when and how to make distributions to beneficiaries. This allows the trustee much more flexibility to make decisions based on the needs of the beneficiaries, while also considering unique circumstances relevant to the trust.
Distinguishing between discretionary and mandatory distributions is particularly crucial, as it can impact your decision-making process significantly as trustee. Sometimes the mandatory and discretionary distributions may apply to the same beneficiary. For example, oftentimes a trust will have provisions to distribute all of the income to a beneficiary, like a surviving spouse, while also giving the trustee discretion to make additional distributions from principal if needed.
Also, depending on the objectives of the trust, the Settlor may have outlined additional distributions that are relevant to themselves or their family members. These types of provisions include the payment of healthcare and medical expenses, housing and maintenance expenses, lifestyle enrichment, and certain emergency expenses. The Settlor may also include provisions for specific circumstances for themselves or the beneficiaries, like the purchase of a home, starting a business, funding higher education, etc.
Duties and Powers Provisions
The Duties and Powers provision is your job description as trustee. This section includes the expectations of you as trustee and how you should operate in your role. These duties are legally binding, so be sure you can confidently uphold them without issue.
In addition to powers, the trust document will outline the responsibilities of the trustee. This may include providing regular accountings to beneficiaries, acting in the best interests of the trust, and following specific guidelines for trust administration. Be sure to fulfill these responsibilities diligently.
Amendments and Restatements
Another core responsibility of the trustee is recognizing and responding when changes are needed. The trust document may signal that the trust can be amended or terminated, based on specific circumstances, or the trustee and/or settlor can petition the court for significant changes. These reasons may include:
- Changes in family or beneficiary circumstances, such as births, divorces, deaths, etc.
- Changes in tax law or regulations
- Modifications to certain terms or provisions
- Corrections or errors
- Removing or adding beneficiaries
- Asset changes or acquisitions
- Trustee resignation or inclusion of a successor trustee
If the changes to the trust are relatively minor, a Codicil may be recommended. This is a legal document that is used to make minor changes without needing to rewrite the trust.
If the changes are more robust, a legal professional can help you determine the next steps in the amendment process to ensure full compliance. These can include:
Amendment Clause: Some trusts may include provisions that allow for amendments by following specific procedures outlined in the trust document itself.
Trust Amendment: The trustee or Settlor drafts a formal document that outlines the proposed changes. This document should clearly identify the trust, specific the provisions being amended, and provide the revised language of those provisions.
Trust Restatements: In some cases, it may be necessary to restate the entire document with the proposed changes incorporated. This involves creating a new trust document that replaces the original trust document, but maintains its original creation date and overall structure.
Once the trust amendment or restatement has been drafted, it must be executed in accordance with applicable legal requirements. This typically involves signing the document in the presence of witnesses and/or a notary public, depending on state law.
From there, it may be necessary to file the trust amendment with the appropriate court or agency for record-keeping purposes. Your trusted legal professional will help point you in the right direction to ensure all aspects of the amendment/restatement are complete. Still, be sure to maintain accurate records – including dates and changes – for future reference and trust administration.
Seeking Professional Advice
If you encounter any complex or unclear provisions in the trust document, don’t hesitate to seek legal advice. An experienced attorney can help clarify any ambiguities and ensure that you are fulfilling your duties appropriately.
Rounding out your team with an experienced financial advisor is also strongly recommended. A financial advisor can help develop and implement investment strategies tailored to the trust’s objectives, risk tolerance, and time horizon, with the goal of optimizing investment performance and achieving the trust’s financial goals. If you’re interested in adding a qualified advisor to your team, we invite you to connect with Prudent Investors today.
Reading and interpreting a trust document is step one in being a successful family trustee. By understanding the basic elements, anatomy of the trust, and your powers and responsibilities, you’ll have a head start in this new role.
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