A trustee named in a will is a person appointed to be responsible for an existing trust or a testamentary trust, which is created based on the testator’s wishes in their will. A trust itself is a separate legal entity from your estate for holding assets for beneficiaries.
While sometimes the terms trustee and executor are used interchangeably, this article will explain the difference between the two terms as they relate to managing trusts and wills, respectively.
We’ll also explore the important role trustees play in estate planning, including the duties and responsibilities of trustees, trustee selection criteria, the differences between estate trustees and estate executors, and more.
Duties and Responsibilities of a Trustee
Testamentary trusts and reading of the will
If someone is named trustee of a testamentary trust, they would need to know what guidelines and specifications the testator put into their will about who the beneficiaries are and how the trust should operate.
So while the executor performs their own duties for administering the estate, they would be responsible for giving the trustee all the information they need to administer the testamentary trust properly, including any relevant information from the will itself.
Trustee responsibilities in asset distribution
Trustees are responsible for finding, evaluating and keeping the trust assets in good condition. The trustee will distribute the trust’s assets in accordance with the rules specified by the testator who made the trust. If the testator didn’t specify when the assets should be distributed, it’s the trustee’s responsibility to make these decisions in the best interest of the beneficary.
Choosing a Trustee
If you create a testamentary trust, who would you want to take care of it?
A list of people may come to mind, but here are some criteria that can help you when selecting a trustee for your will.
- They are at the age of majority or will be at the time they become trustee
- They are likely to live longer than you and can take on the role of your estate trustee
- They are trustworthy, organized and responsible
- They know how to manage finances and settle debts
- They live in your province or territory (this is not mandatory, but it makes things easier and helps avoid estate bonds too)
- They can manage your trust in the best interests of the trust beneficiaries
Choosing a trustee is not that different from choosing an executor, though it can be harder to change a trustee compared to updating your will to change your executor. We’ll talk more about how the two roles are different in the next section.
Tip: Here’s a guide to choosing people for your estate plan if you're in Quebec.
Executor vs Trustee
An executor and trustee are both roles with legal duties and responsibilities, but they have obligations to different things.
The role of trustees in estate management is a fiduciary duty to a trust, so they are responsible for managing and distributing trust assets to the beneficiaries of the trust.
The executor is responsible for managing an estate and distributing the assets of that estate according to the last will and testament of the deceased.
A trustee can often hold their role longer than an executor because it may take longer to distribute assets to beneficiaries based on the rules of the trust than it would to settle an estate. Managing testamentary trusts for your minor children, for example, would require the trustee to pay taxes throughout the years of managing the trust until the beneficiaries come of age.
When should you choose an executor vs a trustee? You can appoint one person to take on both roles if you have a trust and assets that will remain solely in your estate. Or you can choose an executor for your estate and a separate person as trustee for a trust. Or you can just choose an executor.
Choosing someone to look after your affairs is an important step in estate planning and gives your loved ones peace of mind.
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Legal and Financial Considerations
In the realm of estate planning, the trustee's role in beneficiary protection goes beyond just financial considerations and includes a fiduciary duty to act in the beneficiaries' best interests. This includes ensuring the preservation and growth of assets for their long-term welfare as well.
Here’s a closer look at the legal and financial considerations trustees need to be aware of as they complete their duties.
Legal Aspects
Understanding and Administering the Trust in a Will
The trustee needs to thoroughly understand the terms, conditions, and instructions outlined in the trust document to make sure they comply with the grantor's wishes.
Fiduciary Duty and Duty of Loyalty
The trustee must act in the best interests of all beneficiaries. It is their fiduciary duty, so they must prioritize the beneficiaries’ needs over the trustee’s own personal interests.
Legal Compliance
The trustee must comply with trust laws and regulations in the jurisdiction where the trust is established, ensuring compliance with legal requirements. Often, this jurisdiction will be the province where the person who created the trust lived, but that’s not always the case.
Trustees may also need to complete and file required documents with the court, starting with applying for a Certificate of Appointment of Estate Trustee.
Maintaining Detailed Records
Trustees must keep accurate records of all trust activities, including financial transactions, investments, and distributions. This helps in providing transparency and accountability to beneficiaries, should they ever question the trustee’s abilities or process in managing the trust.
Communicating with beneficiaries
Legally, the trustee also has a responsibility to regularly communicate with beneficiaries. This involves keeping them informed about trust activities and decisions, as well as answering questions they may have about the trust itself or the assets they may receive from it.
Financial Aspects
Asset Management
Trustees are responsible for protecting assets for beneficiaries, so they should implement risk management strategies to protect trust assets and minimize potential liabilities.
But they may also have the authority to invest assets to help them grow. So prudent investment, as well as diversification of investments, is important when a trustee invests so that they do not devalue the assets they are responsible for.
For example, the trustee of a testamentary trust must make sure that their trust investments comply with restrictions or guidelines set forth in the will.
Tax Planning and Compliance
Trustees must obtain a tax identification number for the trust and make sure that all tax-related obligations are met. They may also:
- Prepare and file income tax returns for the trust, including reporting any income earned by the trust
- Understand and manage capital gains tax implications on the sale or transfer of trust assets
- Work with tax professionals to explore tax-efficient strategies and opportunities for the trust
Distribution Regulations
Trustees need to comply with any mandatory distribution requirements outlined in the trust document when they are distributing assets to beneficiaries. The same would apply to trustees of testamentary trusts, by following the guidelines of the will.
Challenges Faced by Trustees
Trustees may face some challenges while administering a trust like:
- Legislations & taxes: Navigating through numerous complex laws and regulations on trusts and beneficiaries can be hard, especially for trustees with less experience in the role.
- Investments and asset management: Deciding how to diversify investments of assets for beneficiaries can be challenging, especially if the trustee must also consider the needs and goals of more than one beneficiary.
- Communicating with beneficiaries: Some trustees struggle to balance the need for communication with beneficiaries and the requirement to maintain confidentiality and privacy.
- Accounting and record keeping: Maintaining accurate and detailed records is time-consuming and requires attention to detail, especially for trustees without accounting experience.
- Decision-making: If the trust gives the trustee discretionary powers, deciding when and how to distribute trust assets to beneficiaries can be challenging. Trustees must exercise their discretion in a way that is consistent with the trust's terms and the beneficiaries' best interests.
What power do trustees have?
Trustees have the power to act as fiduciaries, which means they act on behalf of others such as the testator and beneficiaries, and put the interests of these other people or organizations ahead of their own. They are bound by a legal and ethical duty to preserve good faith and trust.
They are responsible for administering a trust, making ongoing decisions about the trust and its assets, and providing beneficiaries of the trust with information, updates, and answers to their questions.
What is the role of the trustees?
Trust management and trustees go hand in hand. Trustees are responsible for holding the assets in the trust, managing them, and distributing them to the beneficiaries at the right time.
Can a trustee be a beneficiary?
Yes, trustees can be beneficiaries of the same trust they are responsible for. But because they have a fiduciary duty to the best interests of all the beneficiaries of the trust, they must never breach the rules of the trust for their own personal interests. Trustees must remain impartial throughout the process of administering the trust so they never have any conflicts of interest.
The importance of estate planning documents
Whether you want to establish a testamentary trust for your minor children in your will, choose a guardian, or name beneficiaries, having an estate plan will give you peace of mind knowing that your wishes are documented and your loved ones are taken care of in the future.
And it’s now easier than ever to make one, especially with online will platforms like Willful.
