A trust is a relationship where money or property is held by one person for the benefit of another. A “trustor” places the property in the trust and a “trustee” manages the trust for the beneficiary or beneficiaries.
A trust account is an account, usually with a bank, where the money is placed by the trustor. The trustee distributes funds from the trust account to the beneficiary according to the instructions given by the trustor when the trust was established.
Often trust accounts are set up so that the funds in the trust are not mixed with or commingled with the trustee’s personal funds. Trusts accounts are useful for controlling when a beneficiary has access to the money and what it can be used to pay for. For example, a trustor may establish a trust account for the beneficiary’s educational expenses. The trustee ensures that any payments from the trust account are used for that purpose.
Who is in Charge of a Trust Account?
The person in charge of a trust account is called a trustee or trust administrator. The trustee is responsible for depositing, managing, and withdrawing the money in the trust account according to the instructions given by the trustor when the trust was created.
The trustee is usually chosen by the trustor, such as when a testator creates a trust as part of their estate planning. The trustor may also name an alternate trustee in case the first option is unable to manage the trust. If necessary, the court can also name a trustee.
Choosing a capable trustee is important for the successful administration of a trust account. The trustee is usually someone who does not have a financial interest in the funds in the trust, or does not stand to benefit in some way from the arrangement. As the name indicates, the person should be trustworthy; therefore many trustors will choose a friend or family member who is good with money, knowledgeable about investing, or who will enlist the help of a financial advisor.
Professional trustees, like accountants or lawyers, are also an option that can make the trust administration less complicated than involving friends or family.
What are Some Trustee Duties with a Trust Account?
Trustees are responsible for following the trustor’s instructions and desires. Ideally, a trustor leaves clear and thorough instructions that leave little room for confusion about how the funds in the trust are distributed.
Every trustee owes fiduciary duties to the beneficiaries of the trust. These duties include:
- Duty of Loyalty: the trustee must remain loyal to the beneficiaries of the trust and act in their best interest. The trustee cannot act in their own interest or in the interest of anyone other than the beneficiaries.
The duty of loyalty includes avoiding conflicts of interest. The trustee should not commingle or combine their own funds with those in the trust account. The trustee must be careful not to allow personal feelings or biases toward one or more beneficiaries affect how funds are distributed.
- Duty of Care: the trustee should not act in a way that could hurt or harm the beneficiaries. The trustee should make prudent investments and use sound judgment when making decisions.
A trustee must manage the trust account as a “reasonably prudent person” would manage a trust. If the trustee has specialized knowledge or experience, such as an attorney or accountant, they will be held to a higher standard.
- Duty of Full Disclosure: The trustee has a responsibility to keep the beneficiaries informed when decisions are made regarding the trust account. The trustee should keep records and make them available to the beneficiaries.
What if a Trustee Mismanages the Trust Account Assets?
A trustee can be liable for a breach of their fiduciary duty if they mismanage the assets in a trust account. The mismanagement can be intentional or negligent. The trustee can be liable to the beneficiaries for any losses incurred because of the mismanagement of the trust account. The trustee may have to pay monetary damages to reimburse the beneficiaries for those losses.
For example, a trustee owes the beneficiary a duty of care to make prudent investments. If a trustee makes risky investments that a reasonable prudent person would not make, the trustee might be ordered to reimburse the beneficiaries for the loss resulting from the risky investment.
Do I Need a Lawyer or Help with Trust Accounts?
If you are creating a trust you should consult a trust attorney. Setting up the trust account is an important step in creating a valid trust. An experienced attorney can help you choose a responsible and reliable trustee who will best manage the trust account as you intend.
An estate planning attorney can help draft instructions for the trust that will help the trustee make decisions and distribute the funds in the account according to your wishes.
An attorney can also help if you need to file a lawsuit for breach of a fiduciary duty related to a trust, or if you are the subject of legal action based on your role as a trustee.