Who is a trustee?

When we think of estate planning, two primary instruments to transfer property come to mind: the first is a will, the second is a trust. A will is easy to understand; you say what someone gets, they get it. The concept behind a trust is somewhat more complex. First of all, you need a trustee.

Two common questions are: "who is a trustee?" and "what official function does that person carry out?"

To fully grasp the answers to those questions, you need some basic knowledge about the general structure of trusts. Unlike a will, where the primary purpose is to give away property at death, the trust can serve a variety of purposes. It is easiest to think of a trust like this: a person uses a trust as a tool to control property.

Even though the purpose varies from trust to trust, most trusts are set up in the same way, with the same structure. That structure is as follows: A transfers title in property to B. B holds the property for the benefit of C. In other words, one person gives his or her property to a second person, and the second person holds and/or manages the property for the benefit of a third person or persons.

It may be easiest to think of a trust as another manner of gift giving, where the gift giving itself is bifurcated. That bifurcation is what necessitates a trustee. Bifurcation is the granting of the property to some intermediate party who holds the property for the party who is to receive the gift. If you want to give Jan $50 next week and you ask Al to hold it for you and give it to her next week, you just bifurcated. The trustee is then the party who is charged with holding or managing the property, Al, for the person who is to receive either the property or its benefits, Jan.

The most important feature of the trustee is that he or she holds the legal title to the property in question, although, generally speaking, he or she is not entitled to the benefits often associated with that legal title. Commonly, the person who gives the property, the person who manages the property, and the person who is to receive the benefits associated with the property are all distinct individuals.

Funding a trust is the critical element of creation; a trust is not funded until this happens: the property is transferred to the trustee with the intention that the trustee hold said property for the benefit of someone else. However, a trust will never fail for want of a trustee. This means that, where the gifting party clearly expressed his or her intent to create a trust, but failed to name a trustee, or the named trustee declines to fill the trustee role, the court will appoint a trustee. This rule is generally applied in testamentary trusts, or trusts created by a provision in a will.

The very nature of the word, "trustee," implies a certain amount of responsibility. Indeed, the trustee is subject to fiduciary duties and must strictly adhere to all of the rules such duties imply. Foremost among these duties is the duty of absolute loyalty—the trustee may not act in any way that he does not reasonably believe is in the best interest of the trust's beneficiary. Additionally, the trustee is also subject to a duty against self-dealing, which prohibits transactions in which the trustee has a personal interest or conflict of interest. The trustee has a duty to care for, maintain, and segregate out the trust property at the same level as a prudent person in similar circumstances.

As general matter, decisions made in good faith that prove financially harmful are generally not deemed the fault of the trustee, if the trustee has observed all of the necessary duties. However, bad faith decisions can create a legal cause of action, and the trustee may be held liable for lost funds.

Acting as a trustee, or deciding whom to appoint as trustee, is largely governed by the intrinsic rules of common sense and cautious decision-making. However, the specific rules associated with trust formation can vary from jurisdiction to jurisdiction. Before setting up a trust or agreeing to act as trustee, it is essential that you investigate the rules of your jurisdiction in order to ensure that your trust results in distribution, not litigation.