The Role of a Trustee in Managing Your Trust

When you are creating a trust, you are doing more than just establishing a legal vehicle to hold and distribute your assets. You are also placing a great deal of responsibility in the hands of a trustee. Whether you are creating a revocable living trust as part of your estate plan or setting up an irrevocable trust for tax or asset protection purposes, choosing the right trustee is one of the most critical decisions you will make.

A trustee is the person or institution appointed to administer the trust according to its terms and in the best interests of the beneficiaries. Their roles are not only to safeguard the trust assets but also to make sound decisions, follow state and federal laws, and act with fairness, transparency, and good judgment. Trustees are held to high standards of fiduciary duty, which means they are legally and ethically bound to act in the best interests of the trust and its beneficiaries at all times.

So, what exactly does a trustee do, and what should you know when appointing one?

Fiduciary Duty

At the core of the trustee’s role is the fiduciary duty. The legal obligation requires the trustee to put the interests of the beneficiaries above their own. They must act prudently, avoid conflicts of interest, and manage the trust assets responsibly.

In Michigan, fiduciary duties are governed by the Michigan Trust Code, which outlines specific standards a trustee must meet.

• The Duty of Loyalty: Acting solely in the interest of the beneficiaries. (MCL - Section 700.7801 - Michigan Legislature)
• The Duty of Prudence: Managing assets with reasonable care, skill, and caution. (MCL - Section 700.7802 - Michigan Legislature)
• The Duty of Impartiality: Treating all beneficiaries fairly, especially when they have different interests or future rights under the trust.
  MCL - Section 700.7803 - Michigan Legislature)
• The Duty to Account: Keeping accurate records and providing regular updates to beneficiaries.
  (MCL - Section 700.7808 - Michigan Legislature)

Failing to meet these duties can result in legal consequences, including personal liability for any financial losses caused by mismanagement or misconduct.

Managing Trust Assets

A trustee is responsible for managing all the assets within the trust. This may include cash, real estate, stocks, business interests, or personal property. In practice, this means the trustee must:

• Collect and safeguard trust property.
• Oversee investments in a way that balances risk and return.
• Maintain any real estate owned by the trust.
• Pay bills, taxes, and other obligations of the trust.
• Distribute income or principal according to the trust terms.

Under the MTC (MCL - Section 700.1502 - Michigan Legislature) , trustees must invest trust assets according to the “prudent investor rule”. This standard encourages a diversified investment strategy unless the trust explicitly states otherwise. A trustee must be thoughtful when managing investments, and they should seek professional guidance when necessary.

Following the Terms of the Trust

A trust is essentially a legal instruction manual. The trustee’s job is to follow those instructions to the letter, ensuring that assets are distributed at the right time, to the right people, and under the right conditions.

For example, a trust may state that a child only receives distributions upon reaching age 30, or funds can only be used for education or medical expenses. The trustee must enforce these terms exactly as written, even if they personally disagree with them.

Trustees do not have the freedom to modify the trust unless the document allows for it or unless a court intervenes. In some cases, Michigan law allows for trust modification, but this process requires careful legal guidance.

Communicating with Beneficiaries

Transparency and communication are essential to a trustee’s role. Trustees are required to keep beneficiaries “reasonably informed” about the trust and its administration. The trustee must:

• Provide notice when the trust becomes irrevocable.
• Respond to reasonable requests for information.
• Send annual accountings that detail the trust’s income, expenses, and distributions.

Good communication can prevent misunderstanding, manage expectations, and reduce the risk of conflict or litigation.

Handling Taxes and Legal Compliance

Trusts have specific tax requirements depending on their structure. The trustee must obtain a taxpayer identification number (TIN) for the trust and file annual tax returns (f1041.pdf) when necessary. If the trust generates income, the trustee is responsible for paying taxes from trust funds and issuing tax documents to beneficiaries.

Additionally, trustees must comply with state laws, federal regulations, and the trust document itself. Depending on the complexity of the trust, it may be wise for a trustee to work with attorneys, accountants, or financial advisors to stay compliant and make sound decisions.

Support for Trustees in Michigan

Serving as a trustee can be complex and time-consuming. Fortunately, Michigan law allows trustees to seek legal and financial guidance and to be compensated for their work. A trustee who fulfills their fiduciary duties and acts in good faith is typically protected from liability, even if honest mistakes are made.

At Leydorf Law Firm, we regularly assist clients in both selecting trustees and advising those who have been appointed. Whether you’re creating a trust or serving as a trustee yourself, having the right legal support can make all the difference.