Trust Administration Guide for Trustees

What Every Trustee Needs to Know About Managing a Trust

Trusts are powerful legal tools designed to hold and transfer assets, especially real estate, efficiently and privately. But creating a trust is only the beginning. Once a trust becomes active, someone must step up to manage it properly. That person is called a trustee.

Whether you have been named trustee of a family trust, land trust, testamentary trust, revocable living trust, a life insurance trust, a farm trust, or a business management trust, you now bear significant legal and financial responsibilities. Trust administration is a complex process governed by both the trust document and state law. Mistakes can lead to liability, tax penalties, and disputes among beneficiaries.

What Is Trust Administration?

Trust administration is the process of carrying out the instructions in a trust agreement after the trust is formally created. This can happen immediately when established, or when the trust creator (called the grantor or settlor) passes away or becomes incapacitated. In some cases, such as trusts created during the grantor’s lifetime, the trust is administered immediately upon signing.

Trust administration typically involves:

• Notifying beneficiaries and interested parties of specific details
• Collecting, valuing, and protecting trust property
• Paying debts and expenses
• Filing required tax returns
• Distributing trust assets according to the trust’s terms
• Keeping detailed records and reporting to beneficiaries

The trustee is legally obligated to manage the trust property for the benefit of the beneficiaries in strict compliance with the trust agreement and the law. Failing to do so can result in removal as trustee and even personal liability.

Who Can Be a Trustee?

Almost anyone can be named trustee, including individuals, banks, and professional fiduciaries. Many families appoint a relative as trustee of a revocable living trust or life insurance trust. Others prefer a professional trustee for complex trusts or those that have business management obligations.

Before accepting appointment, consider:

• Your availability and willingness to serve
• Your understanding of the trust assets, especially real estate or closely held businesses
• Potential conflicts of interest with beneficiaries
• The level of record-keeping and reporting required

If you feel unprepared or overwhelmed, you are not alone. Many trustees rely on a trust lawyer to guide them step by step. Learn more about selecting a trustee or estate representative.

Initial Steps for a New Trustee

When you first become a trustee, it is critical to take certain actions promptly to avoid legal and financial consequences. Some of the most important first steps are:

• Obtain Certified Copies of the Trust. Secure certified copies of the trust instrument and any amendments. You will need these to prove your authority to manage assets and interact with banks, title companies, and tax authorities.
• Read the Trust Thoroughly. It’s important to not rely on summaries or assumptions. Read the entire document to understand who the beneficiaries are, how income and principal shall be distributed, any specific instructions about property, and the trustee’s discretionary powers and limitations.
• Notify Beneficiaries and Creditors. Some states require the trustee to send a formal notice to all beneficiaries and certain heirs when there is a change in trustee. This notice typically informs them of the trust’s existence, the trustee’s name and contact information, and the right to request information. Trustees may also be required to notify creditors so they can present claims against the estate or trust.
• Secure and Inventory Assets. Identify, collect, and secure all trust property. It’s helpful to prepare a detailed inventory with valuations as of the date of death or the date the trust became irrevocable.
• Obtain a Tax Identification Number. Irrevocable trusts generally require a unique Employer Identification Number (EIN) from the IRS which is separate from the original settlors or makers of the trust. This number is used to file trust tax returns and report income.

Managing Trust Assets

Trustees are fiduciaries, meaning they have the highest duty of care under the law. Managing assets properly requires:

• Prudent Investing. Trustees must invest assets prudently, considering diversification, the need for liquidity, the risk and returns appropriate for the trust’s purpose, etc.
• Real Estate Administration. Many trusts hold real estate. Trustees should keep all properties insured, pay mortgages on time, pay taxes and utilities on time, arrange for maintenance and repairs as needed, collect rents, and more.
• Business Interests. Trustees should maintain proper books and records for all business decisions and interests.
• Pay Debts and Expenses. Trustees are often responsible for paying funeral expenses, end of life costs, outstanding bills in the name of the deceased beneficiary or trustee, professional fees, etc.
• Distributions to Beneficiaries. Trustees must distribute trust assets or property to the beneficiaries exactly as provided in the trust, which often includes specific gifts of cash or physical assets, ongoing income distributions, final distributions, and more. Failure to distribute according to the trust terms may lead to disputes.

Record-Keeping and Reporting

Meticulous record-keeping is essential. Trustees should:

• Maintain separate trust accounts and never commingle funds with personal accounts
• Keep receipts for all expenses
• Record all income, gains, and losses
• Provide annual accountings to beneficiaries as required by law

Proper records protect you from claims of mismanagement and are essential for tax reporting.

Trust Taxation

Trust taxation is a complex topic, but here are a few key principles:

• Income Tax: Irrevocable trusts often pay income tax at higher rates. However, distributions to beneficiaries may shift tax liability to them.
• Estate Tax: Assets in a revocable living trust are usually includable in the grantor’s estate.
• Filing Requirements: Trustees must file annual federal (Form 1041) and sometimes state fiduciary income tax returns.

A tax professional can help you meet these obligations correctly.

Trust Dissolution and Termination

When trust assets have been distributed and all obligations satisfied, the trust can usually be terminated. The trustee must typically provide a final accounting to beneficiaries, obtain signed receipts and releases, file final tax returns, and distribute any corpus assets. Trust dissolution can be complex, especially in the event of a disagreement over valuations. Your trust lawyer can prepare the necessary documents to protect you from future claims.

Learn more about trust dissolution, termination, and winding up.

Common Mistakes Trustees Make

Even well-meaning trustees can run into trouble. Some of the most common mistakes include:

• Failing to follow the trust terms
• Missing required notices and deadlines
• Improperly mixing trust funds with personal assets
• Not keeping accurate records
• Neglecting to obtain professional appraisals for real estate
• Overlooking required tax filings
• Making premature distributions

A single misstep can expose a trustee to personal liability. If you are a trustee and you are unsure about any aspect of trust administration, consult with an experienced trust attorney promptly.

How a Trust Lawyer Can Help Trustees

Serving as a trustee is a significant responsibility but you don’t have to face it alone. A trust lawyer can:

• Review the trust and explain your obligations
• Help you prepare required notices and accountings
• Assist with collecting, managing, and distributing assets
• Handle real estate transfers and title issues
• Prepare or coordinate tax filings
• Advise you on investment duties
• Protect you from liability through proper documentation
• Guide you through trust dissolution and termination

Many trustees find that professional legal guidance brings peace of mind and ensures compliance with all legal requirements. Most trust agreements also allow the trustee to rely on the guidance and instruction of professional advisors, such as accountants and lawyers, which provides safe harbor to the trustee.

Legal Services Helpful for Trustees

In addition to guiding trustees through administration, our law firm offers comprehensive trust-related services, including:

• Trust Planning and Creation: Drafting custom trusts to meet client goals, including revocable living trusts, irrevocable trusts, life insurance trusts, farm trusts, and business management trusts.
• Deeding Property Into a Trust: Preparing deeds and transfer documents to fund trusts properly.
• Succession Planning: Developing plans to transition family businesses, farms, and real estate to the next generation smoothly.
• Probate Representation: Assisting with probate administration when assets were not held in trust.
• Trust Dissolution: Advising trustees on the correct procedures to wind down and terminate trusts.

Whether you are establishing a trust or administering an existing one, our experienced trust attorneys are here to help you navigate every step.

Contact Avenue legal Group for a helpful, confidential consultation. We are committed to helping trustees protect trust assets, avoid disputes, and complete their assigned duties effectively.