What Does a Trustee Do? A Clear Guide to Trust Structures

Trusteeship is a core, critical role that carries with it a serious responsibility to manage the assets for the benefit of others. But it also has the potential to have major consequences if you choose the wrong person.  If it turns out that the chosen person is not a reliable person, that can have disastrous results. Whether those results come from outright incompetence or malfeasance, they will tend to redound to the benefit of the wrong person, which is not the intent of the grantor, which is why they chose the person they chose.

That is why understanding what a trustee actually does (and how their responsibilities work in real life) is essential before setting up any trust arrangement.

Key Takeaways

• A trustee is one who is legally accountable for managing the assets which are kept in a trust.
• Trustees must always act on behalf of their beneficiaries with what is known as fiduciary duty.
• A trust works by dividing the control of assets (trustee) from who actually benefits (beneficiaries).
• Choosing an unsuitable trustee for a company could result in major legal, financial or compliance conundrums down the road.
• Trustees are used in estate planning and asset protection schemes.
• In offshore trusts, trustees generally need more experience and stronger regulatory oversight.

What Is a Trustee in Trust Management?

A trustee is an individual or business that is responsible for managing the trust assets. In essence, they hold the title to the trust property in their name, separating ownership from control of the property. For a trustee role and definition, a trustee is someone who accepts the use of trust property for the benefit of someone else, known as a beneficiary. 

Before you set up a trust, you will need to determine who will be the trustee. The role of the trustee is to ensure that the trust is managed according to trust law, and that they do so with due diligence. Trusts are designed to order the management of your finances, whether that’s for inheritance planning or any means of wealth planning with regard to asset protection or family trusts or offshore trusts, and having a trustee is a way of ensuring that the trust is managed according to the trust document. 

As a responsible trustee, you will need to ensure that the property is managed by the trust exactly as intended by the grantor. The trust document will lay out what the property can be used for, and other responsibilities that the trustee must adhere to. A trustee is responsible for administering the trust according to the law of the state where the trust is established, the trust document, and any applicable local law.

How a Trust Works: The Basic Structure

While there are multiple forms of trust, the basic structure and roles involved in setting a trust up is the same. It helps to think of the “trust” as an arrangement, and therefore it is often best set out in a formal trust deed. The considered approach will aid in the later stages of the procedure.

• To set up the trust is usually the role of the settlor. They create the trust and fund the trust (the money or assets placed in trust). 
• The trustee deals with the management of the trust, overseeing all aspects of the trust whilst dealing with any formalities required. 
• Beneficiaries are the persons who benefit from the trust, in a simple example, these may be family members and friends who will receive a benefit under the terms of the trust deed. The trust legalizes the separation of ownership and advantage, a principle also reflected in HMRC’s official guidance on how trusts operate for tax and legal purposes. 

The settlor, trustee and beneficiary do not need to be the same people, there is often a reluctance to have family members in these roles, which is perfectly acceptable. It is legal for a settlor to be a trustee and also have the benefit in the trust, provided that each of these roles are carefully documented in the Trust Deed. For example, where the settlor is the trustee of the trust, there should be strict guidelines in place for the instances in which the settlor may take any benefit in the trust property and how the value of that benefit is determined. There can be advantages in nominating a professional third party as trustee.

Simple breakdown:

There is great value in using a trust, perhaps primarily to protect your assets. Trusts are an easy way to manage your wealth, and provide a level of security that cannot be matched through other means. Only you and the appointed trustees will have control of your assets, thus eliminating the risk of mismanagement. In addition, a trust means your wealth can be passed on to your next of kin without waiting for the testator to die.

1. The settlor places assets into the trust
2. A person named trustee takes charge of the property by law
3. From time to time, the trustee handles these as spelled out in the trust deed
4. The beneficiaries receive benefits as outlined in the trust’s terms

By not transferring your wealth outright to your family member during your lifetime, you can minimize the risk of their financial mismanagement. Instead, if the potential recipient of the trust fund is not able or not ready to manage the money, a trust ensures that money can be accessed easily in a controlled way, as set out in the terms of the trust. Trusts can also be used to reduce inheritance tax liabilities. By passing your wealth to your beneficiaries, during your lifetime, in trust, you mitigate your potential exposure to inheritance tax.

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Core Responsibilities of a Trustee

Being a trustee involves being responsible for much more than simply performing an administrative function. The duty of trustees is to manage assets as per their legal obligations, be transparent, and adhere to specific legal requirements.

Trustees have primary duties to:

• Carefully look after and protect the trust assets;
• Adhere to the provisions set out in the trust deed;
• Act solely in the best interest of each beneficiary at all times;
• Accurately document every transaction made by the trust;
• Properly report on the trusts performance and provide adequate documentation;
• Make distributions in accordance with the terms of the trust.

These roles require more than administrative competence; they require both legal knowledge and financial expertise. A trustee does not get to make decisions based upon his/her own personal preferences. Every action taken and/or every decision made by a trustee must be justified by reference to the terms of the trust and must be performed within the parameters of fiduciary obligations.

Fiduciary Duty: The Legal Foundation of Trusteeship

A fiduciary duty is important as it defines what a trustee owes to her/his beneficiary(ies). A trustee will owe a fiduciary duty to his/her beneficiary(ies); therefore, the trustee has an affirmative legal obligation to be loyal (to have faith) in the individual(s) whom he/she has agreed to serve.

Generally speaking, a fiduciary duty contains at least the three (3) elements listed below:

• Duty of Loyalty: A trustee cannot create a conflict of interest when acting in behalf of his/her beneficiaries.
• Duty of Care – A trustee has the obligation to properly care for, manage and maintain all properties that are in his/her control as reasonably prudent and using due care, diligence, prudence and skill.
• Duty of Good Faith – A trustee has a duty to conduct himself/herself fairly and openly with regard to his/her beneficiaries.

If a trustee fails to carry out the duties set forth in this chapter regarding their fiduciary obligations, a trustee may face serious consequences including removal from office and/or liability for losses suffered by his/her beneficiaries.

Types of Trustees

Not all trustees are the same. Different types are used depending on the complexity and purpose of the trust.

In more complex or international structures, corporate or professional trustees are typically preferred due to regulatory expectations and compliance requirements.

Trustee vs Settlor vs Beneficiary

There’s probably no clearer point in the confusion than that that exists between three primary roles in a trust. 

• The settlor creates the trust and transfers assets into it. 
• The trustee manages those assets and ensures proper administration. 
• The beneficiary receives benefits from the trust according to its terms. 

An easy way to approach this is: the settlor gives up ownership, the trustee manages, and the beneficiary benefits. This separation is why a trust is a legally effective structure for long-term planning and protection strategies.

How Trustees Are Appointed

Much is set out in a trust deed concerning the appointment of trustees. Generally, two characteristics are applicable to the appointment of trustees. First of all, fiduciary obligations exist. That is to say, there is a series of obligations which a trustee must abide by and which may expose him or her to personal liability for breach of trust. Secondly, the governing law will impose legal mandates or requisites concerning the appointment of trustees. These legal requisites do vary from jurisdiction to jurisdiction.

This also applies on local offshore trusts in respect of which the requirements of the governing trust laws must be satisfied. Specifically, offshore trusts are generally accompanied by a raft of restrictions which add to the fiduciary responsibilities of trustees. This is also the case in the sense that offshore trusts generally have stricter regulations such as those pertaining to the location of the trustees, the appointment of men or women who are independent of the settlor and protectees and the maintaining of a physical presence in the locality governing the trust. For example, the law in certain offshore jurisdictions may require the physical presence of at least one of the trustees.

This differs from the requirements of offshore jurisdictions which do not impose any additional restrictions on the appointment of trustees. In some offshore jurisdictions, there are also strict licensing requirements before one can execute the fiduciary responsibilities of a trustee. To simplify matters, it is best to assume that the ultimate responsibility lies with the settlor for the suitability of the trustees who are appointed.

Common Mistakes Trustees and Settlers Make

But the truth is, things don’t always go as planned, when a trust is designed with structure, protection and clarity in mind. Sometimes, the problems are not the idea itself but rather how it is set up, or managed in practice, with trust. Usually, the poor planning or lack of clarity is the natural beginning of problems. 

But some of the other common mistakes are: 

• Designating a trustee with insufficient experience or background. 
• Not clearly delineating what the trust is supposed to do. 
• Time series of weak or incomplete record-keeping.
• Cases where conflicts of interest do not appropriately deal with the problem. 
• A “standard” structure that doesn’t actually fit with the true intent of the trust. 

What’s tricky about these issues is they don’t typically present right away. At first, things can seem under control. Problems usually come to light later on, typically when the trust is reviewed, is scrutinized, or needs to make distributions.

Choosing the Right Trustee

Whoever you choose as your trustee has an enormous amount to do with how successful your trust will be in operation. If you make the right selection (the wrong selection) it can create huge issues for years to come.

When selecting a trustee there are a few key points to consider:

• Do they actually have the real-world experience of managing trusts?
• Are they regulated and respected in their own area?
• Can they maintain records and meet all on-going compliance obligations? 
• Are they open, honest and communicative about everything that affects your trust and reporting to you? 
• Will they remain stable and reliable over time?

The process of choosing a trustee becomes significantly more serious when considering offshore structures. For example due to cross border regulations, banking requirements, and additional compliance obligations, the trustee needs not only to have the competence to manage the assets, but also have knowledge of International Standards and Procedures.

Offshore Trusts and Trustee Roles

A trustee (offshore) has many more rights and regulations than a trustee does in a country that the trust was created in. For example, Nevis and The Cook Islands have developed their own trust systems to be used internationally for asset protection purposes; this is only common sense because there will be people involved, therefore someone needs to watch over them.

As such, most often offshore trustees:

• Are registered/trained under a regulation;
• Have knowledge of international travel/border-crossing rules and regulations and compliance standards;
• Know how to work with international banks and follow all necessary laws and procedures.
• Beyond what would typically be done in a standard local trust, offshore trustees also must keep track of and document the accounts more thoroughly; as such, beyond standard local trust accounting, most offshore trustees also have additional duties (typically referred to as “compliance” and “administrative”) which places them in the position of being compliant/administrators rather than merely account managers. 

Thus, due to the added responsibilities, most offshore trustees have more compliance/administrative roles beyond those of account manager.

Risks and Legal Considerations

Trusts offer a variety of advantages for managing and protecting assets but like all legal tools also involve risks. Generally the actual risk associated with a trust will depend as much on the effectiveness of the trustee’s day-to-day management as it does on the terms of the trust itself.

Examples of potential risks include:

• A significant risk exists that the assets placed into a trust could be fraudulently diverted by the untrained/unexperienced individual who has been appointed to administer them.
• If the trustee fails to comply with their duties or breaches either their contract or their fiduciary obligation, there is a risk that the trustee will be sued.
• Regulators may continually monitor cross border or off shore entities.
• Disputes/conflicts can arise amongst Trustees and Beneficiaries regarding administration of the Trust.
• Misinterpretation of the terms contained within the Trust Deed.

Summary

The trustee – who is the very bone and flesh of a trust – plays a vital role. They are more than just administrators; their duties are fiduciary, and the beneficiaries receive the benefits only if the trustee (agent) is working without conflict of interest. Any person thinking of establishing a trust should learn about the workings of the trustees, their duties, and also their relations with the settlor and the beneficiaries. “If you make a correct choice and consider the management of the trustees, they will look after the running of trustees so that the trust will operate smoothly, will not violate laws, and will achieve its purpose in the long run. “

Frequently Asked Questions