In this article, we’ll discuss the responsibilities of a Trustee and common mistakes to avoid when it comes to a trust administration. We will cover "What is a Trustee?", Common Trustee Mistakes in Illinois", and "Common Settlor Mistakes in Illinois."
What is a Trustee?
Trustees play a vital role in a successful trust administration, as they are responsible for executing the terms of a trust document, managing, investing, protecting, and distributing trust property, and recording any transactions involving the trust. The individual creating the trust is referred to as the “Settlor.” The Settlor appoints another person to be his or her Trustee. A Trustee is a fiduciary role, meaning he or she must use an even higher level of care with the trust assets than he or she would use with his or her own assets. A testamentary trust is only activated when the Settlor dies, via a provision in the Settlor’s Last Will and Testament, and a living trust is activated immediately upon signature and filing.
Estate plans aren’t only for the wealthy; if you own a car, house, or money in a bank account, you should consider creating a trust. When selecting a Trustee for your estate, you should choose someone you know would carefully manage your assets and place the interest of your beneficiaries above all others. If you were recently named as a Trustee, you may be worried about fulfilling your duties for the trust administration.
Common Trustee Mistakes in Illinois
- Failing to end an existing real estate purchase and sale agreement from the deceased seller. Be sure to terminate any existing real estate purchases to avoid increased taxes.
- Liquidating everything to cash. Taking a lump sum distribution from a pension plan, IRA, or deferred compensation plan may be tempting, but as soon as you cash out, the estate owes income taxes on every penny the Settlor hasn’t paid yet.
- Creating tension among surviving family members. Emotions will be running wild, so when you’re splitting the decedent’s personal property among family members, try to handle the situation with grace and fairness. This includes staying neutral toward all beneficiaries, including your own spouse and children. Failure to remain objective could lead to your replacement.
- Missing court deadlines. Always show up, period.
- Failing to file the trust’s taxes. Income tax returns (Form 1041) are due three and one half months after the estate or trust’s year end, and estate tax returns (Form 706) are due nine months after the date of death. Hire a certified public accountant (CPA) to meet tax deadlines.
- Failing to keep detailed records. Trustees are legally obligated to provide all beneficiaries with detailed reporting of all transactions involving trust property. This is one of the most litigated issues when it comes to trust administration. Document all transactions, as well as your rationale behind your decisions to approve or deny distribution requests from beneficiaries. This will help you protect and defend yourself from personal liability in the long run.
- Paying out of the wrong pocket. While money is money, it’s important to keep a clear distinction between principal and income values when paying trust bills. Different beneficiaries may be entitled to receive money and property from either income or principal; trustees are often sued for switching or combining the two.
- Misunderstanding a trust’s terms and provisions. If you are confused by any of the Settlor’s terms, be sure to consult with a trust attorney for clarity. Ignorance is not an excuse for error.
- Forgetting about future beneficiaries. If the trust has both current and future beneficiaries, consider both classes when making large financial decisions.
- Not consulting with a trust administration attorney. As a Trustee, you’re taking on a variety of legal liabilities. Consulting with an experienced legal professional for advice and guidance is imperative when carrying out your responsibilities. An experienced attorney can provide you with tax-planning strategies based on the individual needs of the Settlor’s estate.
- Appointing the wrong person as the Trustee of the estate. Many people think their spouse or children are logical, trustworthy first choices to handle the trust. However, grief and other emotions mixed with a lack of estate management experience may work against your loved ones in this scenario. It’s best to choose a Trustee who is not personally invested in your affairs to make sure he or she can objectively make major decisions and effectively execute the duties of your requests.
Common Settlor Mistakes in Illinois
- Failing to provide clear directions for the trust. As a Settlor, you need to develop specific directives regarding assets, investments, distribution, etc. If you do not include these vital details, the Trustee will make these decisions for you.
- Settling and forgetting. Settlors often fail to update the trust as life goes on; this can make the trust invalid, inaccurate, and irrelevant. Be sure to update the trust with every major life change and evaluate the trust on a yearly basis, if not quarterly.
- Not having any trust administration at all. This is the most common estate-planning mistake! Take the time to outline your personal and financial affairs to make sure they are handled with care if you were to pass away.
- Not making gifts to reduce your estate’s taxes. A surviving spouse may exclude a gift worth up to $14,000 from estate taxes each year. Gifts made to individuals, groups, or organizations are subject to a $28,000 estate tax savings. By giving assets away, you’re leaving more money in your estate long-term while positively impacting another person or group of individuals.