You may want to ask a trusted friend or family member if they are willing to be the executor of your estate, or successor trustee of your trust. To have that conversation, you should know what you are asking of them. Alternatively, you may have found out that your parents have nominated you to serve as their executor or successor trustee, and are wondering what your responsibilities may be. The roles of trustee or executor, are considered ‘fiduciary’ roles, and are positions of special trust that impose duties on the trustee or executor for the protection of the beneficiaries of the estate or trust.
As executor or trustee, the primary guiding principle is that you must always act to further the interests of the estate or trust, and not use the role to advance your own interests. This guiding principle manifests in three separate ways; as trustee or executor you have the duty to:
- Act impartially, not favoring the interests of one beneficiary over any others.
- Have undivided loyalty to the trust or estate and not place yourself in a position where your interests are in conflict with the interests of the trust or estate.
- Administer the trust or estate with care and prudence.
To honor the duties of impartiality and loyalty you must always act to further the interests of the trust or estate and all beneficiaries without preference for any one beneficiary over the other. You should not enter into transactions in which you will benefit at the expense of the trust or estate and beneficiaries. You must keep the estate or trust’s assets separate from your own assets, and the trust’s assets must be readily identifiable.
The duty to administer the estate or trust carefully and prudently in practice requires a number of steps, the first of which is accounting for your activities as trustee or executor. To do this you must set up and keep complete financial records. Reports, referred to as ‘accountings’, must be delivered to the beneficiaries, typically annually unless stated otherwise. The accountings should reflect in detail all income, disbursements, and liabilities, and should show the opening and closing balances for all accounts during the accounting period. You should maintain all supporting documentation in the event the court or beneficiaries request to review the financial activity. At the time these accountings are made, a trustee or executor may also ask the beneficiaries to approve the actions described in the accounting and release you from any liability.
While you are serving as a fiduciary you have the responsibility to keep the estate or trust’s assets invested, and you will be held to a higher standard of care than if you were investing your own funds. Illinois law requires fiduciaries to follow the “prudent investor rule,” meaning that you must invest the assets as a prudent person would in a similar situation. In effect, the “prudent investor rule” generally means that you will diversify the investments, balance the need for income versus long-term principal growth, not make risky investments, and continue to reevaluate and consider new advice on an ongoing basis.
While serving as fiduciary, the trust or estate will most likely be required to have a tax identification number, file federal and state income tax returns, and if the estate or trust is sufficiently large, file state and federal estate tax returns. Under federal and state tax laws, the fiduciary is personally responsible for ensuring that all necessary tax filings are submitted and taxes paid. If you fail to do so, you may be personally held financially responsible for the failure to file returns or pay taxes.
You will also be required to make distributions of trust or estate assets to beneficiaries. The terms under which distributions must or may be made can differ greatly between different trusts or wills, and may be mandatory or at your discretion, based on the beneficiary’s health, education, maintenance, or best interest.
In addition to failing to file or pay taxes, other circumstances where you may be held personally liable as trustee or executor are where you fail to exercise the care and skill of a person of ordinary prudence in managing the assets, or negligently or intentionally did something, or failed to do something, that harmed the interests of the trust, estate, or its beneficiaries.
While these duties may sound daunting, there are steps that can be taken with the assistance of an attorney to protect yourself from liability during the administration of an estate or trust. Those steps include:
- Obtaining Written Consent. A consent is a written document exonerating you for what you are about to do. Although you do not have to obtain consent for many actions you take as trustee or executor, a written consent from a competent adult beneficiary will protect you from a charge that you are acting improperly. A beneficiary who does not consent has the right to question your action and is not bound by consents given by other beneficiaries.
- Obtaining a Release. A release is what you obtain if you have not obtained consent. A release is a document that discharges you from liability for actions or omissions of the past. A release is not effective unless the beneficiary had knowledge of all relevant facts and you have not used any improper conduct to influence the beneficiary.
- Obtaining Receipts. A receipt serves as beneficiaries’ acknowledgement that they have received the distributions from a trust or estate that they are entitled to. A receipt should describe the assets in detail so that you can prove what has been distributed, to whom, and when.
A final factor to consider is compensation for service as a trustee or executor. Typically a trust agreement or will permits the trustee or executor to receive reasonable compensation for his or her service. As executor or trustee you should maintain a diary enumerating your services to the trust and the amount of time spent for each service. Reasonable compensation is determined on a case-by-case basis and good record keeping and accounting is absolutely necessary. Any compensation is considered income to you and as such, is generally taken as a tax deduction by the trust or estate.
While the role of trustee or executor is a serious undertaking that should not be entered into lightly or without understanding what responsibilities are involved, with the assistance of experienced attorneys the responsibilities can be navigated with a reasonable degree of ease in most situations. The attorneys at Plager, Krug, Bauer, Rudolph & Stodden, Ltd. have extensive experience in assisting executors and trustees as they perform their duties.