What Powers Are Granted to a Trustee?

By Margaret Atkins Munro and Kathryn A. Murphy

The powers the grantor gives you, the trustee, in a trust instrument include the buying and selling of assets, determining distributions to the beneficiaries, and even the hiring and firing of advisors. Distributions to beneficiaries will include income distributions and principal distributions. Your powers as trustee enable you to determine what the beneficiaries receive from the trust and when, and give you the administrative powers ensure the smooth running of the trust.

Buying and selling assets

You, as trustee, typically have the power under the trust instrument to buy and sell assets. Aside from any other specific directions in the trust instrument or state law, you must follow the prudent man rule — that is, to act as a prudent person would in managing their own affairs. In addition, most states have a legal list of investments that are suitable for trusts.

Determining distributions to beneficiaries

The grantor can determine the frequency and amount of the distributions to the beneficiaries in the terms of the trust, or he or she can leave it to your discretion as trustee. If the grantor leaves it to your discretion, your job includes observing any guidelines in the trust instrument. Some of the types of distributions you may need to make as a trustee include income distributions and principal distributions.

Income distributions

Frequently, trust instruments direct that all income is to be distributed at least quarterly. Alternatively, income distributions may be made at other specified intervals, or at your discretion. No two trusts are the same. You need to read the instrument upon your appointment and reread it periodically to be certain that you’re still following the guidelines.

Principal distributions

Distributions of principal, or corpus, are usually in the discretion of the trustee(s). The trust could also provide for no principal distributions, especially if the grantor wants to maintain the principal for a later generation of beneficiaries.

Many trusts are set up with the intent of distributing the trust principal to the beneficiary over a period of time, usually between five and ten years, and at very specific ages. Keep an eye out for this language as you make your plans for the administration of the trust and the investment of the assets.

Trusts contain different standards for when principal distributions can be made to a beneficiary based on whether the trust has an independent trustee. The following are two reasons for different standards for principal distributions:

With no independent trustee: If there isn’t an independent trustee (and the trust is for the benefit of someone other than the grantor), the IRS has identified certain “magic words” that restrict the distribution of principal and keep the trust from being included in the beneficiary’s estate for estate tax purposes. The magic words that keep this trust out of the beneficiary’s estate are “health, education, maintenance, and support,” which constitute an ascertainable standard.
With an independent trustee: Comfort isn’t one of the IRS’s magic words. Using the word “comfort” makes a trust taxable in a surviving spouse’s estate. Because many grantors feel the ascertainable standard described previously is too limiting, especially in a trust for the surviving spouse, grantors frequently elect to have an independent trustee. This enables the grantor to bestow broader powers of principal distribution without causing adverse tax consequences.

Hiring and firing advisors

The grantor and the person drafting the trust instrument understand that not every trustee will be a wizard at all aspects of trust administration. Trust instruments typically give the trustee the power to hire and fire advisors. Look for this power in your trust instrument. If an advisor isn’t working out, including one whom the grantor has chosen, you need the power to let the advisor go.