Income and principal accounting: It is a fundamental requirement for a Trustee to keep track of income earned by the Trust separate from the principal appreciation of the portfolio. The basic Trust structure gives one class of beneficiary the entitlement to income, and the remainder class of beneficiary an entitlement to principal. While there are variations on this structure where the lines can be blurred, this is a record keeping obligation of the Trustee. Corporate Trustees have accounting systems designed to automatically record the income in a separate column or "bucket". Individual Trustees can use their systems by hiring them as agent, or rely on an accountant to break out the income earned by the Trust portfolio.

Remainder/Remainderman, Remainder Beneficiaries, Future Beneficiaries: The individual or class of individuals (e.g. "heirs", "issue", "children") or institution (e.g. another Trust or Charity) named in the Trust Agreement to benefit after the current beneficiaries pass away or after a period of years defined in the Trust. The remainders will typically take the remaining balance of the Trust outright in their own name. If there are multiple remainders they will take the percentage share allocated to them in the Trust. Remainders are not to be confused with succeeding current beneficiaries who are named to become current beneficiaries of the Trust when an initial current beneficiary passes away.

Current Beneficiaries: The individual, class of individuals, or institutions named to have an immediate (current) interest in the Trust. Typically they have either a mandatory right to income (e.g. "the Trustee shall pay the net income") or a discretionary right to all or some of the income (e.g. "the Trustee may pay in the discretion of the Trustee"). They may also have a right to principal of the Trust through the Trustee's discretion or a withdrawal power granted them in the Trust. If the right is discretionary, the Trust will typically give the Trustee either a blanket discretionary power or limit the discretion to certain needs (e.g. health, education, maintenance, support). If the discretion is broad it will often include terms like "comfort" and "happiness".

Grantor/Trustor/Settlor/Creator: These are different names given to the individual creating the Trust by causing a legal document to be drafted and funding the Trust with cash, securities or other assets.

Co-Trustee/Co-Fiduciary: Names given to any individual or institution named as a Trustee when there is more than one Trustee. A Co-Trustee will typically share the same duties, responsibilities and liabilities equally with the other Trustees. In some cases the Trust Agreement may carve out certain duties for each Trustee, but generally they share equally in the management of the Trust.

Protector: The Trust may create the role of a Trust Protector which is different from that of a Trustee. While a Trustee it typically responsible for everything that happens with the Trust, a Protector is usually restricted to some specific duties such as change of situs for the Trust, and/or removal and appointment of the Trustee. The concept of a Protector was very common in the Offshore Trust practice but is gaining acceptance with domestic (U.S. based Trusts) as well.

Offshore Trust: Any Trust having its situs (legal location), Trustee and therefore place of administration outside the United States. [Trusts having a situs, Trustee and place of administration within the United States are typically referred to as "domestic" Trusts.]

Distributions: Paying out income or principal from the Trust is one of a Trustee's most important duties, and if left to the discretion of the Trustee, one of the most difficult. It can also be one of the most contentious areas of the administration of your Trust and therefore has the potential for challenge and for liability. "Mandatory" distributions are required by the Trust (e.g. "The Trustee shall pay the net income."). "Discretionary" distributions are those permitted by the Trust in the discretion of the Trustee. (e.g. "The Trustee may pay to the children of the Grantor such sums as may be necessary…for health, support, maintenance, and education.").

Distribution Committee: Usually found only in Trusts drafted for "modern" Trust law states, a Distribution Committee is given the responsibility to distribute funds from income or principal. The Trust is usually structured so the Trustee takes instruction from the Committee and is relieved of all liability for the result of following those instructions. Historically found in offshore Trusts, Distribution Committees are now finding their way into domestic Trusts.

Unitrust: There are now at least two types of Unitrusts. The distinctive characteristic of both is a distribution based on a percentage of the market value of the Trust, revalued annually.

1. A Charitable Unitrust available under the IRS Regulations where an individual can create a "split interest" trust [meaning two unrelated beneficial interests within the same Trust Agreement] for a charity and for family. With a Charitable Lead Unitrust a fixed percentage is paid to a recognized (by the IRS) charity for a period of years with the remainder going to family members. A Charitable Remainder Unitrust reverses the order and a fixed percentage of the Trust is paid to the Grantor for life or a period of years with the balance (remainder) going to a recognized charity.
2. Private Unitrusts (meaning no charitable interest involved) are now available in many states that have adopted versions of the Uniform Principal and Income Act (UPAIA). Where available the law will allow the Trustee to elect (a discretionary decision that should be documented) to pay out a percentage of the market value of the Trust as "deemed income". The percentage paid is usually between three and five percent (3% to 5%) and will be considered income even if some principal funds are paid out as part of the percentage. Usually the Trustee must also elect to invest the Trust for "total return" meaning to have a fairly aggressive investment allocation that seeks to maximize the growth of the Trust within reasonable risk parameters.

Trustee Tip:

While charitable unitrusts are baked into the Trust Agreement, private unitrusts are usually a discretionary election by the Trustee after considering the best interests of the beneficiaries, the purpose and the structure of the Trust. It is a decision that should also be reviewed every year or when circumstances change. MyTrustCo.com has sample Unitrust and Power to Adjust discretionary action forms in the member section.

Power to Adjust: Like a unitrust, the Power to Adjust is available for private (non-charitable) Trusts as a discretionary option for the distribution of income by the Trustee.

• The Trust must be governed by a state law which includes the adoption of the Uniform Principal and Income Act (UPAIA) which will in part authorize the use of the Power to Adjust.
• The Trustee can use the Power to Adjust to achieve fairness between the current and future classes of beneficiaries of the Trust.
• The Power can be used on a one-time basis to adjust funds from income to principal, or from principal to income if that will further the impartial treatment of the beneficial classes. (For example, if an asset like undeveloped land or a family business is held in principal for many years without producing income for the income beneficiaries, and that asset is finally sold for a windfall, then the remainder beneficiaries will have benefited from the investment at the sacrifice of the income beneficiaries who received nothing during the holding period. In this case, the Trustee could exercise her discretion to use the Power to adjust a sum from principal to income representing a fair share of the investment for the income beneficiaries. The Trustee would be advised to have professional advice on the right allocation documented and on file.)
• The Power can also be used on an ongoing basis to pay out a percentage of the market value of the Trust as "deemed income" to the income beneficiary. Again, the percentage is usually between three and five percent (3% to 5%) and the decision should be documented and reviewed annually. Once the Trustee determines the percentage to pay, principal may be used if necessary to make up the "deemed income" amount. The Trust is usually also invested for total return to maximize the overall growth of the portfolio within reasonable risk parameters.

Many professional Trustees prefer the Power to Adjust over the unitrust option as it is less formal and can be modified or cancelled at anytime by the exercise of the Trustee's discretion. [Note: the Trustee should also consider the tax implications of the percentage payment: will the payment be gross of its representative share of capital gains if principal is used, or net?]

Uniform Principal and Income Act (UPAIA):Also mentioned above, UPAIA is a uniform rule created by academics and recommended for use in each state's body of Trust law. Some states will adopt it in it's entirety, but most state will adopt a modified version of it. In addition to authorizing Unitrusts and the Power to Adjust, the act addresses how a Trustee should treat various expenses (legal fees, real estate taxes, etc.) and where certain extraordinary receipts (liquidating dividends for example) should be credited: principal or income? The Trust Agreement may address this as well, and will always override state law, but to the extent the Trust is silent, the Trustee may look to the state law.

Prudent Investor Rule: The current standard applied to a Trustee's duty to invest the assets of the Trust. A Trustee must act "prudently" when making investment decisions. This is a gray area with no bright lines. Generally it means no speculation, no investments made without research, no concentrations of any one investment, and each investment made to further the purpose of the Trust and the interests of the current and future beneficiaries.

• Will the investment provide income for the current beneficiaries?
• Will it provide growth to maintain purchasing power of the portfolio over time, and for the ultimate remainder beneficiaries?

(See also the discussion above about Unitrusts and the Power to Adjust.) Remember, as a Trustee you should have the power to hire an investment manager as an expense of the Trust. It is always a best practice to document your investment decisions and any discussions you have with the investment advisor you retain. You will be responsible for the selection and oversight of the investment advisor (unless you are a Directed Trustee) and will be responsible for hiring someone experienced in the field, and replacing them if they do not perform.

Uniform Prudent Investor Act (UPIA): A suggested law governing the investment of Trusts written by academics and proposed for adoption by each individual state as part of their body of Trust law. Most states have in fact adopted a version of UPIA. The Act addresses proper diversification of assets, appropriate delegation by the Trustee, and factors to be considered by the Trustee in constructing a portfolio appropriate for the Trust. In addition the Act allows the Trustee to view the portfolio as a whole, avoiding the older "Prudent Man" rule that held the Trustee responsible for each asset purchased in the Trust, and each asset would need to provide income for the current beneficiaries. Under the Prudent Investor, each asset need not produce income, but the overall portfolio should produce sufficient return for the current as well as the future beneficiaries. Note: the Uniform Principal and Income Act (UPAIA) is intended to work in harmony with UPIA so a percentage of the portfolio could be shared with the income beneficiaries. [See: Unitrusts, Power to Adjust]

Investment Committee or Investment Advisor: Once the exclusive responsibility of the Trustee, "modern" Trust laws have allowed the unbundling of many historic duties. The investment of Trust assets is one of the most common duties to unbundle. So if you are a Trustee for a Trust established under Delaware, South Dakota, or jurisdiction with similar Trust laws, you may find your investment duties assigned to an Investment Committee or Advisor.

WARNING: be sure to confirm with the attorney for the Trust the extent you are protected following the directions of the advisor or committee. Some state laws allow the Trustee to be directed on the investments but still leave some responsibility with the Trustee to ensure the investments do not defeat the purpose of the Trust. When you are directed you should prefer to have the protection of state laws (e.g. Delaware, South Dakota) that allow you to follow the directions with no liability to you should they underperform or otherwise deplete the portfolio.

Tax Letter or K-1: A Trustee is responsible for the preparation and filing of tax returns for the Trust.

• A Trust is a separate legal entity and therefore must file a federal return and state tax return (unless the Trust's legal residence or "situs" is in a no income tax state).
• There may be certain exceptions to this rule, such as "Grantor Trusts" where the Grantor is taxed on all the income and capital gains generated by the Trust, but even then the Trustee is usually responsible for preparing an informational return.
• The Trustee is also responsible for notifying the beneficiary of their tax obligations for any distributions made during the tax year.
• The notice to the beneficiary is usually in the form of a "tax letter" or "K-1 advice" and will detail, much like a 1099, any income or capital gains/losses reportable by the beneficiary. Unlike a 1099, the tax letter is not due at the end of January. Instead the Trustee has until April to provide the information.

Duties: The role of Trustee has always come with many "duties" imposed on the Trustee. (See more detailed discussion of individual duties later and in the member's section.) If a Trustee fails to adhere to any of these duties she can be sued for a "breech" of Trust, and face possible removal from the office of Trustee and surcharge for any damages to the Trust. Some examples of the duties follow.

• Duty to make the Trust productive: the Trustee must invest the assets of the Trust and generate a return for the beneficiaries.
• Duty of Loyalty: the Trustee must make every decision with the best interests of the Trust and the beneficiaries in mind. At no point should the Trustee benefit from any transaction for the Trust.
• Duty of Impartiality: the Trustee's actions must consider the interests of the remainder beneficiaries equally with the current beneficiaries.

As you can see from these examples, the Trustee must always act as a true fiduciary; making the best decisions, informed decisions, at all times considering the needs of the beneficiaries and the purpose of the Trust. (And don't forget to document your decisions.)

Executor or Personal Representative: Both are names given the fiduciary of an individual's estate, the one responsible for probating a Will. The role of Executor is similar to that of a Trustee in that he must preserve the assets of the Estate, pay any obligations, file tax returns, pay out debts, oversee the assets, and finally distribute the funds. The Executor must also make informed decisions in the best interests of the Estate and its beneficiaries.

The difference between the role of the Executor and that of the Trustee is:

1. The Estate has a typical life cycle of three or four years while a Trust can last for generations or in perpetuity and
2. because of the short life of an Estate the investment duties are usually focused on preserving the assets for distribution instead of investing for long term growth.

Rule Against Perpetuities: One of the oldest laws related to Trusts dating back hundreds of years to English common law.

• The rule was created by the King to limit the time wealth (land) could be held in Trust before it "vested" in an individual, meaning before an individual owned it outright.
• Why? Because the King could tax the land upon the death of an owner, and if it was held in Trust beyond the owner's life then the King could not levy his taxes.
• The original rule stated that a Trust must "vest" (be owned outright by and individual) no later than lives in being at the time of creation plus 21 years. Assuming you had a child born on the day you created the Trust, the maximum duration would be the life of that child or any other individuals, plus the time it took any late born grandchildren to reach majority, or a total of approximately 60 to 100 years.
• The Rule lasted for centuries and made it into the American law of Trusts, which in most states was based on the English law rules. It still exists in many states today, but has been modified by many to a straight period of years (e.g. 99years; 360 years), or eliminated in a number of other states (e.g. Delaware, South Dakota, Alaska) to provide for perpetual or "Dynasty" Trusts.

Uniform Trust Code (UTC): The UTC was crafted by academics and practitioners in the field of Trusts and Estates in an attempt to modernize and standardize the American law of Trusts. Historically each state developed through judicial practice (common law) and legislative enactment (statutory law) a body of Trust law based on English Trust law principals. (Louisiana being the exception as with their French roots much of their laws have roots in the Napolionic Code.) The UTC did not contemplate the interest in each state's attorney organization (state Bar Association) desire to cling to certain state specific views on the practice of Trust law. So while a number of states have adopted the UTC, most have done so only in part or with modifications particular to their home state. The result is a commonality but not a complete consistency among states that have adopted the UTC.

Sole Trustee: the single fiduciary responsible for the Trust. This individual (or institution) has complete legal ownership of the assets for the current and future beneficiaries. The Trustee is responsible for:

1. Preserving the assets of the Trust and making them productive (growth to preserve purchasing power and income for the current beneficiaries).
2. Paying taxes owed by the Trust.
3. Distributing funds as directed or allowed by the Trust.

The Trustee is answerable to current and future beneficiaries for the preservation and productivity of the Trust's assets and the distributions paid out.

Co-Trustee: Possessing the same obligations and responsibility as the sole Trustee, but shared with one or more additional Trustees. Liability is usually shared for all actions taken on behalf of the Trust. Multiple Trustees usually must act by majority, but the Trust Agreement may require a unanimous vote on some or all decisions. If the Trustees become deadlocked on a decision, they usually must go to court to resolve the issues (i.e. ask the court for instructions).

Directed Trustee: Generally, this Trustee will have many of the usual duties of a Trustee (e.g. custody of assets; tax preparation) but will be directed on investments, distributions or both by the terms of the Trust. The Trust Agreement typically assigns the duties and responsibilities of investing the assets of the Trust to an individual or committee (often described as the Investment Advisor; Investment Committee), and the Trustee is only responsible for following the instructions. The same is true for any Trust that names a Distribution Advisor; the Trustee is only responsible for following the instructions of the individual named in the Trust Agreement with regard to payment of income or principal funds to the beneficiaries.

Trustee Tip: Directed Trusts are often viewed as relieving the Trustee of all fiduciary responsibility. This is incorrect. With the right state law governing and the necessary language in the Trust Agreement the Trustee should be relieved from any responsibility and liability with regard to the particular direction indicated: investments or distributions. But the Trustee will usually still have the fiduciary duties and responsibilities for all other aspects of the Trust. E.g. if a Trustee is directed on investments and the advisor asks the Trustee to make a distribution of assets, the Trustee will still have to consider if that is appropriate and in the best interests of the Trust and the beneficiaries.

Administrative Trustee: Very similar to a Directed Trustee, only here the Trust Agreement limits the Trustee's duties to a very specific and short list of duties designed to establish legal situs (e.g. custody of assets; providing tax information; sending statements) while the discretionary decisions are made by another Trustee or by advisors.

Trustee Tip: Directed and Administrative Trustees are most commonly used with "modern" trust states (e.g. Delaware, South Dakota, Alaska) having laws that allow a Trustee's duties to be unbundled without any residual liability to the Directed Trustee. If your Trust is not governed by the laws of one of these modern states you should consult with an attorney regarding any continuing oversight duties you may have.

Delegated Trustee: Unlike a Directed or Administrative Trustee, a Delegated (or delegating) Trustee starts off with full responsibility for the operation of the Trust, but then receives either beneficiary or court approval to delegate certain duties (typically the investment responsibility) to an individual or firm. Again, this option is more popular in modern Trust states where the liability protection is greater for the Trustee delegation the responsibility. (E.g. South Dakota has a good Delegated Trustee statute where all interested parties to the Trust must sign off agreeing to the delegation.)

1. Understand the role of Trustee. MyTrustCo.com can help: read through the basic information provided here. Have a conversation with the drafting attorney and any family members involved with your appointment as Trustee.

2. Understand the Trust Agreement and the specific duties that will be required:

   1. Investing the assets;

   2. Paying out funds

   3. Making discretionary decisions

   4. Keeping records.

      Speak with the attorney who drafted the Trust if you have any questions.

3. Meet with your Co-Trustee(s) and any other advisors named in the Trust (e.g. Protector, Investment Advisor, Distribution Advisor) if any.

   • Discuss how you will work together, invest the Trust funds, distribute funds, prepare taxes, and any other duties required by the Trust.

   • Develop a plan for responding to beneficiary requests for funds. Decide how often you will meet (in person or conference call) to review the status of the investments and the beneficiaries.

   • Agree on who will be responsible for the initial and annual reviews of the Trust and who will keep the official records. [Note: MyTrustCo.com has sample checklists; initial and annual reviews, letters and recommendations to assist you in your duties.]

4. Meet with the beneficiaries. Make sure they know how to reach you. As a Trustee you must know their needs now and if they change in the future. They should receive statements of the investment activity (typically the current beneficiaries, but in some states the "presumptive remainder beneficiaries" who would take if the Trust terminated today). A best practice would be to agree how often they would like to meet to discuss the Trust.

5. Read through MyTrustCo.com to ensure you have a good understanding of your responsibilities and some of the best practices used by professional Trustees (banks, Trust Companies).