Trust Administration

Trusts are an essential component of most Colorado estate plans. However, despite their importance, many individuals do not understand the basics of a trust, including their key concepts and terms. While trusts can sometimes be complicated, the following post breaks down the essential aspects and terms associated with a Colorado trust.

What is a Trust and Who is Involved in the Process?

A trust is a legal agreement involving at least three parties, where one party holds and distributes assets on behalf of another. The terms of the trust – which all parties must abide by – are included in a legal document called the trust agreement.

As mentioned previously, there are three parties involved in a trust agreement. The first party is called a trustor, who creates the trust and is giving away, or transferring, the assets. The second party is called the trustee, who manages the trust and its assets. The trustee is legally obligated to manage the trust in the best interest of those receiving the assets and also consistent with the terms of the trust agreement. The third party is called the beneficiary, who will receive the assets in the trust. They are called the beneficiary because they benefit from the trust. It is important to note that the same person can be in more than one of these roles, even at the same time. For example, often, the same individual will be the trustor and the trustee.

Choosing a trustee to manage a Colorado trust after someone has died may seem like a simple decision; however, much thought should be put into it. From keeping a detailed record of trust account activity to reporting the income tax liability of the trust, performing the duties associated with being a trustee can often be both overwhelming and immensely important. While the first instinct might be to pick a friend or family member to serve as trustee for the estate, there are compelling reasons why a professional trustee should be chosen instead.

Managing an estate can often be very technical and time-consuming. Because of this, there are factors to take into account when selecting a trustee:

Cost

It may seem logical that having a family member serve as a trustee would be cheaper than hiring a professional; however, this is not often the case. Individual trustees, unlike fiduciary institutions, must hire other professionals like attorneys and CPAs to help them perform estate-related duties. These costs are often unexpected and not included when calculating the overall cost of a trustee. On the other hand, corporate trustees often provide these services in house and are bundled into a comprehensive fee.
Additionally, inexperienced trustees will often forget that the residence of a trustee determines the income taxation of a trust and its relevant state law. On the other hand, professional trustees may also have an office in a state that will avoid state income tax on the estate.

Articles Posted in Trust Administration

A Primer on Colorado Trusts

How to Pick the Right Trustee for a Colorado Estate Plan