Fiduciary fundamentals

When you set up a trust, you will choose a trustee whose function it will be to oversee and administer property and assets in the trust according to your specific instructions. Keep in mind that property in a trust isn't just held; it is also invested and distributed according to the instructions contained in your trust agreement.

Therefore, when you create a trust, you will need to decide how much authority — broad or limited — you want to give to your trustee. For example, you may choose to give the trustee "investment discretion", or you may elect to retain full investment discretion over the assets in the trust yourself.

While the trustee you select can be an individual, such as a friend or relative, you may instead hire a professional corporate trustee who will manage all of the financial and legal aspects of the trust for you. Unlike an individual trustee, a corporate trustee won't die, move away, take a vacation or be biased or distracted by personal concerns.

If you choose a professional trustee, he or she will play many roles. Some of the important functions are:

• Estate planning assistant: Trusts are the cornerstones of an effective estate plan, helping to protect wealth and maintain investments for future generation. Your trustee can work with your estate-planning attorney to set up a trust to take care of investments and protect wealth. Others may want a standby trust that goes into effect only if a predetermined event, such as disability, should occur.

• Personal banker: Your trustee should have the ability to pay bills, make wire transfers and complete other financial cash-flow transactions.

• Investment professional: When you give full investment discretion to a corporate trustee, trust an investment professional to work with you and make investment decisions based on your investment guidelines and risk tolerance. If you opt for a family member or friend to be your trustee, a trust firm still can provide you with record keeping and administrative services while you and/or the trustee named by you will hold fiduciary responsibility for the trust and be responsible for investing its assets.

• Tax preparer: One of the most important responsibilities of a trustee is to handle, prepare and submit all required tax forms related to the trust. Your trustee should be experienced in performing these tax duties. It helps if your trustee has access to experienced tax professionals who can anticipate any complications regarding income taxes, gift taxes and estate taxes.

• Record keeper: Your trustee should keep all trust records and activity up to date, as well as execute buy and sell orders, collect your investment income, and deposit, disperse or reinvest the income as your trust agreement directs. Your trustee also should prepare periodic statements for you and for the trust beneficiaries if requested in the trust document.

• Security guard: Your trustee is responsible for protecting your trust assets and keeping them separate from other trust accounts. In addition, by law, your trustee may not use your trust's assets for the trustee's own financial obligations. Because of these responsibilities, it is important that you make sure your trustee is reliable and financially stable.

When it comes to planning a trust, understanding the various roles and responsibilities expected of its trustee is necessary before you begin. Your financial adviser can guide you and be sure to consult your tax and legal advisers before making any related investment decisions.

Dr. Fox has owned and operated a mixed animal practice in Taos, N.M. He is currently with Morgan Stanley in San Diego. He can be reached directly at (800) 473-1331; or e-mail: steven.fox@morganstanley.com