The creation of a trust allows a grantor to place assets under the care of a trustee, who then administers these assets in accordance with the terms of a trust deed written by the grantor. The trustee must administer the trust for the benefit of the beneficiaries named by the grantor.
The trustee is responsible for notifying various parties for various purposes as required by state law. He may be required to notify state officials, for example, if the trust purchases real estate, so that the property's tax basis can be reassessed. If a revocable trust becomes irrevocable because the grantor dies, the trustee must notify all beneficiaries and anyone else who may have a legitimate interest in the assets of the trust, such as the heirs of the grantor. If he resigns as trustee, he must notify all actual and potential beneficiaries of the name and address of the new trustee. If the trust is irrevocable, he must provide a written accounting of his disposition of trust assets to any beneficiary who demands one.
Trustees are often granted broad discretion to manage trust assets. A trustee may be entitled to invest trust funds in the stock market to increase the value of the trust, for example. He must exercise his discretion with care and loyalty toward the interests of the beneficiaries. He must also ensure that trust assets such as real estate and bank accounts are titled or registered in the name of the trust. In any case, the trustee must administer assets in strict accordance with the terms of the trust deed.
The IRS taxes trust income -- rents received from tenants living in trust-owned real estate, for example. If the trust is irrevocable, a tax return must be filed on behalf of the trust. It is the trustee, not the grantor, who is responsible for filing the trust tax return, Form 1041. The trustee must also file any required state and local tax returns.
The trustee must distribute trust assets to beneficiaries in accordance with the terms of the trust deed. The trust deed might require lump-sum distribution on a certain date, or it might require periodic payments to beneficiaries until the trust assets are exhausted. It might require the trustee to invest trust assets and distribute only interest and profits to beneficiaries. If the trust deed allows the trustee discretion in distributing assets to beneficiaries, he must exercise this discretion in an impartial manner. If he distributes trust assets to beneficiaries during the tax year, he must provide each beneficiary with Schedule K-1 so that the beneficiary can use it to prepare his own individual income tax return.