An irrevocable trust is a trust that can't be changed, except by a court order. The person who runs an irrevocable trust is known as a trustee. Trustees have many legal duties to the trust, including careful investment of assets and the duty to account for their decisions. Everything the trustee does must be for the good of the trust's beneficiary; the trustee can't seek to gain something for himself in operating the trust.
The Trustee's Role
A trust means that someone has transferred his assets to the trustee, so that the trustee can take care of those assets on behalf of another person, the beneficiary. In running the trust, the trustee must follow the language of the trust and must act at all times for the good of the beneficiary. Because of the trustee's position, one of great trust, the law holds him to a high standard of behavior; the trustee has fiduciary duties of loyalty and confidentiality to the trust. Fiduciary duties mean that the trustee is forbidden from doing business directly with the trust or making a profit from his dealings with the trust, even if those dealings profit the trust as well.
In running the trust, the trustee has a fiduciary duty of due care, meaning that he must make prudent investment decisions. Due care is defined by the applicable state's law; some state statutes list the types of investment that qualify as "prudent," other states hold the trustee to the standard of any reasonable investor and still other states follow the Uniform Prudent Investment Act. When the trustee fails to invest prudently and the trust takes a loss as a result, the law may ask the trustee to make up the loss.
Earmarking and Nondelegation
As part of his management of the trust, the trustee must keep all of the trust property separate from his own property. In practical terms, this usually means separate bank accounts, with no commingling of funds or assets, for which the accounting is also entirely separate from the trustee's own accounts. This is commonly referred to as the trustee's duty to "earmark" property. Traditionally, the trustee is also forbidden from delegating his responsibilities by handing over decisions on trust management to another party. However, many jurisdictions have now relaxed this law in order to allow the trustee to consult with a professional financial adviser.
The Beneficiary's Rights
Because the trustee is required to act for the good of the beneficiary, the law grants the beneficiary certain rights to make sure the trustee is doing his job. The beneficiary always has the right to demand that the trustee provide an accounting that clearly shows what has been done with the trust assets and how they've been earmarked. If the trustee fails to provide the accounting, or if the beneficiary isn't satisfied with the accounting, the beneficiary can petition a court to dismiss the trustee and appoint a new one.
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