A trustee manages a trust, while a custodian manages assets in a financial institution.
The trustee manages the assets in a trust or pension
The custodian is the financial institution that holds the assets
The trustee or custodian of a retirement plan is usually the plan administrator
A trustee is responsible for managing and maintaining trust property while the custodian is only the entity that holds the assets. When you open a trust, you must appoint a trustee to oversee the trust's activities, which includes managing, selling, and distributing trust property to beneficiaries. The assets are held by the custodian, which is a financial institution like a bank or brokerage firm. The custodian is limited to administrative services and they don’t typically have the power to make investment decisions.
You may encounter trustees and custodians when creating an estate plan, which lays out what happens to your things when you die or can no longer handle your affairs. A trustee and custodian are also involved in pensions, and retirement plans — though the term may be interchangeable for IRA and 401(k) accounts.
The trustee has a fiduciary responsibility to the beneficiaries of the trust. They manage financial assets and make investment decisions according to the terms set by the grantor, the person who created the trust.
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The trustee can do any of the following:
Manage the trust assets
Sell trust property and invest trust funds
File and pay trust taxes
The trustee can be a person, like a friend, family member, estate attorney, or even the grantor, depending on whether the trust is revocable or irrevocable. You can also choose a professional trustee, like a trust company, which is a corporation that can act as trustee and offer robust asset management and brokerage services.
The custodian typically isn't a person, but a financial institution, like a bank, credit union, stock broker, or investment firm. If your trust contains assets in different places, then there are multiple custodians involved. For example, the trust may be funded with savings accounts at different banks; both institutions serve as custodians of your money.
The custodian does not make management decisions, but can do any of the following:
Hold assets in electronic or physical form
Collect income and dividends
Provide activity statements and applicable tax forms (which the trustee uses to file taxes)
Make payments or distributions when directed by the trustee or account owner
A custodian can be appointed to manage the finances of a minor, such as with an UTMA account. The custodian acts in a similar capacity to a trustee with the fiduciary duty to invest and manage assets on behalf of the minor beneficiary until they reach the age of the majority.
When it comes to a retirement plan, trustee and custodian are sometimes interchangeable terms. The trustee or custodian of your 401(k) or IRA account is typically the plan administrator, which ensures transactions are being made in accordance with IRS rules. If you want to include alternative assets in your retirement plan, then you’ll need to find a custodian that allows for such investments and open a self-directed IRA with them.
Learn more about retirement plans in our investing series.
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Elissa Suh is a personal finance editor at Policygenius in New York City. She has researched and written extensively about finance and insurance since 2019, with an emphasis in esate planning and mortgages. Her writing has been cited by MarketWatch, CNBC, and Betterment.
Elissa has a B.A. in Film Studies from Barnard College.
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