Trust Administration

William Sweeney

AN OVERVIEW OF TRUST ADMINISTRATION

FIRST STEP-NOTICES AND LODGE WILL

Trust administration is similar to probate but takes place without court supervision, unless court assistance is formally requested. Trust administration is a necessary process that occurs after the death of either one or both trustors. To protect the successor trustees, there are many things that must be done to ensure proper administration. Fortunately, working with an attorney for trust administration is a straightforward process that will give the successor trustees a great peace of mind throughout the administration.

How Trust Administration Begins

Trust administration begins with a required probate code notice to all trust beneficiaries and heirs of the trustors. As of January 1, 1998, California Probate Code §16061.7 requires that within 60 days of a Trust becoming irrevocable, which is normally at the death of the trustor, the trustee must send out written notices which include appropriate warnings and information regarding the trustee to the named beneficiaries and heirs of the decedent and allows the recipient of the notice to request a copy of the trust. After receiving the mailed notice, the recipient has 120 days from the date of mailing to file a trust contest. If no contest is filed within a 120 days, then the notice recipient may forfeit their right to file a contest. But if no notice is mailed, the statute of limitations in which a trust contest could be filed is much greater, and could be up to at least four years.

Many successor trustees who handle trust administration without the advice of an attorney often skip this very important step.

Requirements

The notice required under California Probate Code §16061.7 has several requirements, each one of which must be met in order for the notice to be effective. These requirements include the following:

  • The notification by the trustee is usually required to be served on each beneficiary and each heir of the deceased trustor.
  • The notification by trustee shall be served by mail to the last known address or by personal delivery.
  • The notification by trustee shall contain the following information:
    • The identity of the trustor or trustors of the trust and the date of execution of the trust instrument.
    • The name, mailing address and telephone number of each trustee.
    • The address of the physical location where the principal place of administration of the trust is located.
    • Any additional information that may be expressly required by the terms of the trust instrument.
    • A notification that the recipient is entitled, upon reasonable request to the trustee, to receive from the trustee a true and complete copy of the terms of the trust.

There's much more to the notice requirement than meets the eye at first glance. If you are concerned or want to ensure that the administration of the trust is properly handled, please contact me for legal advice concerning your situation.

Lodge The Decedent's Original Will

Pursuant to Probate Code § 8200, the possessor of the original will needs to the original will for safekeeping within 30 days after having knowledge of the death of the testator. Lodging the will does not mean there is a probate being commenced. There is a $50 fee, payable to the court, for lodging the will (unless there is a probate).

SECOND STEP-DEALING WITH REAL PROPERTY

In those cases where the trust holds real property, a number of steps must be followed to vest title in the successor trustee so that the property can be managed, sold, or distributed as part of the trust administration. When a trustor dies, an Affidavit of the Death along with an original death certificate should be recorded for each piece of real property. When it is recorded, it changes the title of the property from the trustee (usually the trustor) who has died and into the names of the new trustee(s). Also maintain a copy of the trust in the event a title insurance company wants to see the trust distribution provisions.

Along with this Affidavit, a Preliminary Change of Ownership Form must be completed and recorded at the same time. This form informs the county recorder why the Affidavit is being recorded. Riverside County usually does not require a Preliminary Change of Ownership Form.

If the Living Trust will transfer the ownership of the real property from parents to children or in any other manner exempt from property tax reassessment, then the appropriate exemption form must be filled out and mailed to the county assessor's office. A grandparent/grandchild exclusion is also available for the portion of the property passing to a grandchild if their parents are deceased. I can prepare these documents for you to sign.

THIRD STEP-COLLECTING THE OTHER ASSETS

Once you have dealt with the real property, you will need to identify all of the other trust assets, e.g. bank accounts and investment accounts, and have the title to those assets transferred into your name as successor trustee. In order to accomplish this, you will first need to obtain a federal tax identification number for the trust. It is essential that you obtain a federal tax ID number for the accounts that are in the name of the trust so that any income earned from those assets is reported correctly to the IRS.

Do not use your own social security number as an identification number when administering someone else's trust, or you will find yourself liable for tax on income earned by the trust, and not by you.

How to Obtain a Federal Tax ID Number for Your Trusts

Obtaining a federal tax identification number (also called an employer identification number) is very easy. With the right information, you can obtain one online from the Internal Revenue Service. If you are working with me on the trust administration, I can obtain the number for you.

Transference of Trust Accounts

Once you have obtained a federal tax identification number, you should have all trust accounts transferred to your name as successor trustee, using the new identification number. If you are administering a trust that is splitting into multiple share trusts as part of a distribution plan, be sure to get a separate federal tax identification number for each separate share trust. Don't use one federal tax identification number for multiple trusts.

What to Do If Not All the Assets Are Placed Into the Trust

During the process of collecting all of the decedent's assets, you may discover that the decedent failed to place all the intended assets into his or her trust prior to death. The result is that these assets remain part of the decedent's estate and are subject to the probate process. The most common way this situation can be dealt with during Trust Administration is through the use of a will with a "pour-over" provision. This provision directs that any assets not placed into the trust during the deceased's lifetime will be put into the trust at death and distributed according to the terms and conditions of the trust.

What if the decedent forgot to transfer a significant asset to the trust? Will you be stuck with a very expensive and time-consuming probate proceeding? Maybe not. If the asset was specifically described in the trust or in the property schedule to the trust, then, under some circumstances, you can get out of a costly probate proceedings by using a "Heggstad Petition" (named after a 1993 California case).

To assist you in collecting the assets and transferring them to your name as successor trustee, I will prepare a document known as a Certification of Trust, which will identify you as successor trustee and set forth the scope and extent of your powers. The Certification will also set forth how title to the assets should now be held and will recite the new tax identification number to be used for all trust accounts. You will want to present this Certification to any financial institution holding trust assets in order to have the assets transferred to your name.

Once you have all of the assets identified and under your control, be sure to prepare an inventory of all trust assets and obtain appraisals for trust assets that do not have a readily ascertained value. Assets such as real property should be appraised immediately from the date of death. After the death of a trustor, (a single person, the first spouse to die or upon the death of the surviving spouse) an appraisal is necessary for the following reasons:

  • To determine the amount of the stepped-up basis. The value may be determined as of the date of death or six months after the date of death. It is recommended that the inventory be appraised by an official probate referee or licensed appraiser.
  • For asset splitting.
  • For an accounting.
  • To determine whether estate taxes are due.

FOURTH STEP-ASCERTAINING AND PAYING DEBTS & TAXES

As trustee you must determine the debts and liabilities of the decedent and make provisions for payment.

To protect against fraud, notify credit card companies that the person has passed away, and that no one should be permitted to make additional charges to the credit cards following the date of death. Let them know that the trustee intends to close the accounts. Send a letter to each of the three major credit reporting agencies, Equifax, Experian, and Transunion, letting them know that the person has passed away and instructing them that no one should be allowed to use his or her name or social security number to apply for new credit.

FIFTH STEP-ACCOUNTING AND TAX MATTERS

As successor trustee, it is your obligation to satisfy any tax liabilities owed. If the Decedent owned real property, be sure that real property taxes are paid before the due dates. Taxes can be especially tricky, as there may be estate taxes owed in addition to income taxes, if the estate is large enough. For a married couple, after the first death, there is generally no estate tax payable, due to the unlimited marital deduction.

To determine whether a federal estate tax return must be filed for the deceased settlor, you will need to add up the total value of the decedent's estate, including both trust assets and no-trust assets. If the total value of the estate is more than the exemption amount - currently in 2015, $5,430,000 - then it will be necessary to file Form 706 federal estate tax return. However, if the decedent made gifts during his lifetime, the decedent may have already used up a portion of his or her exemption amount and thus even if the estate is less than the exemption amount, a federal estate tax return may still be required. You will want to work closely with me and an accountant to evaluate whether a federal estate tax return is required.

The IRS requires that the federal estate tax Form 706 be filed within nine months of death. (This is in addition to income tax return 1040 for the deceased for the year of his or her death and a 1041 tax return for the trust every year of its existence after the death of the original trustor.)

At the death of the surviving spouse or that of a single individual, estate tax becomes a very important issue. I will work with you to determine which assets are in the trust, which assets are outside of the trust, which assets may need to go through probate and which assets are subject to estate tax. Often, estate assets may need to be sold in order to pay the estate tax liability. Since this may take time, it is essential that you consult with me early on in the administration process regarding any potential estate tax liability, to ensure there is sufficient time to liquidate estate assets in order to pay the estate taxes by the nine month post-death deadline.

A number of tax elections are available to the trustee when preparing the federal estate tax return. The following are tax elections which may be significant if estate taxes are contemplated. These tax elections should be discussed with your accountant:

  • Alternate valuation date.
  • Special use valuation.
  • Deductible fees.

Filing Income Tax Returns

Whenever a Trust becomes irrevocable tax returns are required each year. This is filed on Form 1041 U.S. Fiduciary Income Tax Return. Also, the decedent's final income tax return is due on April 15 of the year after death. The trustee should determine whether the decedent made estimated income tax payments. If so, make the estimated payments when due.

Stepped-up Basis: No matter what the value at the time of purchase, most assets (some assets like IRAs, annuities and retirement plans are excluded) receive a "step-up" in basis for tax purposes. Basis is the purchase price plus capital improvements minus depreciation. For example, a stock is purchased at a price of $100 but has reached $150 at the time of death. If this stock is sold before death, there will be a capital gains tax on the $50 profit. At death, the stock is revalued so that the beneficiary can sell the stock at $150 without incurring any capital gains tax. While it often appears that this higher value may be detrimental from an asset tax perspective, the income tax consequences may make the higher estate tax valuation a better deal for the beneficiary.

Because a successor trustee may be held personally liable for unpaid taxes, you will want to work with me and your accountant to make sure that all tax liabilities are satisfied prior to distributing the trust assets to the beneficiaries of the trust.

SIXTH STEP-THE ACCOUNTING

A Living Trust is only revocable while the trustor(s), the person(s) who created the Living Trust, are alive and well. Once the trustors lose capacity or pass away, their Living Trust becomes irrevocable. The California Probate Code requires that a successor trustee who is administering an irrevocable trust prepare and render an accounting of their actions and administration of the trust. To satisfy that legal requirement, you must keep detailed accounting records of the trust.

You will need to:

  • Keep track of all the trust money you are spending to wind up the decedent's final affairs.
  • Keep track of all deposits and disbursements from the trust.
  • Review the trust document to see what method of accounting is required.

Some trust documents expressly require an accounting while others have waived accountings. However, even where a trust document waives an accounting, the law may still require it. So, it is recommended that you consult with me early in the administration process to determine the scope of your accounting obligation. And even where the trust waives the requirement of a formal accounting, you will still want to keep detailed accounting in case the trust administration goes into litigation.

SEVENTH STEP-DISTRIBUTION

After all of the assets have been collected, the debts paid, the tax returns filed and the tax liabilities satisfied, the accounting prepared and rendered (if required), you will be in a position to distribute the remaining trust assets. As with all other aspects of trust administration, the terms of the trust document will dictate how the trust assets are to be distributed among the trust beneficiaries.

Before Anything Else - Determine Who the Beneficiaries Are

A trust will often simply direct that the assets be distributed outright to the various beneficiaries. However, the trust may dictate that assets for certain beneficiaries be held in trust for those beneficiaries. This requires that you establish sub-trusts for those beneficiaries. Examples of common sub-trusts are a separate share trust for a minor, a bypass trust and survivor's trust (for a married couple) or even a pet trust so that a beloved pet can be cared for. As successor trustee, you will need to identify any sub-trusts that are required under the trust document and ensure that those sub-trusts are properly funded.

Allocation and Distribution of Trust Assets

Once you have identified who the beneficiaries are, you can proceed with allocating and distributing the trust assets. Before distribution, you are advised to provide a Notice To Beneficiaries under California Probate Code §16461(c)(3) and a Beneficiary Release. Also, California Probate Code §16063 requires that you inform a recipient of an account that they may petition the court pursuant to California Probate Code §17200 to obtain a court review of the account and of the acts of the trustee. Claims for breach of trust are barred after the expiration of three years from the date the recipient receives an account or report disclosing facts giving rise to the claim.

A trustee is required to report and account no less often than annually California Probate Code §16060, et seq., requires the report and account to be in a certain form and contain certain notices.

An account must contain the following information:

  • A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.
  • A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or since the last account.
  • The trustee's compensation for the last complete fiscal year of the trust or since the last account.
  • The agents hired by the trustee, their relationship to the trustee, if any, and their compensation for the last complete fiscal year of the trust or since the last account.
  • A statement that the recipient of the account may petition the court pursuant to annually California Probate Code §17200 to obtain a court review of the account and the acts of the trustee.
  • A statement that makes a claim against the trustee for breach of trust may not be made after the expiration of three (3) years from the date the beneficiary receives an account or report disclosing the facts giving rise to the claim.

What to Do When There Are Issues Between Beneficiaries

In situations where there is acrimony among the beneficiaries or towards the successor trustee, I will likely suggest that you prepare a formal accounting of your actions as successor trustee and seek court approval of those actions and of your proposed distribution scheme. By petitioning the court for such approval, you minimize the risk of future litigation, since a beneficiary who does not object in the court proceedings is typically barred from later complaining about your administration of the trust, if you have properly disclosed your actions. If you do not choose to obtain court approval, a beneficiary generally has three years to object to your administration of the trust after close of your administration.

CONCLUSION

Trust administration is often complicated and confusing, and can seem overwhelming at times. You may not know what to do. That is where I can be of help. I make a difficult and bewildering trust administration process as simple as possible. If you wish to gain more information on California trust administration please contact me for a free consultation. I will spend time with you to answer your questions. From my office in Southern California, I represent families in all Southern California counties, including Imperial County, Los Angeles County, Orange County, San Bernardino County, San Diego County, others spread across the state and interested parties outside California.

To schedule a consultation, call me toll free at 800-575-9610 or locally at 760-989-4820. I enjoy meeting in person whenever possible, but am also available via Skype and email or through my online contact form.