The process for administering a living trust varies as to (a) the nature of the trust, (b) the trust’s assets, (c) the plan of distribution, (d) tax concerns, and several other matters.
Basically, trust administration is a task that involves several skills. They are not necessarily complex, but one is well advised to consult with certain professionals, such as an accountant, an attorney, a financial advisor, and an insurance specialist
In theory, trust administration is somewhat like running a small business. One needs to know what the assets are, how to manage the assets, how to handle various tax issues, how to determine the needs of the beneficiaries (if called for), and how to properly distribute the assets to the beneficiaries.
Occasionally, one must resort to the probate court to have special questions answered which cannot otherwise be determined. Sometimes tax disputes require administrative resolution and occasionally court action. Recall that a trust is often a separate tax-paying entity, and must be treated as such.
This brief summary will serve as a guide to understanding what tasks fall to a successor trustee who assumes such duties. It is not meant to be exhaustive, but merely an overview to guide one’s preliminary thinking. This is not legal advice.
Where to Begin
Usually, a successor trustee begins by reviewing the trust document and related documents. He or she also wants to review the list of trust assets and the documents which represent the assets such as deeds, bank statements, brokerage company statements, insurance policies, leases, mortgage lender’s statements, etc.
Typically, one is well advised to review the mail for at least one or two months since most financial institutions send monthly statements concerning their accounts. Of course, one needs to determine whether certain bills are paid “automatically” from checking accounts. If so, it is important to advise the financial institution whether that method should be continued.
Monthly billings can also serve as “clues” to locate other assets such as real property. For example, a property tax bill can lead one to find a piece of real property previously not known. Similarly, rent checks received from tenants may also indicate property ownership in another city or county.
Reviewing the decedent’s recent income tax returns will show a host of information. One can easily see a listing of interest and dividend income set forth, and identifying the source(s). Even though circumstances may change, people often continue to bank at the same institutions, based mostly on habit or convenience. Safety deposit boxes can be located by contacting those same financial institutions and those in the area where the decedent lived and/or worked.
Securing Trust Assets
After determining what the trust assets consist of, it is most important for the trustee to be certain that all assets are safely maintained and fully insured. An empty home may attract vandals, and a vehicle left on the street may easily be stolen. If there is a going business, the trustee must take all reasonable steps to see that it continues on, including the supervision of employees, etc. If the trustor owns any firearms, they must be secured to prevent harm to any third party. In short, prudence is the watchword.
Income Tax Returns
One of the first tasks is to determine whether the decedent had taxable income for the portion of the last year that he/she lived. A personal income tax return (state and federal) may need to be prepared and filed for that time period. For example, the decedent who died on May 1st will need to file a personal tax return for the first four months of that year. Thereafter, the trust will likely need to file its own tax return for the balance of that year (i.e., for the months of May through December). After applying, a trust will be assigned a taxpayer identification number by the I.R.S. to be used on all of its business and financial dealings.
Each year thereafter, the trust will need to file its own tax returns so long as the trust is in force. That means a trustee will be responsible for such tax filing and payment until the trust has been fully distributed and terminated.
Estate Tax Returns
The Congress from time to time determines whether we should have an estate tax and what the tax rates should be. Interestingly, we presently have a “first” in that the federal estate tax is set in place for a specific term of years, and then reverts to a former scheme in 2011. In fact, in 2010 there will be NO federal estate tax for people dying in that year!
One can only wonder how such decisions are made...and for what purpose.
The only sound advice to give regarding that matter is to keep current as things develop. As with all legislative decisions, there is a “give and take” in the process, and the final law which results is a product of various forces. However, the year in which the decedent dies is a major determinant. The amount of his gross estate, tax deductions, gifts to charities, etc., all play a part in determining the final tax figure.
Other Sources of Information
Most “trustors” (creators of living trusts) maintain some kind of information files, etc. They typically try to set aside certain ledgers, file drawers, checking account registers, bank statements (with or without cancelled checks), etc. Another source of information is the name, address and telephone number of the person who prepared his/her last tax returns.
The name, address and telephone number of his/her attorney is often helpful. If a person had a current relationship with his attorney, that may be an additional resource for you. If he had ongoing business dealings....as opposed to being the recipient of merely “passive income” (such as interest and dividends)...that may have required ongoing legal advice. Evidence of contracts and lawsuits will be another good indicator.
If there is a surviving spouse, that should also be a good source for further data. Some couples share many details of their financial lives, while others are often “kept in the dark”. It varies as to the couple, their sophistication, their level of income, the nature of their own work histories, family histories, and many factors one cannot even know. So, always ask!
Marshaling the Trust Assets
A trustee has to carry out the directions of the trustor (one who created the trust) so far as possible. Thus, he needs to know (a) what there is, and (b) who gets what. So, the first reference is to the trust instrument itself.
Some trusts describe in great detail how to distribute the trust assets, such as a list naming each beneficiary and the exact item or amount to be given to him/her. (E.g., $25,000 each to my nieces and nephews named in Article 3). Others may be a “formula” distribution (e.g., 10% of the net assets of this trust after administration costs and fees shall be paid over to my son, John Q. Jones, Jr.) . Each trust instrument will suggest the nature of the distribution...and the trustee will want to have that in mind as he gathers and identifies (“marshalls”) the assets.
Appraisal of the assets may also occur at that time if it seems necessary. Certain types of assets, such as real estate, coin collections, works of art, may need special handling, both for tax purposes and otherwise.
Often, a trustor may own a fractional interest in an asset with others, such as a partnership interest in a commercial building. Only that interest need be inventories and appraised. The interest of other co-owners may or may not be affected. Sometimes, family members may own a family limited partnership, with various percentages owned by each member. That will introduce other factors.
Creditors and Other Claimants
Each trust may set forth how and when creditors are to be paid. Some creditors are general creditors of the decedent, such as banks or credit card companies. Others may only be involved as to a specific asset, such as a mortgage lender on a particular piece of real property.
Successor trustees will want to determine what creditors there are, what amounts they are seeking and for what goods or services, whether their claims revolve around a specific asset, the value of that asset, whether there is insurance to pay such claims, and similar such things.
A trustee’s duty is to prudently manage the trust’s business and financial matters, so he/she does not want to either pay or deny a claim lightly. So, all reasonable concerns must be satisfied before doing so.
Some trusts have been established to avoid paying creditors to some degree or other. For example, people who create “offshore trusts” outside the jurisdiction of the United States may wish to protect their assets from local creditors. This may be utilized by a physician who wants to protect his family from runaway malpractice lawsuits and judgments, especially where he may not be able to purchase insurance against this kind of hazard.
The distribution of the trust’s assets is the purpose for which the trust was likely created. As mentioned earlier, distribution may be straightforward under a clear formula or simple set of directions, or it may be more complex. It might depend upon who survives whom, the age of the beneficiary, the timing of distribution, etc. In creating the trust, the trustor often has in mind certain situations where distribution should be delayed, such as with a minor beneficiary reaching age 25 and not receiving the bulk of his gift until that age, only interest income until then.
Typically, the trustee will need to “overview” the trust’s financial and tax matters before forming any plan of distribution. Of course, if there are difficult claims and/or pending lawsuits, those matters will normally need to be dealt with first.
Occasionally, a trustee will be able to create a “preliminary distribution” whereby he will distribute some of the beneficiary’s gift immediately (or early in the administration process), and determine the actual balance due at a later time. This gives the beneficiary something now and more later. It is especially helpful if the beneficiary has crucial economic needs to be met in the short term, such as medical care.
From time to time, a trustee is obligated to render a form of accounting to the beneficiaries, specifying certain things regarding the trust and its administration. It is a formality which often is overlooked, especially if things are to be wound up quickly. In a close family situation, it may be waived.
Trustee’s Fiduciary Duties
A trustee is a fiduciary and, as such, is held to the highest standard known to the law. This must be so, since one who undertakes such a task is essentially the substitute for the entire probate court process which would have been employed if the decedent had left a Will. So, when all of that trustee’s court supervision is lacking, only the highest standards of performance insure that the trustor’s wishes will be carried out.
This is why a trustee may engage legal counsel, tax advisors and tax preparers, financial advisors and others to assist him in the performance of his duties...all at the expense of the trust. He must act reasonably and prudently in carrying out his duties.
While it is not feasible to outline every possible situation, the standard of care which a trustee must follow is clear. He or she must act reasonably under the circumstances as a fiduciary. All necessary steps must be taken to prudently handle the affairs of the trust. Seeking out the assistance of trained professionals is often the best way. Of course, it is most helpful to engage those who will be readily available to answer your questions as they arise.
In any event, please keep in mind that you are performing a very valuable service, and this should be appreciated by all of the beneficiaries.