Trust Administration: The First and Most Important Step

Trust administration is a necessary process that occurs after the death of either one or both settlors. 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 straightfprobate attorney burbank caorward process that will give the successor trustees a great peace of mind throughout the administration. Geisler Patterson Law has helped many families with the administration of Trusts and will guide your family through the process.

Trust administration begins with a required probate code notice to all trust beneficiaries and heirs of the settlors. California Probate Code Section 16061.7 states that such notice must be sent within 60 days of the death of a settlor 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.

Beware: Many successor trustees who handle trust administration without the advice of an attorney often skip this very important step. The notice required under California Probate Code Section 16061.7 has several requirements, each one of which must be met in order for the notice to be effective.

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 consult with an attorney for legal advice concerning your situation.

As part of the initial trust administration process, you will need to provide your attorney with the decedent’s original will so it may be lodged with the court. California law requires that a decedent’s will be lodged with the court for safekeeping, even if no probate is going to be opened.

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.

An Affidavit of Death of Trustee and Consent of Successor Trustee should be recorded against each real property held in the Living Trust. This Affidavit is recorded with a certified copy of the death certificate. When it is recorded, it changes the title of the property from the trustee (usually the settlor) who has died and into the names of the new trustee(s).

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. 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.

Remember if the owner of Real Property has received Nursing Home Care, or Medi-Cal for any reason the State of California may have a right to recover, if you do not provide the State of California with proper notice there is no limit on the time they have to make their claim.

The notice to the State is often overlooked, the State knows when the people who receive public benefits own real property and they do assert their claims, but as with most government agencies they do not always assert their claim immediately, so if you don’t consult an attorney the State can and will assert a claim against the beneficiaries who received the real property.

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.

Beware: 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.

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.

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.

As successor trustee, it is your obligation to pay the settlor(s) valid debts and to satisfy any tax liabilities owed.

Taxes can be especially tricky, as there may be estate taxes owed in addition to income taxes, if the estate is large enough. To determine whether a federal estate tax return must be filed for the deceased settler, 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 $5,000,000 – 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 an attorney and an accountant to evaluate whether a federal estate tax return is required. If a return is required, it is highly recommended that you engage a competent professional to prepare the return as the return can be quite complicated.

As successor trustee, you will be responsible for filing the last income tax returns for the decedent. You may also have to file fiduciary tax returns.

A note on income tax consequences: All assets owned by the deceased must be valued as of the date of death. 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.

For example, a stock is purchased at a price of $10 but has reached $100 at the time of death. If this stock is sold before death, there will be a capital gains tax on the $90 profit. At death, the stock is revalued so that the beneficiary can sell the stock at $100 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 your attorney and accountant to make sure that all tax liabilities are satisfied prior to distributing the trust assets to the beneficiaries of the trust.

A Living Trust is only revocable while the settlor(s), the person(s) who created the Living Trust, are alive and well. Once the settlors 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 an attorney 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.

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.

This may require that you establish sub-trusts for those beneficiaries. 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.

It is crucial that all subtrusts are properly funded because an improper funding of the sub-trusts can endanger the tax protection afforded to these sub-trusts—plus can result in an equitable distribution to the sub-trust beneficiaries.

It is highly recommended that you consult with an attorney regarding the funding of any sub-trusts prior to making any allocations of assets to the sub-trusts or distributions to any of the trust beneficiaries.

Once you have determined whether there are any sub-trusts that need to be funded and you have identified who the beneficiaries are, you can proceed with allocating and distributing the trust assets.

You will want to document the Distributions and make sure that those who receive a distribution acknowledge receipt of the funds, and either acknowledge that they accept the accounting you have provided or waive the accounting.

In situations where there is acrimony among the beneficiaries or towards the successor trustee, you really need the advice of an attorney.

You may need to 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

The trust administration process is often complicated and confusing, and can seem overwhelming at times. Many times the process is hampered even further due to the emotions and conflicts that arise among the trust beneficiaries as a result of family dynamics and the grieving process.

If not properly dealt with, these emotions and conflicts often play out in court in protracted and expensive trust litigation.

Geisler Patterson Law can help you avoid such a result by offering you competent and capable assistance throughout the trust administration process.

If you need someone to guide you through the Trust Administration process, call (855) 99ELDER or (855)993-5337 today.

About the Author Martha Patterson

Martha Patterson is a California Certified Specialist in Estate Planning, Trust and Probate Law, and Certified Elder Law Attorney by the National Elder Law Foundation. She focuses on Elder Law, Asset Protection and Estate Planning. She is a Member of NAELA; Past President of Southern California NAELA. Featured on CNN, Good Morning America, NBC, ABC, CBS, Fox News, and radio stations KABC, KNX, and KKLA. She overcame incredible objections and enabled Kerri and Julie Kasem to visit their dad radio host Casey Kasem. She is a frequent lecturer for NBI, and is a at MCLE events, and public forums.

Martha Patterson, Attorney

Popular posts