How Trust Administration Works: Each Step Explained

HOW TRUST ADMINISTRATION WORKS

What happens if someone creates a trust and then dies? Now what?

The person in charge is called the “successor trustee.” Being a successor trustee is an honor and privilege since the person who created the trust (the “Decedent”) trusted your judgement and character to allow you to exercise control over their various assets. However, it is an honor that comes with substantial legal responsibilities and can be a daunting task for those who do not fully understand what is required of them.

As a successor trustee, you not only have an ethical obligation to understand and abide by the provisions of the trust but also a legal obligation to do so.  You are what is known as a “fiduciary” – i.e. an individual who is acting for the benefit of another.  Failing to act accordingly can subject you to personal liability and lawsuits brought forth by the beneficiaries of the trust.

Please read our article, “Understanding the Duties & Responsibilities of a Trustee” to learn more.

After the Death: Initial Steps of Successor Trustee

While California law requires a minimum of 40 days to elapse before any actions can be taken to administer a trust, there are things you can do in that time to be ahead of the game. One of the first steps you will need to take as successor trustee is to gather all legal and financial documents and information about the decedent, their trust, and their assets.  Making an inventory of all the assets is essential. You can also notify the Social Security office of the death, obtain copies of the death certificate (usually 10 or more copies is recommended), and secure any valuables. 

THE FORMAL TRUST ADMINISTRATION PROCESS

In addition to following the decedent’s wishes identified in the trust, there are several formal trust administration requirements you must follow. We discuss many of these requirements below. 

PROVIDE NOTICE TO HEIRS AND BENEFICIARIES

As a successor trustee, you are required to provide notice of the trust administration process to all legal heirs and beneficiaries within 60 days of the decedent’s date of death. This notice must include information such as the date the Trust was created, when the decedent died, your (the successor trustee’s) details, and the beneficiary’s right to a copy of the decedent’s trust document.  It is generally advisable to provide a copy of the trust alongside this notice as well. These letters to beneficiaries are governed by Penal Code Section 16061.7 and are often referred to as “16061.7 letters.” It is advisable that an attorney draft and send these letters on your behalf.

What is the purpose of this notice to beneficiaries? It is to let them see the trust and to let them state openly any objections they have to the trust document. That’s right! Beneficiaries and legal heirs have a right to challenge the trust, so by sending this notice, you are letting them make their objections known. By sending these letters, you are also “starting the clock,” as these beneficiaries have a certain amount of time to challenge the trust (generally, 120 days from the date that the notice is served or 60 days from the date a copy of the trust is served upon them, whichever is later). This is why it’s advisable to send a copy of the trust, as it starts the 60-day clock. If you don’t send the trust, and 120 days passes, they can get another 60 days to challenge the trust, once they request a copy.

What happens if you don’t send the letter? Few things. First, the clock does not start, which means a legal heir or beneficiary can come out of the woodworks years later and undo all the work you’ve done to administer the trust. Second, you as the trustee can be held personally liable later if you distribute assets to the beneficiaries and then someone says they were entitled to a distribution because the trust was improper.

The lesson is that it’s always better to send the notice with a copy of the trust.

Of course, if you are the sole beneficiary of the trust, you do not need to provide a notice to yourself.

INVENTORY, OBTAIN TITLE, AND INVEST THE TRUST’S ASSETS

• Inventory of Assets – One of your primary duties as a successor trustee is to identify and secure the decedent’s assets.  This can be especially difficult if the decedent did not leave a list of their accounts and assets for your reference.  In such cases, it is essential that you contact the decedent’s financial advisors and accountants and even go through their mail or paperwork to better understand what they owned. This is a critical step and must be done no matter the cost or effort.

• Obtain Title to Assets – Financial entities are always on high alert for fraud. As such, you will quickly learn that no one will give you the time of day unless you prove to them your status as a successor trustee of the decedent’s trust. To obtain access to the decedent’s assets, you’ll need to notify the financial entities of the death and provide a copy of either a certification of trust or the trust itself where you are identified as a successor trustee. Below are a few examples of how you can obtain title to certain assets:
  
  • Real Property: If the decedent’s home is owned by their trust, you must notify the County Recorder’s Office of the death by filing an Affidavit Change of Trustee along with the decedent’s death certificate and a Preliminary Change of Ownership form. Doing so will give you the ability to work with lenders, realtors, tenants, and others so that you can refinance, sell, or rent the property as needed and/or required by the trust. We do not recommend lay persons to try to file these documents on their own, as mistakes can affect property taxes.
    
  • Bank or Brokerage Accounts: If the decedent had bank or brokerage accounts in the name of their trust, you must notify the bank or brokerage company of your Successor Trustee status so that you can access and take the appropriate action on those accounts. Most often, these entities require a copy of the decedent’s Death Certificate, a copy of the trust, and their own specific forms to be completed in order to grant you proper access.
    
  • Insurance or Retirement Accounts: If the decedent had named their trust as a beneficiary on their insurance or retirement accounts, you will need to contact these entities in order to access the proceeds. In the same manner as mentioned above, these entities often require a copy of the decedent’s Death Certificate, a copy of the trust, and their own specific forms to be completed in order to distribute assets to you.
    
    • CAUTION ON RETIREMENT ACCOUNTS – There can be serious tax implications for distributing the decedent’s retirement assets to a trust. We highly recommend that you work with an attorney or accountant who understands retirement accounts so that you can properly distribute these funds with limited tax consequences. 
      
• Obtain a Tax Identification Number to Open an Interest-Bearing Account – Once you have obtained title to the trust’s various assets and have the ability to take action on them, you should consolidate and/or invest those assets.  Often, this may be as simple as opening an interest-bearing trust account on behalf of the trust.  To do so, you’ll need to obtain a Tax Identification Number for the trust from the IRS. Other times, the decedent may have identified specific ways in which to invest the Trust’s assets such as renting out their property for a period of time or selling the property and placing the proceeds into a brokerage or bank account.

LODGE LAST WILL AND TESTAMENT WITH COURT

Most attorneys in California, along with drafting a trust, will also draft a last will and testament for clients.  Generally, the type of will that is drafted alongside a trust is called a “pour-over-will.”  A pour-over-will states that if any property or assets have been inadvertently left out of the trust, then those assets should be distributed to the trust after the proper probate proceedings have concluded. Note that a pour-over will does not avoid a probate! 

Even when all assets are properly owned by the trust, you are still required to lodge the decedent’s original will with the court within 30 days of their death. The court will acknowledge and file the will within their system for record keeping should a probate ever become necessary. 

PROVIDE NOTICE AND SETTLE CREDITOR CLAIMS

In trust administration cases, there is generally no requirement to provide notice to creditors, however, doing so can help prevent future claims against the trust and protect you, as successor trustee, from personal liability for such claims.  For example, if you don’t settle the affairs of the decedent and then distribute the remaining assets to the beneficiaries, a potential creditor can sue you later for not settling their claim. It is difficult, if not impossible, to go back to beneficiaries years later and ask them to return money you disbursed to them. Thus, it is advisable to settle any outstanding bills, debts, liabilities in order to expedite matters and to avoid additional fees. Any existing mortgages, for example, should be dealt with, usually with the trustee or intended beneficiaries assuming the terms of the note.

FILE TAX RETURNS AND PAY TAXES

It’s often said that death and taxes are the two certainties in life. This idiom continues to hold true in your capacity as a successor trustee also. You have an obligation to continue to pay all property taxes and file all final tax returns on behalf of the decedent and their trust as needed. 

This can include personal tax returns for any and all income earned from January 1st of the year of death up until the date of death (Form 1040), as well as any and all income earned from the date of death to the final distribution of assets (Form 1041). Even when there is no income being generated, you may still be required to file the 1041. 

If the decedent was married and if the surviving spouse is still alive, it may be critical to also timely file a Form 706 to elect portability. Portability allows for the surviving spouse to acquire the deceased spouse’s unused exemption. This is a lesser-known fact but can lead to tremendous savings upon the death of the surviving spouse, especially in a year where the estate tax exemption is low. A Form 706 can also allocate generation-skipping transfer tax, which will otherwise be lost, as GSTT is not portable upon death.

We highly advise speaking with an attorney or accountant who is well versed on tax returns and fiduciary returns. 

OBTAIN DATE OF DEATH VALUES OF THE ASSETS

In order to help you file taxes and keep proper accounting of the trust’s assets and their appreciation or depreciation, you will need to obtain the date of death values for each of the decedent’s assets. Most financial entities are able to provide a date of death value statement for the deceased’s bank, brokerage, or IRA accounts.  It is also advisable to obtain a date-of-death appraisal for any real property that the decedent owned. This is done by way of a qualified appraisal. Having the property appraised is also important from the standpoint of locking in a new basis value. In community property states, for example, the death of one spouse can lead to a complete step-up in basis for the surviving spouse, so having a qualified appraisal can help eliminate capital gains taxes.

PREPARE A FORMAL OR INFORMAL TRUST ACCOUNTING

Based on the specific provisions of the trust, successor trustees generally have a duty to keep accounting of the trust’s assets, usually on an annual basis.  Beneficiaries of the trust are generally entitled to an accounting in order to review and confirm that the trust’s assets are being properly managed and/or distributed. 

Keeping a good record or accounting of the trust’s assets will help you, as a successor trustee, protect yourself against possible claims by beneficiaries. There are different kinds of accounting. Some are informal and others are formal. If a beneficiary desires, he or she can insist that a formal accounting be done. A formal trust administration accounting is far more detailed and must abide by specific rules under the California Probate Code. However, an informal accounting may be sufficient if all beneficiaries are agreeable to it. Most beneficiaries are amenable as an informal accounting saves time and money. In fact, in certain cases, an accounting can be waived altogether by the beneficiaries in order to expedite the trust administration and obtain a faster distribution. 

DISTRIBUTE TRUST ASSETS

Distribution of the trust’s assets is one of the final steps in a trust administration and should only be done once the trustee has a good grasp over any outstanding debts, liabilities, and obligations of the trust. Distribution can vary widely based on the complexity of the trust’s assets and the provisions regarding the distribution. In most cases, however, you must settle all creditor claims, pay all taxes, and satisfy any costs or liabilities that the trust may have prior to any distribution. In some unique circumstances, a preliminary distribution may be allowed if all beneficiaries agree, or if a court approves the distribution.

Most trusts specify three types of distributions which are detailed below:

• Outright Distribution – In simple trust administration cases where the decedent specified one or more beneficiaries, you can simply issue checks to the beneficiaries based on the amount or percentages detailed in the trust. However, you should obtain the consent of all beneficiaries prior to issuing checks in order to protect yourself against potential beneficiary claims in the future.

• Staggered Distribution – In more complex trust administration cases, you may be required to manage the trust’s assets for a number of years and make staggered distributions during that time.  An example of staggered distribution is when the decedent leaves behind minor children who will not inherit the trust’s assets until they are adults or even older. 
  
  • Minor Children: Many parents create provisions in their trusts for their minor children. For example, the trust provisions may require you to distribute certain living expenses to the child’s legal guardian and invest the remainder of the funds until the child reaches the age of distribution specified in the trust provisions.  In such cases, accounting of the trust’s assets becomes even more crucial. 

• Discretionary Distribution – In some situations, the decedent may have left the decision to distribute the trust’s assets entirely up to the successor trustee.  In such cases, you will decide when and what the beneficiary receives from the trust. 

CLOSING TRUST ADMINISTRATION

A trust administration is officially completed once all distributions have been issued and all trust accounts have been properly closed.  The trust, at that point, has fulfilled its documented purpose of passing assets to the designated beneficiaries and ceases to exist. 

While the trust administration process can seem daunting, working with experienced attorneys can help ease the tension and burden.  Kiran Sohal is a partner at Bridge Law, LLP who specializes in Trust Administration matters.  She patiently walks families through the legal nuances of losing a loved one and provides expert advice based on their specific needs.  In addition to Trust Administration matters, Kiran has an intimate understanding of the probate process, Spousal Property Petitions, and Heggstad Petitions.