Trust administration is one of the most overlooked parts of estate planning. Failure to properly administer a trust can result in unnecessary taxes, very large attorney fees, and lawsuits by beneficiaries against trustees.
Trust administration is the process that takes place between the time of a person’s death and when his or her trust assets are to be distributed to his or her beneficiaries. During this time, there are many matters that must be addressed, some of which depend on the kind of trust that is being administered.
Some of these matters include:
- Having the successor trustee take control of the trust and its assets.
- Notifying the trust’s beneficiaries and the decedent’s heirs that they are entitled to a copy of the trust.
- Identifying and collecting the trust assets.
- Identifying what debts the decedent owed.
- Paying the decedent’s income taxes.
- Determining whether an estate tax return will need to be filed and whether estate taxes will be owed.
- Determining what tax planning might need to be done, such as avoiding property tax increases on real estate, the making of disclaimers and allocating generation-skipping tax exemption to trusts created as a result of the decedent’s death.
- Creating trusts for beneficiaries.
- Determining what assets are to be allocated to the beneficiaries.
- Distributing the assets to the beneficiaries.
Every trust has a trustee who is responsible for properly carrying out his duties. These duties are called “fiduciary” duties, which means the trustee must exercise the highest standard of care in carrying out his or her responsibilities under the terms of the trust. Failure to meet this standard could result in the trustee being sued by the beneficiaries for breach of the trustee’s duties.
The trustee’s duties are derived from three sources: the trust document, the California Probate Code and case law. The trustee’s actions must be in compliance with all of these.
The duties discussed in this section apply to all trustees of all trusts, including the trustee of the Administrative Trust during its trust administration and the trustee of any trusts created for beneficiaries after distribution of the assets.
Among the trustee’s responsibilities are:
- Collecting, managing, and investing of trust assets and accumulating and distributing income and principal to the beneficiaries.
- Keeping the trust’s assets separate from the assets of any other trust as well as any person’s assets. It is important not to commingle the trust’s assets with other assets.
- Dealing impartially with the trust’s assets, which includes not using trust assets for the benefit of the trustee, nor taking any action that will result in a conflict of interest between the trustee and the trust or one of the beneficiaries.
- Preserving the trust’s assets. If real estate is a trust asset, this would include properly managing the real estate. For stocks and bonds, the trustee should hire someone to properly manage the accounts, which would include following California’s prudent investor rules for investments.
- Keeping adequate records of the trust’s activities, including proper bookkeeping. This is necessary for the filing of the trust’s income tax returns and properly preparing trust accountings. See Annual Trust Accountings.
- Filing income tax returns for the trust. The trust will have its own taxpayer identification number.