TRUST ADMINISTRATION OVERVIEW
STEP 1 – SERVE NOTICES AND “LODGE” THE WILL
Trust administration has many similarities with probate, but it is done without need of supervision by a court. Nonetheless, the trust administrator may still formally invite court assistance as proof of due diligence. Trust administration necessarily unfolds after one or both trustors die. There are specific steps that need doing to protect successor trustees and to be sure of their proper trust administration. An attorney for trust administration can help in this scenario, and working with that lawyer is a simple process giving successor trustees assurance of efficiency and effectiveness during their administration.
Starting Trust Administration
Trust administration starts with notice to all heirs and beneficiaries of the trustors as required by the probate code. Since 1998, California Probate Code §16061.7 requires that the trustee shall send written notice, including appropriate warnings and information about the trustee, to each of the named heirs and beneficiaries of the deceased enabling each recipient to seek copies of the trust. This must be done no more than 60 days after a trust becomes irrevocable. That status is usually triggered when the trustor dies. The notice recipient can file a trust contest only within 120 days after the mailing date. If a contest is not filed in that time, the recipient of the notice might lose any right to file a contest. However, if notice was not mailed, statute of limitations for filing a trust contest could be up to four years or more.
Successor trustees administering a trust without a lawyer’s counsel frequently skip this crucial notice to beneficiaries and heirs.
The California Probate Code §16061.7 requirement of notice specifies several elements. Each element needs to be fulfilled before the notice can have effect. Those requirements especially direct that the notification by the trustee:
- Must usually be served on each heir and beneficiary of the decedent trustor.
- Must be served by mail to the most recent address on record for each heir or beneficiary or be delivered in person.
- Must include:
- The trustor or trustors’ identity/s and the date when the trust document was executed.
- Each trustee’s name, mailing address and phone number.
- The physical address of the primary location of trust administration.
- Any and all further detail that the trust document may specifically require.
- Notice to each recipient that he or she is entitled to obtain a complete and true copy of the trust’s terms from the trustee. The notice recipient must make reasonable request for such copy from the trustee.
The requirements for this notice are more detailed than first look reveals. For any concerns or questions about proper administration of a trust, please bring them to us for professional counsel.
Lodge the Will
According to California Probate Code § 8200, the original will must be filed with the court within 30 days from when the holder of the will learns of the trustor’s death. This is known as lodging the will, and it neither equates to nor implies the initiation of probate. Lodging the will has a $50 filing fee at the court (though any trigger of probate will change that).
STEP 2 – REAL PROPERTY
When a trust owns real estate (real property), specific steps accomplish vesting the title with a successor trustee. These steps are vital to ensure the real estate can be included in normal administration of the trust, including property management, sale or distribution. At death of a trustor, the succeeding trustee must properly record an Affidavit of the Death combined with an original death certificate for each and every piece of real estate. This recording transfers the property title away from the deceased trustee (the trustor in many cases) into the name/s of the new trustee/s. The succeeding trustee(s) should also keep a copy of the trust document because a title insurance company may need to verify the distribution instructions in the trust.
The recording of the above Affidavit must also include a completed Preliminary Change of Ownership Form. This form is what tells the county recorder the purpose of the Affidavit. San Francisco County typically requires a Preliminary Change of Ownership Form.
If a Living Trust transfers real estate from parents to a child or children or by some other means seeks to exempt the property from reassessment of property tax, then an exemption form needs to be completed and sent to the county assessor. An exclusion for grandparents/grandchildren is possible for any part of the real estate going to a grandchild in cases where their parents have died. Call us to arrange these documents for signature and recording.
STEP 3 – COLLECTING NON-REAL ESTATE ASSETS
After arranging matters for the real estate, the trustee needs to inventory all other assets affected by the trust, such as bank and investment accounts. Title to and control of these assets must transfer into the name of the successor trustee. For this to happen, you must first acquire a federal tax ID number (Employer Identification Number or EIN) for the trust. Accounts created for the trust must have an EIN in the trust’s name in order to properly report any income earned on trust assets to the IRS.
Using a personal Social Security number as an ID number when managing a trust makes that individual person liable for tax on the trust’s income rather than the trust being liable. That’s a very big reason why obtaining an EIN is critical.
Getting a Federal Tax Identification Number (EIN) for the Trust
Getting an employer identification number (EIN) is simple. Having the needed details in hand, just go to the IRS website for an online form. We can also get the ID number for you when you put us to use in regards to administration of the trust.
Transferring Trust Accounts
With an EIN for the trust in hand, transfer all trust accounts into the name of the successor trustee, using the EIN rather than Social Security number. If a trust distribution plan divides assets into more than one share trust, a separate EIN should be obtained for each of those share trusts.
What if Some Assets Are not Included in the Trust?
During administration of a trust, especially during the phases of inventory and collecting of all of the deceased‘s assets, some assets may be found that the deceased had intended to include in the trust yet were not actually transferred to the trust before death. That failure to transfer means the affected assets stay part of the deceased’s estate and succumb to the probate process. The probability of overlooking assets in the establishment of a trust and transfer to that trust is high. A common way to prevent probate triggered by this circumstance is inclusion of a “pour-over” provision in the will. Such provision instructs that assets that don’t get put into the trust while the decedent is still alive are to be transferred into the trust upon death, and that those assets will be distributed by the trust’s terms and conditions.
If one of the assets overlooked in establishment of the trust is significant, then expensive and/or lengthy probate may be required. However, if the trust specifically describes the asset or it is included in the trust’s property schedule, then a “Heggstad Petition” may be successful to avoid probate in some situations.
If you put our skills to your service, we will create a Certification of Trust to help you gather and transfer assets to you as successor trustee. This Certification names you as the succeeding trustee and defines your extent and scope of powers and duties. It also lays out how any title to the trust’s assets is to be held, including listing the new federal tax ID number (EIN) for use with each trust account. You should provide a copy of this Certification of Trust to each financial institution with whom trust assets are held so that they transfer the assets into your name.
Once all trust assets are discovered and brought into your control, they should be inventoried and appraised. Appraisal is most applicable to trust assets for which the value(s) are more difficult to establish. Appraisal for real estate and similar significant assets should be done right away after the trustor or previous trustee’s death. When a trustor dies (whether as a single person, as married and being the first spouse to pass, or on passing of the surviving husband or wife), appraisal is needed to accomplish the following:
- To ascertain the “step up in basis.” This affects income tax. The amount of stepped-up basis is found either for the date of death or at six (6) months beyond the death. The appraisal of inventory is best done by an official California probate referee or a licensed appraiser.
- For any dividing of assets.
- For accounting.
- To ascertain the necessity of paying estate taxes.
STEP 4 – PAY DEBTS AND TAXES AS APPROPRIATE
The trustee must ascertain the deceased’s debts and liabilities and arrange to pay them.
For the prevention of identity theft and other fraud, inform any credit card issuers that the cardholder has died and to block further charges on the credit cards after the date of death. Tell the companies that the accounts will be closed by the trustee. Also inform the largest credit reporting agencies (Experian, Equifax and Transunion) that the individual died. Specifically direct them to block anyone from using the deceased’s name or Social Security number to open new accounts or for new credit.
STEP 5 – TAXES AND ACCOUNTING
The successor trustee is obligated to pay all tax liabilities. This includes paying real estate taxes on any real estate before the taxes are due. Other taxes impacting trusts are income taxes and the possibility of estate taxes for larger estates. Estate tax generally does not apply to a married couple when the first spouse dies, because an unlimited marital deduction can be applied.
A federal estate tax return may be required for the deceased settler. Make this determination by adding up the complete value of the deceased’s estate – calculate the value of trust assets as well as assets outside the trust. For 2017, the basic exclusion amount is $5,490,000. If the sum of the deceased’s assets is more than the current exclusion amount (which may change annually), then an IRS Form 706 estate tax return will be needed. Note, though, that a portion of the exclusion amount might be used up by gifts made by the deceased in his or her lifetime. Hence, even though the present estate size may be less than the basic exclusion amount, the trustee may still need to file the Form 706 estate tax return. Working with a knowledgeable attorney like T.S. Wrobel & Associates and an accountant provides you accurate determination of needing to pay estate taxes.
If required, the trustee must file Form 706 within nine (9) months of the date of death. The 1040 income tax return for the decedent covering the year of death is still required. The trust itself will also have to file a 1041 tax return for every year it exists, effective after the original trustor’s death.
Estate taxes are more significant of an issue when a surviving spouse or a single individual dies. Your attorney will help you evaluate whether assets are covered by the trust or are outside the trust, including whether any assets need to be probated, and whether estate tax affects any assets. Sale of estate assets is often needed to cover estate taxes. Such liquidation can be time consuming, yet must still be accomplished within the nine-month window to file Form 706 after the trustor’s death. Engaging a qualified attorney early in the trust’s administration process to address estate tax liability questions and to effect any asset liquidation if necessary is critical.
In the preparation of federal estate taxes, the trustee has some tax elections available. The elections of particular significance, and which your accountant can discuss, are:
- Special use valuation
- Alternate valuation date
- Deductible fees
Are Trust Income Tax Returns Required?
Tax returns are required for a trust from the moment its status changes to irrevocable. Form 1041, the U.S. Fiduciary Income Tax Return, is for trusts, nonetheless, the deceased’s own 1040 income tax return is also required for the year of death, due April 15th in the year following the death. Determine if the deceased previously made any estimated income tax payments. If yes, then the trustee must continue those payments on time.
Step Up Basis: Regardless of an asset’s value when initially purchased, most assets (except some assets like annuities, IRAs and retirement plans) get a “step up in basis” when evaluated for taxes. “Basis” means the purchase price, plus capital improvements, minus depreciation. In the case of an asset bought for $200 but which reached $250 in value at the time of passing – If that asset is sold BEFORE death, a capital gains tax applies to the $50 profit. However, at death, the asset is revalued and the receiving beneficiary may sell it at $250 without the capital gains tax. Consider that the stepped-up value may yield a higher estate tax valuation offsetting some savings from lower capital gains tax. Your accountant can help determine the best strategy to minimize beneficiary taxation.
Note: Liability for unpaid taxes may fall on the successor trustee personally, so consult with T.S. Wrobel & Associates and your accountant to ensure tax obligations are met before trust assets are distributed to beneficiaries.
STEP 6 – ACCOUNTING FOR AN IRREVOCABLE TRUST
The revocability of a Living Trust exists only while the person/s who established the Living Trust (known as the trustor/s) are alive and sound of mind. The Living Trust status immediately changes to irrevocable when the trustor/s die or are no longer mentally competent. California Probate Code governs the actions of the successor trustee. The Code requires that someone managing an irrevocable trust must provide accounting of their trust administration and detail their actions. That requirement especially includes detailed financial records and accounting of the trust assets.
The successor trustee must:
- Account for all expenses applied to close out the deceased’s final affairs.
- Account for all disbursements from and deposits into the trust’s accounts.
- Comply with any specification in the trust document directing what accounting method is to be used.
Trust instruments sometimes waive accounting, and others specifically require accounting. Yet even in those cases when a trust instrument directly and unequivocally waives accounting, it may still be required by law. Call us for initial consultation early in your administration process so we can recognize your accounting obligations. Even when the law does not override a trust’s waiving of formal accounting, it is still a very good idea to maintain detailed and accurate accounting records in case the administration of the trust is ever the subject of litigation, as well as to assist future distributions or transfers of administration.
STEP 7 – DISTRIBUTING ASSETS
Distribution of trust assets can only be done after determining what is available to be distributed. That is only known once you’ve gathered all trust assets, paid the debts, filed tax returns and settled the tax liabilities, and prepared and finalized the accounting (if required). The trust instrument spells out how the remaining trust assets shall be divided and transferred to trust beneficiaries.
Who Are the Beneficiaries
Frequently, the trust will specify direct transfer of assets to beneficiaries. In contrast, a trust can also specify that assets be held in trust for certain beneficiaries, for example when a beneficiary is a minor. In such cases, the trustee must create sub-trusts to hold assets on behalf of the affected beneficiaries. Common sub-trusts include (A) share trusts for minors; (B) bypass trusts and survivor’s trusts (for couples or registered domestic partners); and (C) pet trusts to ensure the care of surviving pets. Any sub-trusts required to fulfill obligations in the trust instrument, and the proper funding of those sub-trusts, are the responsibility of the successor trustee.
Trust Asset Distribution
After all beneficiaries are recognized, and the available assets are settled, allocation and distribution of trust assets can proceed. The trustee should accomplish a Notice to Beneficiaries pursuant to California Probate Code §16461(c)(3) as well as a Beneficiary Release. You are required by California Probate Code §16063 to inform each beneficiary of their right to petition the court under California Probate Code §17200 for review of the beneficiary’s account as well as for court review of the trustee’s actions. The statute of limitations on such claims of breach of trust bars dispute after the pass of three (3) years beyond the date on which the notice recipient gets the documentation providing the information upon which the claim is based.
California Probate Code §16060, et seq., requires that trustees provide reporting and accounting at least on an annual basis, and these reports and accounting must be in a specific form and include specific notices.
The accounting is required to include:
- A declaration or statement of trust income, expenses and disbursements of principal and receipts having occurred since the last accounting, at minimum yearly, for the past full fiscal year.
- A declaration of trust assets and liabilities as of the close of the most recent full fiscal year or since the previous accounting was submitted.
- A statement of compensation received by the trustee for the trust’s most recent full fiscal year or since the previous accounting was submitted.
- A listing of agents the trustee hired, how and what they were paid, plus any relationship they have with the trustee, all during the trust’s most recent full fiscal year or since the previous accounting was submitted.
- An acknowledgement that each recipient of the accounting may formally request (per California Probate Code §17200) a court review of the accounting and of the trustee’s actions.
- The statute of limitations for any challenge to this annual report and account is three years from when the beneficiary received it. Any breach of trust claim against a trustee is barred beyond 3 years from receipt of documents providing information upon which the claim is based.
Issues Between Beneficiaries
When acrimony exists between beneficiaries against a successor trustee, an experienced attorney may be your best friend. Available actions qualified counsel can suggest includes the preparation of official, detailed accounting of actions you have taken as successor trustee. This should be submitted to the court for approval of your decisions and acts and of the proposed distributions. By requesting court approval, and by properly disclosing your actions, risk of future litigation is minimized. That is because the resulting court process provides opportunity for a beneficiary to object. If there is no objection, then the beneficiary is usually blocked from later claim against the trust’s administration for any matters covered by the court proceedings. Without this court approval, a beneficiary normally has the full three (3) years to lodge complaint against the trust’s administration.
Trust administration can be confusing and complex, even overwhelming. Call on T.S. Wrobel Law Group to help shoulder the burden. Our expertise in your corner can dramatically simplify the challenges inherent to administration of the trust process. It starts with an initial consultation scheduled by calling or emailing us.
For an initial consultation, contact T.S. Wrobel Law Group to speak with Thomas Wrobel for your probate needs. Call (415) 928-4161 now for an initial consultation, or reach us by email at info@TSWrobel.law. We look forward to assisting you.