TRUST ADMINISTRATION

Trust administration begins at the time a Trust is created and funded, and continues until terminated, either by the express terms of the trust or upon depletion or distribution of all trust assets. When an individual or a couple establish a Trust (whether revocable or irrevocable), a separate and distinct entity is created. The person creating the trust is called the Trustor (also known as a "settlor," "grantor," "owner", or "creator"), and the person or institution that holds the property in trust is called the Trustee. The person for whose benefit property is held in the Trust is the beneficiary. In most cases, the same individual or couple who establish a "revocable living trust" holds the position of Trustor, Trustee and beneficiary. A trust may begin as a revocable trust, but upon death or incapacity, may become irrevocable.

Proper administration of the Trust, both during the Trustor(s) lifetime and after death, is necessary and important if the desired goals and intentions of the Trustor(s) are to be achieved. A properly funded trust provides an excellent vehicle for the quick and simple transfer of assets to the intended beneficiaries of the Trustor(s) upon death, without the delay and expense of a probate or other court proceeding.

The most common administrative error is the failure of the Trustor(s) during lifetime to transfer assets to the trust, or to properly title assets transferred to the trust. A trust can be deemed invalid because of the failure to fund the trust with assets since California law states that "a trust is created only if there is trust property." When assets are not properly transferred to the trust during lifetime, it can cause an administrative nightmare for the Trustee after the death of the Trustor. This may include the initiation of a probate or other court proceeding, which is in contravention to the intention of the Trustor in creating the trust. Trust administration is intended to be free from court supervision.

The individual or institution who serves as Trustee becomes legally obligated to act in the best interests of the beneficiaries and in accordance with the terms of the trust. The Trustee has a "fiduciary" duty and must adhere to the standard of care spelled out under California law. Any individual who is serving as a Trustee should become familiar with the duties and obligations required by law. A Trustee who breaches his or her fiduciary obligations may be held personally responsible for any loss or injury occurring to the beneficiaries (both present and future).

To summarize the process, trust administration can be broken into five basic steps:

1. Inventory assets
2. Determine estate tax
3. Division of trust assets
4. File the 706 tax form
5. Distributions to beneficiaries

Although the trust administration process seems relatively straightforward, there are several reasons it can sometimes be drawn out over several months or even years. The first step, the inventory of assets, must be completed before the trust administration can begin, and this can be difficult to complete depending upon the prior organization and the size and complexity of the decedent’s assets. Next, the 706 estate tax return must be filed within 9 months, or 15 months if an extension is filed. Often, it is prudent to wait until the last minute to file this form. If the spouse of the decedent is in failing health and may pass away before the deadline, then both 706 forms can be used to maximize tax advantages to the estate. The final step, asset distribution, cannot take place until the 706 has been filed, and even then should not take place until the "Closing Letter" is received from the IRS certifying acceptance of the 706 return. This closing letter will take a minimum of 6 to 8 months, and as long as 3 years, to arrive after the 706 is filed.

Post-Mortem Trust Administration

Trust administration occurring upon the death of the Trustor(s) may include, but is not limited to, the following:

1. Immediate review of the trust, Will and assets by an attorney to determine any tax implications or requirements that are time sensitive.
2. Preparation of an inventory of all property owned by the Trustor, including property that will pass outside of the trust, property that will be transferred to the trust by Will, and property titled in the trust.
3. Procurement of date of death values of all property. This may include professional appraisals of certain real property.
4. Preparation of a list of all debts at the date of death, including funeral and last illness expenses, mortgages and liens on real property.
5. Prudent management, protection, and investment of the property, including maintenance of appropriate property and liability insurance.
6. Payment of various debts and trust expenses.
7. Preparation and filing of California and federal estate tax returns. These returns are due nine (9) months after the date of death.
8. Preparation and recording of affidavits for the real property to establish the Successor Trustee, and notification of the county assessor of the changes in real estate ownership resulting from the Trustor's death, and filing documents required to avoid property tax reassessment. These are due 45 days after date of death.
9. Preparation and filing of income tax returns for the income the Trustor received before date of death. The returns are due next April 15. Earlier estimated tax payments may be necessary.
10. Preparation and filing of one or more California and federal fiduciary income tax returns for trust(s). These may be required annually, with the returns being due on April 15 of each year.
11. If appropriate, allocation of assets to subtrusts. California law currently provides that the allocation of assets may be accomplished on a non pro rata basis (each community property asset does not have to be fractionalized); however, the trust must be carefully reviewed to insure that the terms stated in the trust do not override this type of allocation.
12. If appropriate, actual transfer of property to the various trusts, or to the beneficiaries of the trust.
13. Making trust distributions to beneficiaries, including distributions of income to a surviving spouse or an income beneficiary, as determined by the terms of the trust. "Income" refers to interest, dividends, and rents, in contrast to "capital gains" which is the increase in value of the asset over time, and "principal," which is the asset which produces the "income." The Trustee should become familiar with the Revised Income and Principal Law of the State of California.
14. Preparation of periodic written reports to the beneficiaries on the financial status of the trusts when appropriately requested by them.

Conclusion

The importance of proper trust administration cannot be overstated. The failure to properly fund subtrusts, prepare fiduciary tax returns, properly allocate assets, prepare trust accountings, make prudent investments, or make trust distributions can have disastrous consequences. If you are currently serving as a Trustee, or named as a Successor Trustee, it is crucial that you obtain advice from qualified professionals who are familiar with current tax law, current developments in trust law, and the administration of trusts.