There is a misconception that the preparation of a living trust will avoid all of the responsibilities and expenses of administration and eliminate the need for a formal administration of a decedent's estate. Administration of trust assets is not automatic and the Trustee has many duties and responsibilities. There are tasks that require immediate attention upon the death of the grantor and there are ongoing responsibilities required of the Trustee throughout the period during which time the trust is in existence. The assistance of an attorney and tax professional is often required. The difficulty or ease of administrating a trust depends on many factors such as the type of assets held by trust, the dispositive terms and the sophistication of the trustee.
The privacy, flexibility and tax saving opportunities still prove that trusts are preferable over a probate process.
During the process of designing and creating your plan, your estate planning professional should inform you of post-death action required to most effectively make use of your plan. This information should be in written form and contained in your Estate Planning Portfolio along with directions for your successor Trustees. Some promoters of trusts neglect to educate their clients on the need for post-death administration and as a result administration attorneys and tax practitioners are dealing with numerous cases of the "unfunded" or "stale" trust.
The stale trust occurs most often when a trust document provides for sub-trusts upon the death of the first spouse but the sub-trusts are not created or funded at the time of death. In many cases, the issue is not identified until the surviving spouse dies. There are multiple taxation, valuation and allocation issues surrounding the lack of administration or late administration potentially resulting in great expense.
One main concern is that the failure to fund the Bypass Trust could cause the inclusion of all the family assets in the estate of the surviving spouse at death and result in the loss of the first spouse's unified credit.
Duties and Responsibilities or Trustee
There is a statutory framework that sets forth the Trustee's duties (see chart below), the standard of care necessary to carry out those duties and the powers that allow the Trustee to conduct the affairs of the trust.
A Trustee is under a duty to administer the trust strictly by its terms and acts in a fiduciary capacity owing certain legal duties to the beneficiaries. The duties of the Trustee are promulgated from the language of the trust instrument itself, from statutory law and decisional law created by the courts.
The Trustee must read the trust document carefully to ascertain the terms concerning the distribution of property and administrative provisions that will guide and direct the Trustee as to payment of taxes and expenses as well as other procedural issues.
Trustees must send a notice to each beneficiary and heir within 60 days from the date of death advising them that the post-death administration period has commenced and provide a complete copy of the terms of the trust to any beneficiary requesting it. A statutory prescribed warning must be included in the notice.
Beneficiaries have 120 days from the date of notice to contest the trust or 60 days from the day they received a copy of the terms of the trust, whichever is later.
The basic duties as Trustee involve asset collection, management, investment and distribution. The trustee must prepare an inventory of all of the decedent's assets and determine their fair market value as of the date of the decedent's death.
Trustees are empowered to pay routine administration expenses out of the trust estate, including taxes, accountant and attorney fees, and expenses related to the maintenance of trust property.
Trustees have a duty to keep beneficiaries reasonably informed of the trust and its administration. Annual accountings should be prepared and presented to the beneficiaries that give a full accounting of all trust transactions. The Trustee is generally required to account, at least annually, at termination of the trust, and on a change of trustee to each beneficiary to whom income or principal is required or authorized in the trustee's discretion to be currently distributed. Even if a formal accounting is not required, an accounting should be prepared as it provides a permanent record of trust transactions and provides a single source of data for preparation of income tax returns.
Additionally, if requested by a beneficiary, the Trustee must provide a report of information about the assets, liabilities, receipts, and disbursements of the trust, the acts of the trustee, and the particulars relating to the trust that are relevant to the beneficiary's interest.
If the estate is subject to estate tax, estate tax returns must generally be filed within nine months after the decedent's death. The decedent's final income tax return must also be prepared and filed. A separate taxpayer identification number must be obtained. If the decedent owned an interest in any real estate, a change of ownership must be filed with the county assessor within 150 days from the date of death. If the trust meets certain minimum income limits, the Trustee must arrange for the filing of fiduciary tax returns.
If the trust provides for a beneficiary's interest to be further held in trust for their benefit, it will be necessary for the Trustee to take the necessary steps to establish the sub-trust. As mentioned above, this is especially important for married couples with trusts that divide at the first death. The Trustee must value and allocate the assets among sub-trusts and beneficiaries by changing title to the trust assets by executing instruments of conveyance, such as deeds or bills of sale.