By: Terry J. Traktman, Traktman Law Office, Novato, California
Estate Planning Estate Administration/Probate Wills and Trusts
If a decedent had a properly drafted and funded trust,** probate** is generally not required. Unlike a will, a trust is a private document and need not be filed with the probate court. Nonetheless, the successor trustee must still take steps to administer the trust: Beneficiaries must be contacted and kept informed; the trust-maker's assets gathered and invested; any debts paid; potential creditors notified; taxes filed and paid; assets and/or income distributed in conformity with trust provisions to beneficiaries, etc.
Successor trustees often lack the time, resources or knowledge to personally administer the trust, and therefore may call upon legal, accounting and investment professionals for assistance.
Below is a summary of the basic obligations of a successor trustee of a living trust (or any type of trust, for that matter):
· Show loyalty of all trust beneficiaries. Even if the successor trustee is himself a beneficiary, as trustee he has the duty of loyalty to all the other beneficiaries, including the remaindermen.
· Deal impartially with beneficiaries. The successor trustee cannot favor the income beneficiary over the interests of the remainder beneficiaries.
· Make the trust property productive of income. This duty is violated if the successor trustee keeps large amounts in a checking account that does not pay interest and does not grow in value. There may be other trust assets which do not produce income, such as vacant land. If you are administering a trust that has or acquires unproductive assets, consult with us and we can advise you as to your options.
· Invest only in prudent investments.
Consideration by the trustee of the purposes, terms and other circumstances of the trust.
Exercise reasonable care and caution as part of an overall investment strategy which incorporates risk and return objectives reasonably suitable to the trust.
Diversity of investments, unless specific reasons are present not to diversify.
Review at investment and implementation of a formal investment plan.
An investments strategy that considers both the reasonable production of income and safety of principal, consistent with the fiduciary's duty of impartiality and the purposes of the trust.
· Account to beneficiaries and keep beneficiaries informed. Upon commencement of the trust administration, the successor trustee must inform all income and remainder beneficiaries of his acceptance of the trust. If a beneficiary requests it, the successor trustee is required to provide that beneficiary with a complete copy of the trust document, including any amendments as well as relevant information about the assets of the trust and the particulars relating to administration. In addition, it may be necessary to provide all beneficiaries with an annual statement of the accounts of the trust.
· Keep trust assets separate. The successor trustee must keep the assets of each trust separate and keep his personal assets separate from the trust assets. This requires separate bank accounts, brokerage accounts, and safe deposit boxes for trust assets. It is particularly important that you keep the assets of the Credit Shelter Trust (also known as the AB Trust or Bypass Trust) separate from all other assets, since these assets will pass tax-free at the death of the income beneficiary. If the successor comingles any other assets in with these assets (or even simply takes the assets out of the trust and mixes them with his personal assets), in addition to breaching fiduciary obligations, the successor trustee will have subjected these assets to taxation when he dies, whereas they would not have been subjected to tax otherwise.
· Avoid conflicts of interest and self dealing. The successor trustee cannot buy assets from the trust or sell his personal assets to the trust. He cannot favor himself as a beneficiary at the expense of any other remainder or potential remainder beneficiary. He cannot make any distribution to anyone or any withdrawals from the trust unless specifically authorized by the trust to do so. Conflicts of interest and self-dealing is a very broad and ill-defined area. If you are a trustee and have any concern as to any specific action or situation, consult with our law firm.
· Preserve the trust assets and uphold the trust. The successor trustee is liable if trust assets are lost, misplaced or destroyed because of inattention or negligence. The successor trustee should always be certain that all trust assets are appropriately insured.
· File tax returns and pay any tax due. Each trust has a tax year, which like the personal tax year, ends annually on December 31. The trust must have a taxpayer identification number and file a tax return no later than April 15 of the year following. The income tax return for the trust is Form 1041, the Fiduciary Income Tax Return. If this is not filed annually and timely, penalties and interest may be assessed. There may be other tax returns and taxes, like the decedent's personal tax return, which the trust may be required to file, and the successor trustee is responsible for doing so.
We recommend that successor trustees consult with a qualified and experienced Certified Public Accountant. You should not assume that your long-time CPA is necessarily experienced or qualified, since fiduciary taxation differs significantly from taxation of individuals and corporations, the types of accounting that CPA's are generally most familiar with. Before deciding on a CPA for the trust, determine whether that individual has experience and qualifications in this specialized area.
· Distribute income. Income generally includes interest earned on bank accounts, CD's, bonds or mortgages, and dividends on stocks and mutual funds. The current income beneficiaries are entitled to all of the income annually. Beneficiaries cannot choose to take less than all of the income, and the trustee is under an obligation to distribute it. What is income? Generally, it includes interest earned on bank accounts, CD's, bonds or mortgages, and dividends on stocks or mutual funds. Certain types of income may also consist of principal as well as income. If this is the case, the portion that is income is distributed and the portion that is principal is retained. If there is any question about what is principal and what is income, consult with the trust's CPA.
· Handle trust expenses. The administration of the trust necessarily requires certain expenditures. Example of expenses include CPA fees, legal services, the cost of insurance or real estate taxes on real estate owned by the trust. Every check written by the successor trustee (except to pay himself trust income) and each direct charge to a trust's bank or brokerage account, is considered a trust expenses. Like receipts, expenses must also be appropriately apportioned between the income side and the principal side.
· Delegate investment functions if necessary. In many instances, individual trustees are not equipped to comply with their investment responsibilities. In these cases, investment professionals may be retained. The successor trustee is obligated to exercise reasonable care, judgment and caution in selecting an investment agent. Trust administration specialists may be found through brokerage houses and banks. Note that "delegating" differs from merely obtaining investment advice. It contemplates turning over the investment functions to an advisor as opposed to simply seeking advice, and then acting or not acting on that advice. Even if investment functions are fully turned over to an agent, the successor trustee is still required to monitor the agent's investment performance.
A successor trustee should not assume that he has satisfied his investment responsibilities just because he has consulted regularly or occasionally with a stockbroker. Further, stockbrokers often know less about the prudent investor rule and fiduciary duties than does the successor trustee.
· Good record keeping. Keeping accurate, up-to-date and comprehensive records is one of the most difficult jobs a successor trustee must perform. If the successor trustee becomes disabled or dies, another person must be able to seamlessly step into his shoes and understand the current status of trust matters. Trust records are also vital because the trustee must be able to explain any trust matter if the IRS or remainder beneficiary requests it. The CPA selected to handle the trust can be very helpful in setting up a sound accounting and record-keeping system. If keeping records is too burdensome for the successor trustee, he can retain the trust department of a bank to do the work on a fee basis.