Trust administration, simply put, is the process of managing and distributing trust assets. It’s a process undertaken by the “Trustee” (i.e. the person put in charge of managing trust assets in the trust document) for the benefit of the “Trustor” (i.e. the person who established the trust) while he/she is alive, and for the benefit of the remainder beneficiaries after the Trustor passes away.
It’s also a process that imposes a fiduciary duty (i.e. the highest standard of care) on the Trustee, and thus a process for which a Trustee would be wise to engage an attorney for assistance, primarily to keep the Trustee free of legal liability to the Trustor and to the trust’s beneficiaries.
Generally speaking, a “trust administration” does not kick in to gear until the Trustor has been deemed to lack capacity or has passed away. Until such event, the Trustor usually acts as his/her own Trustee, owing a fiduciary duty to no one but him/herself – thus leaving very little to do in terms of “trust administration”. Upon the Trustor’s incapacity, or in the event of his/her death, however, the Trust instrument usually provides for a family member, friend or trusted advisor to take over as Trustee.
In the case of death of the Trustor, where there are few Trust assets, few beneficiaries and/or few conflicts among such beneficiaries, the trust administration may run its course in a matter of only months; whereas in the event of incapacity of the Trustor, or death of the Trustor where there are many Trust assets, many beneficiaries and/or many conflicts among such beneficiaries, the trust administration may run for years.
Attorney’s Role in Trust Administration
The job of the Trustee’s attorney is to assist the Trustee in carrying out his/her duties as Trustee, including those described below, and to keep the Trustee free of legal liability to the Trustor and to the trust’s beneficiaries. The attorney will help the Trustee collect and value assets, pay debts and taxes, and prepare the necessary transfer documents in connection with the eventual distribution of trust property among the various beneficiaries. The attorney will also prepare accountings and reports to be given to the beneficiaries, if required, and will give the Trustee advice concerning certain tax matters and may prepare certain required death tax returns. If court action is necessary, the attorney will represent the Trustee in that action
General Duties: Generally speaking, the Trustee’s basic duties involve the collection, management, and investment of trust assets and the accumulation and distribution of income and principal pursuant to the terms of the trust. Another important set of duties relates to tax matters, which are explained in detail below.
It is a fundamental principle of trust law that the Trustee be faithful to the interests of the trust and its beneficiaries. The Trustee occupies a position of trust and confidence and owes a duty of care to the beneficiaries. The Trustee has a duty to administer the trust solely in the interest of the beneficiaries and to deal impartially with them. He/she cannot use trust property for his/her own profit or for any non-trust purpose. The Trustee may not engage in any transaction that will result in a conflict of interest between the Trustee and the trust or a trust beneficiary.
The Trustee has a duty to take reasonable steps to take and keep control of Trust property and to preserve the Trust property and make it productive. The Trustee may not commingle trust property with his/her own property under any circumstances. The Trustee also has a duty to take reasonable steps to enforce claims of the trust and to defend lawsuits brought against the trust.
The Trustee must carry out all Trustee activities personally. In other words, the trustee may not delegate his/her responsibilities to others. For example, someone may not act as trustee in the place of the Trustee under a power of attorney. However, the Trustee may hire attorneys, accountants, investment advisors, and others to consult him/her concerning the trust administration.
Providing Information to Beneficiaries: Under trust law, the Trustee owes a duty to the beneficiaries to make them aware of the existence of the trust and to keep them reasonably informed of the trust and its administration. Trust law also requires that the Trustee provide the beneficiaries with certain information upon reasonable request and that the Trustee give a full accounting and report of all trust transactions not less often than annually or at the termination of the trust. Providing such an accounting will start the running of a three (3) year statute of limitations for all matters disclosed in the accounting. If no accounting is made, no statute of limitations will run, and the Trustee’s potential liability exposure to beneficiaries may continue indefinitely.
A trust accounting is a legal document that should be prepared by a lawyer, a competent paralegal or professional fiduciary to make certain that it meets the format required by trust law. Only in this way can the Trustee be assured that the three (3) year statute of limitations will begin to run. Although making accountings will add to the expense of administration, the cost to prepare such accountings is payable from the trust (not from the Trustee’s own pocket, except to the extent the Trustee is also a beneficiary, in which such event only on a pro rata basis) and is tax deductible. Because the cost is payable from the trust, it is spread among all the beneficiaries.
Record-Keeping: The Trustee must keep careful records of all trust transactions. In particular, the Trustee must keep an accurate bookkeeping ledger, with descriptive notations of all income and receipts, noting for each entry the date, the person to whom or from whom payment was made or received, the nature of the payment, and the amount. All disbursements for trust expenses should be made by check, and rarely if ever in the way of cash. The Trustee should keep a file or set of files wherein he/she keeps a copy of the trust instrument and his/her financial records for the trust, including bank statements, statements of income received, bills for expenses, bank deposit receipts, canceled checks, copies of tax returns, and copies of correspondence relating to the trust.
The Trustee should open a checking account with a financial institution of his/her choice in his/her name as Trustee of the trust. The Trustee should not use his/her own social security number or that of the Trustor on this account, but instead a Tax Payer Identification Number specific to the trust. All trust expenses should be paid from, and all Trust income should be deposited to, such trust account.
Generally speaking, the Trustee is entitled to reasonable compensation for his/her services as Trustee, which if taken by the Trustee will be taxed to such Trustee as ordinary income. Pursuant to California law, the Trustee’s fee must be “reasonable.” Historically, one percent (1%) of the gross value of the Trust estate has been considered reasonable. However, in some counties the probate judges are “cracking down” on trustee’s fees. In determining what is “reasonable”, these judges often look to certain criteria, such as:
The gross income of the trust estate;
- The success or failure of the Trustee’s administration;
- Any unusual skill, expertise, or experience brought to the Trustee’s work;
- The fidelity or disloyalty shown by the Trustee;
- The amount of risk and responsibility assumed by the Trustee;
- The time spent in the performance of the Trustee’s duties;
- The custom in the community where the court is located regarding compensation authorized by the Trustor, compensation allowed by the court, or charges of corporate trustees for trusts of similar size and complexity and Whether the work performed was routine, or required more than ordinary skill or judgment.
For the above reasons, Trustees are strongly recommended to keep detailed records of their time spent acting as Trustee and the services performed in the event they are required to substantiate their time and duties.
Taxpayer Identification Number: As stated above, the Trustee should obtain a Taxpayer Identification Number (TIN) for the trust. All accounts (e.g. bank, brokerage, etc.) standing in the name of the Trustor should be transferred to the Trustee, in trust, under the TIN obtained, and not under the Trustee’s own Social Security Number.
Estate Tax Returns: Under current law, an estate tax return (Form 706) is required in any case where a decedent’s gross estate exceeds $11,400,000 (as of 2019) in value and when “portability” is to be elected. See Tax Planning at RassmanLaw. The “gross estate” includes any property interests of the decedent at the time of death, including but not limited to property in a probate estate, property in a living trust, and joint tenancy property. In other words, the “gross estate” for tax purposes is not the same thing as the “probate estate.” In fact, someone could avoid probate altogether by having a fully funded living trust, but still be subject to an estate tax.
Decedent’s Final Returns: The Trustee will be required to file final state and federal personal income tax returns for the Trustor on death for the period of January 1 through the date of Trustor’s death.
Fiduciary Returns: Trusts must file fiduciary tax returns (state form 541 and federal form 1041) on a calendar year basis (tax year ending December 31), unless the trust elects to be taxed as part of the probate estate, which may select a non-calendar fiscal year. Such returns are due on 15th day of the 4th month following the end of the fiscal / calendar year.
There is a popular misconception that the existence of a trust avoids all possibility of court involvement. This is true (in part) only if all of the Trustor’s assets were properly funded into the living trust. For example, if there are assets held outside the trust exceeding $150,000 in gross value, a probate will be required for those assets in order for the Trustee to collect those assets and add them to the trust.
Moreover, if at any time a beneficiary of the trust believes that the Trustee has acted improperly or without regard for the beneficiary’s interests, the beneficiary may file a petition with the court to force the Trustee to make a full report and accounting or to redress an alleged breach of trust, including removal of the Trustee or surcharge against the Trustee.
Finally, circumstances may arise where there are questions about whether the Trustee should or should not take certain actions (such as selling a business interest or real property, commencing litigation, etc.).
In such a case, it may be advisable for the Trustee to petition the court for instructions re: how to proceed.
In this event, beneficiaries will be given notice of the hearing and will be provided with a copy of the petition that describes the proposed action.
The matter will then be addressed in open court and the beneficiaries will have an opportunity to appear in court and be heard. By obtaining an order from the court in this manner, the Trustee may preclude the beneficiary from taking any further action or having any further legal right contrary to the court’s order.
Such a petition provides protection for the Trustee if there is a fear that the Trustee’s decision will be second-guessed by a beneficiary.
Also, if there is hostility between the Trustee and the beneficiaries, it may be advisable for the Trustee to seek court approval of the Trustee’s accounting in order to minimize any potential arguments with the beneficiaries.