GENERIC OUTLINE OF BASIC TRUST ADMINISTRATION STEPS:
(Each step of administration can create serious pitfalls and problems if ignored)
1. Study of the trust documents to determine specific instructions i.e. what to do on death of first or second spouse as the case may be.
[Why do this? Trust documents are legally enforceable documents. The successor trustees are bound by law to follow the trust and can be sued, penalized and removed, if they don’t follow the trust and the trust laws found in the CA probate code. Also, serious income and property tax losses and penalties can result unless proper and timely forms are sent to all concerned including government agencies .]
2. Authorize successor Trustee with acceptance document.
[Why do this? Just because someone is named as a successor trustee, he/she is not required to accept the job and may decline. Until the successor trustee named in the trust actually accepts the position, it is not clear who can act for the trust and legal disputes can result. ]
3. Bank accounts – changes to name of successor Trustee.
[Why do this? The trust bank accounts cannot be accessed until the successor trustee goes to the bank and signs signature cards and proves his/her position according to what the trust says.]
4. Identify Beneficiaries & determine if any disputed matters.
[Why do this? Trust beneficiaries are legally entitled to various legal notifications, and accounting, and other information. Failure to notify and/or failure to distribute to proper beneficiaries can result in litigation and personal liability to the trustee for damages and penalties. Disputes about the trust wording and/or who is to inherit can lead to expensive and lengthy litigation so any problems and claims should be identified as soon as possible.]
5. Real estate – Identify and determine value & status of occupancy & rents
[Why do this? If the county is not properly notified then the property taxes will go up to market. Exemptions from tax increases may be available if timely applied for. All trust property needs to be rented at market rent or sold unless the trust provides otherwise. Rental income needs to be properly accounted for. Children & relatives living in the family home after the parents die must be paying rent which often causes litigation and problems. The trustee can be sued and held personally liable if the property taxes go up and/or if properties are not rented.]
6. Real estate & stocks & business interests valuation
[Why do this? Severe income tax consequences can result if an appraisal by a licensed appraiser as of the date of death is not done.]
7. Real estate & business interests have to be properly run and/or sold
[Why do this? The trustee can be sued and removed and be personally liable for rental income losses, business losses and/or mismanagement. The trustee is legally responsible to the trust beneficiaries to professionally manage everything. Just because the person who died neglected to manage things, is no excuse for the trustee.]
8. Notices to be sent to Beneficiaries & government agencies
[Why do this? The law requires various notices to be sent and a trustee can be removed and/or sued and penalized for not sending the proper notices on time. Also, some of the notices establish legal deadlines (statutes of limitation) to make claims and contest the trust or the money handling. Unless these deadlines are established with proper notification, the trust and trustee will remain liable and can face litigation for years in the future and closing of the trust could be delayed a long time.]
9. Inventory of assets in Trust & have appraisals done
[Why do this? The trust beneficiaries and government agencies will want to know what is in the trust and what the values are at date of death.
According to CA law, the legal job of the trustee is to take care of, account for, and distribute the trust assets. The trustee can be sued and removed and penalties if the assets are not fully inventoried and accounted for.]
10. Deal with life and property insurance matters
[Why do this? The beneficiaries of the life insurance will want to be paid and the trustee must keep up the property insurance. The trustee can be removed, penalized, and held liable for losses that should have been covered by insurance.]
11. Trust money handling & notices to the IRS
[Why do this? The trust laws in the CA probate code and general trust law principles require the trust money to be handled in a businesslike way. This means that trust money is to be kept in bank accounts, trust expenses are to be paid by check and/or credit cards on the trust bank accounts so that every dollar and penny spent is recorded and accounted for. Checkbooks should be kept. Receipts for all expenditures should be kept. Bills and expenses and taxes need to be paid on time. The IRS needs to be notified of deaths and tax ID numbers obtained, depending upon the circumstances. Unless the trustee is an accountant or a business person skilled in handling financial matters, the trustee needs to hire accountants and attorneys and pay them with trust money to make sure these things are properly handled. Failure of money and tax handling is a major cause of trust litigation to remove and penalize trustees. ]
12. Legal division of assets into subtrusts if this is the death of the first spouse
[Why do this? Many trusts require the division of assets into subtrusts on the death of the first spouse. The trust is a legal document and must be followed by the trustee or he/she can be sued for damages and removed for failure to do what the trust says. Division into subtrusts is generally done to (i) save estate taxes and to (ii) preserve the deceased spouse’s half of the trust estate so that the surviving spouse, a stepmother for example, doesn’t spend all the money leaving nothing for the trust beneficiaries. These situations can be very complicated and often lead to protracted litigation if not handled properly.]
13. Creditors -need to be notified & debts & taxes paid
[Why do this? Debts and taxes are legally required to be paid before the trust money is distributed to the beneficiaries. If beneficiaries take the money out of the trust before the debts and taxes are paid, they are personally liable to put it back. A trustee of course can be sued, removed and penalized for failure to pay the debts and taxes. Various legal deadlines and cutoffs need to be considered concerning debts and taxes.]
14. Income, estate and gift tax returns to be filed
[Why do this? Failure to file tax returns subject the trust and the trustee personally to penalties and interest for tax fraud. A trustee can be removed, sued and penalties for neglecting to timely prepare and file tax returns. The trustee should consult tax professionals (attorneys/CPA’s) to determine the requirements and to file and prepare the trust tax returns. ]
15. Accounting to beneficiaries required by law
[Why do this? The CA probate code laws have detailed and strict requirements for trust accounting. An accounting in compliance with legal standards, is due one year after the date of death and then every year thereafter until the trust is finally distributed and closed. Failure to account properly is a major source of trust litigation. Trustees can be sued and removed and penalized and be made to pay back improper trust money expenditures. It is pretty much common sense to understand that every trust beneficiary wants to know what is happening with the trust money.]
16. Closing and distributions – various forms & requirements
[Why do this? The trust money and assets must be distributed to the beneficiaries after the payment of debts, taxes and fees including trustees fees. The trust documents may have requirements and restrictions on the payment of trustees fees and when to pay the beneficiaries. If the trust does not say when to distribute then the laws requires payment in a reasonable time. There can be litigation over what is a “reasonable” time to payout especially when years go by and nothing happens. Any distribution needs to have a receipt signed by the beneficiary receiving it. Preliminary trust distributions may be appropriate depending upon the situation but in any event receipts are to be signed. Failure to distribute trust assets is a major source of litigation and can result in the trustee being sued, removed and held liable for damages.]
PLEASE DO NOT ASSUME THAT THIS OUTLINE COVERS ALL THE ISSUES AND STEPS IN THE PARTICULAR TRUST YOU ARE CONCERNED WITH. There may be other steps to be taken, forms to be filed and legal notices to give depending upon the particular circumstances. IT IS ADVISEABLE TO RETAIN AN EXPERIENCED ESTATE & TRUST ATTORNEY TO DETERMINE JUST EXACTLY WHAT NEEDS TO BE DONE AND TO PREPARE THE LEGAL DOCUMENTS NEEDED.