A Primer For Trustees & Prospective Trustees

One of the most important decisions to make in estate planning is the selection of a trustee to administer the trusts upon death or disability

It Takes a Trustee…

A trustee should be experienced, responsible, trustworthy, fair, insightful, intelligent, and resourceful. Now that just may fit a lot of folks.  But for those of us who were selected as trustee because we are the lesser of evils (our siblings being the other evils) this article may be a helpful guide to the task of being a trustee.

For whatever reason, you were chosen to be trustee of your parents’/aunt’s/cousin’s/best friend’s/dentist’s trust.

Now What Do You Do?

1. Take all of the funds from the trust, buy a large yacht, sail to a small island off La Paz and sip margarita’s in the shade of a mango tree for the rest of your life, or

2. Celebrate all your good luck by throwing a clothing optional party for all of your friends at trust expense, or

3. Burn the trust so that one will ever know it even existed, or

4. Get some professional help (financial, accounting and legal not psychiatric).

If you chose d you are already on way to becoming a good trustee.  If you choose anything else, you may want to advise the Trustors to reconsider their choice of trustee.

All kidding aside, being a trustee involves a lot of responsibility, and is usually on the top of most people’s list of thank less jobs.  The following are ideas that can help make the job of trustee a kinder and gentler undertaking.  By the way, we will be using a lot of legal words which we have to use because we are attorneys. If you would like to know what in the world we are talking about, there is a glossary of terms at the end of this article. Please don’t hesitate to use these terms freely even if you are not an attorney.

FREELY SHARE INFORMATION WITH THE BENEFICIARIES.

Remember how your parents taught you to share with your siblings?  Well that’s applicable to Trustees as well.  In fact, Probate Code Section 16060 says that it is a trustee’s fiduciary duty to keep a beneficiary informed.  The idea that a trust agreement is private and the beneficiaries have no business knowing what is going on inside the trust is pure fiction – and any trustee that has this attitude is only asking for trouble.

In the first place, most judges have always had little tolerance for a trustee who wants to hide what is in the trust, or what they are doing in regards to the administration of the trust.  So if you are ever brought to task by a beneficiary, a clandestine approach to the job of trustee may not end up being to your advantage.

But even more importantly, a trustee who is not being up front to the beneficiaries is simply cloaking him or herself in a veil of dis-trust.  If that is the objective, then you would be called a distrustee instead of a trustee.  It is not always possible to have the trust of the beneficiaries – all beneficiaries not being equal.  However, having that trust and respect is a goal that every trustee should strive for.  It will pay off in spades as far as the positive affect it can have on family harmony and avoiding controversy with actions that the loss of a loved one can have a profound effect on the beneficiaries of a trust, not only from the standpoint of grieving, but even as to how the beneficiaries relate to each other after a close relative’s death.  It is amazing to me how often I have seen sibling rivalries and jealousies that are kept in tow during parent’s lifetimes suddenly erupt upon the death of a parent,  Anything the trustee can do to lessen the load of grief, or the unresolved family issues, is a positive step, and worth the effort.  

A trustee should fully apprise the beneficiaries of the terms of the trust and the trustee’s intended game plan for carrying out those terms.  If a beneficiary has a questions or concern, it should be addressed up front.  Granted, there are some beneficiaries who will be adversarial no matter what the trustee does, but it is remarkable what a little bit of empathy, understanding and a listening ear can do to help calm an otherwise volatile family situation.  Trustee who see themselves as adversaries with the beneficiaries of the trust, are simply fueling the flames of dissension.

Probate Code Section 16061.7 requires a trustee to serve a notification to each beneficiary of a trust whenever a trust becomes irrevocable or whenever there is a change of trustees.  The notification should be served by mail upon the beneficiaries within 60 days following the occurrence of the event requiring such service of notification.  The notification must contain certain information about the trust as described by the statute.  The notification also includes a warning that anyone who wants to contest the trust has 120 days to do so.  The failure of a trustee to serve such notice means that the 120 day period does not run.  It also means that a trustee can be in breach of his fiduciary duty to other beneficiaries is a contest is filed after the period in which the 120 days would have run had the notice been timely filed.

Keeping beneficiaries informed also means providing them with an accounting.  Probate Codes Section 16602 requires a trustee to provide a beneficiary with an accounting at least annually.  The accounting must contain a statement of receipts and disbursements of income, a statement of assets and liabilities at the beginning and the end of the accounting period, a statement of the trustee’s compensation, a statement of the trustee’s compensation, a statement of the names and compensation of agents used by the trustee, a statement that the recipient of the accounting may apply to the court for review of the accounting, and finally a statement that claims against a trustee cannot be made after the expiration of three years from the date the beneficiary receives an accounting which discloses facts giving rise to the claim.    

The trustee may elect to have the account approved by the court to protect the trustee from liability in the future.  Or the trustee may request a release of claims from beneficiaries after furnishing them with an accounting.  An accounting can also be waived in writing by the beneficiaries with some type of accounting, even if minimal, is preferable.

INVESTING IN CERTIFICATES OF DEPOSIT AND BONDS MAY NO LONFER BE A SAFE HARBOR FOR TRUSTEE

In the good old days, all a trustee had to do was open a checking and savings account as long as the savings account was drawing a little interest.  That kind of investment strategy might get you into trouble today.

Since 1996 Sections 16047 to 16050 of the California Probate Code have required a trustee to become a little more involved in investment decisions.  A trustee has a duty to select risk and return objectives reasonably suited to the particular trust; to diversify the asset portfolio; to evaluate investments in the context of the portfolio as a whole; to avoid unreasonable or inappropriate costs; and to consider the tax consequences of the investments.

Probate Code 16047, the so called prudent investor rule requires that a trustee’s investment and management decisions should be based on, among other things, the age of the beneficiaries, their current health, their life expectancies, their genetic profiles, their particular needs for liquidity, regularity of income and appreciation of capital, their financial condition, their tax status, their level of financial responsibility and their level and nature of other resources.  Every trustee should put together an investment plan based on a consideration of all of the above criteria. 

Are you still sure you want to be a trustee?

Sure you do – you just have to remember to get some help.  Unless you have the sophistication to make prudent decisions (and perhaps even if you do) a wise trustee will select a competent financial advisor from the very start to assist with investment decisions based on the above factors.  After all, the above factors are factors that good financial advisors consider for their clients on a daily basis.  Probate Code Section 16052 (a) authorizes a trustee to delegate investment functions to an expert and provides the trustee from liability for the decisions of the agent of the trustee so long as the trustee exercised prudence in selecting the agent, establishing the scope and terms of the delegation consistent with the terms of the trust and the trustee periodically reviews the agent’s performance.

POST-DEATH TAX PLANNING

One of the consequences of living trusts is that many trustees just don’t take them very seriously.  After all, that guy in the orange socks at the You and Your Living Trust seminar said that handling a living trust was a piece of cake.  All that happened at the Trustor’s death was for the successor trustee to distribute out the assets and viola- it’s that easy!

Well – not quite…

First there’s that little thing about a federal estate tax return – due nine months from date of death of the Trustor, and unfortunately the IRS does not have a real sense of humor about delinquent estate tax returns.  Guess who has the responsibility for filing one of these babies.  Let’s put it this way, it isn’t the beneficiary.  Failure by the trustee to timely file the federal estate tax return means interest and penalties get tacked on to any taxes owning, and penalties get assessed whether the taxes are owning or not.

Not to mention that many important elections can be lost if not made on a timely filed federal estate tax return.  For example, the marital deduction (which allows a spouse to inherit his or her share of the estate tax free); the IRC 2032a election (which allows a qualified estate to obtain a favorable valuation for estate tax purpose for a farm or closely held business); the IRC 6166 election (which allows estate taxes to be paid in installments over 15 years with a favorable interest rate).

Unfortunate also, is the lack of humor of beneficiaries who end up paying more taxes because of the trustee’s failure to timely file the estate tax return.  Sometimes beneficiaries are just not very understanding.

Furthermore, an irrevocable trust itself is a taxpayer and needs to obtain its own ID number for state and federal income tax filings. 

Decisions such as how to allocate administrative expenses, how to value assets, and how to allocate assets among trusts can all make considerable difference in the final toll of taxes to the trust.

A good accountant should be every trustee’s new best friend. Get your accountant involved in the game as early as possible.

Property taxes are also an issue that a trustee must address as any distribution of real property may trigger a reassessment.  In some cases, such as transfers to children of the Trustors, the transfer will be exempt from reassessment if the trustee has filed the proper forms.

LIQUIDATING OR RETAINING ASSETS.

To sell or not to sell, that is the question.  Sometimes the answer is obvious, other times not so obvious.  If the beneficiaries all hate each other, it may be an easy call to sell the property and divide the proceeds.  IF one son is living in the house and there are sufficient assets for the rest of the beneficiaries, then selling the house may not be such a great idea.

In cases involving multiple beneficiaries, selling the real property of the trust is normally going to be the most practical result for several reasons.  The cost of maintaining the property-property taxes, repairs and maintenance, insurance and upkeep- may be a significant drain on the estate.  If the beneficiaries can’t agree on what to do with real property, they may end up in litigation at a high cost to all of them.  Oftentimes, the sale of the property is necessary to pay taxes or debts of the estate.

On the other hand, if the beneficiaries all want to keep the real property, selling the property is normally not appropriate, unless necessary to pay debts of the estate.  In such a situation, however, the trustee should encourage the beneficiaries to enter into some kind of co-ownership or partnership agreement to govern future administration of the property.

If the decision is made to sell the real property it should be done with caution.  Selling the property to the next door neighbor for $50,000 less than its value is probably not the thing to do, as your focus needs to be on what is best for the beneficiaries, not for you and the next door neighbor.

In a probate proceeding there is not much risk of getting in trouble on the sale of real estate, since beneficiary approval is always a prerequisite.  Not so with a trust.  Therefor the risk of a disgruntled beneficiary second guessing the trustee of a trust is a hundred fold (based on statistics which we have compiled over the last twenty years – just kidding).

Getting beneficiary approval to the sale of the real property should be the trustee’s first priority.  If that is not possible, then the property should be appraised for sale (which is usually a good idea in any event).  If there is a real liability risk from the beneficiaries, there is a proves in which if objections are made to the proposed sale by any beneficiary, Probate Court approval can be obtained upon petition by the trustee.

Personal property presents other issues to a trustee.  Oftentimes dividing or selling personal property becomes a trustee’s most challenging task.  How the trustee approaches this issue can make all the difference.

DEBTS AND CONTINGENT DEBTS.

A trustee has a responsibility to pay the debts of the Trustors.  When the trustee has distributed an estate to the beneficiaries without paying debtors, problems arise.

If a trustee fails to pay estate taxes, the IRS does not care that the beneficiaries have blown all of the assets on a wayward investment on the latest dot com stock.  They don’t care that you didn’t realize life insurance was includable in the taxable estate and they don’t care that you didn’t ask to be trustee in the first place.  A trustee can be liable for the debts of the trusts to the extent of the value of the trust assets distributed to the beneficiaries.  Think of Tommy Lee Jones in The Fugitive – that’s the IRS.  But don’t tell them I said that.

Trustees who are concerned about this kind of exposure (those that aren’t concerned about this kind of exposure probably are not bothering to read this article anyway) have several options available to them:

• Publishing a notice to the creditors, pursuant to Section 19040 of the Probate Code which allows a trustee to protect him or herself from claims of creditors, by giving the creditors four months to file claims, in the same manner that notices are given by executors in probate proceedings.

• Delaying the distribution of the trust for at least one year, and until the estate tax return has been audited or a closing letter has been obtained from the IRS (although an IRS response can take up to four years after the death of the Trustor).  There is a one year statute of limitations against a decedent on most claims.

• Distributing assets early, but reserving enough assets for contingent debts.

• Getting professional help (we already said that but sometimes repetition is a good thing).

ADMINISTERING THE TRUST: MANAGING AND SECURING ASSETS

According to Probate Code Section 16000, the trustee’s job is to administer the trust.  That means to gather up and take control of the trust assets for the beneficiaries.

That also means that the trustee has the responsibility to make sure he or she is aware of all assets, and has taken control of the assets.  A search of records of the Trustor may reveal an unknown insurance policy, an oil or gas lease, an old stock certificate – who knows what – but the responsibility of determining what is out there.  Assets should be transferred into the control of the trustee as soon as practical after the death of the Trustors.

Secondly, the trustee has the responsibility of protecting the assets under his or her control.  That may mean securing insurance on the house or the car; putting a security system in the house; changing the locks; storing personal property in a storage facility or making sure it is distributed to the beneficiaries as soon as possible.

Notifying banks, brokers, and credit card companies of the death of the Trustor and your appointment as successor trustee may protect the trust estate from fraud.

The trustee has the responsibility to maintain the assets and keep them in good repair.  A trustee that lets the house deteriorate into a state of disrepair causing its value to substantially decline, may have a difficult time justifying this to a beneficiary.

The trustee also has a duty to make the trust property productive.  That may mean renting the real estate as discussed above.  A trustee who allows an estate to sit idle for too long is at risk. 

In administering the trust, the trustee has a responsibility to do so in accordance with the terms of the trust.  A trustee needs to be fully aware of the terms of the trust he or she is administering, including any restrictions the trust may have on his or her authority.  Review of the provisions of the trust with an attorney at an early stage should be a priority for any trustee.

A trustee must apply the full extent of his or her skills, including any special skills that the trustee may have.  He or she may not delegate the performance of the trustee’s duties, although as discussed above, a trustee may, with certain restrictions, use agents to assist the trustee in carrying out those duties.

DUTY OF LOYALTY, DEALING IMPARTIALLY WITH THE BENEFICIARIES AND AVOIDING CONFLICTS OF INTEREST.

Section 16002 of the Probate Code says that a trustee has duty to administer the trust estate solely in the interest of the beneficiaries.  Probate Code Section 16003 requires a trustee to deal impartially with beneficiaries. And Section 16004 of the Probate Code requires trustees to avoid conflicts of interest.

These statutes mean that trustees are working for the best interests of the beneficiaries as a whole and not their own best interests.  When there is more than one beneficiary, the trustee must be sure to balance their interests so that they are all treated fairly.  Weighing the interests of income and remainder beneficiaries, for instance, may mean that investments should be balanced so as to combine income and growth to the trust.

Trustees who engage in transactions with the trust for their own interest, are presumed to be acting in violation of their fiduciary duties.  A trustee is, however, entitled to reasonable compensation for his or her services to the trust.  Since the reasonableness of compensation can vary from one trust to another, the trustee should obtain advice of an attorney before computing compensation to avoid conflicts with the beneficiary.

Nobody Said It Was Easy…

Nobody ever said that being a trustee was easy.  But with the right attitude, some professional guidance and maybe just a little bit of luck, you’ll be fine.  And if you do get into trouble, we’ll be there to help you pick up the pieces.  (But try to call us before the trouble starts).

We hope this proves to be helpful to you.  Please don’t hesitate to call us with your questions or comments.

GLOSSARY OF TERMS USED IN THIS   ARTICLE:

BENEFICIARY:

• The person who is going to benefit from the trust.  A beneficiary may have a present interest in the trust, such as an income beneficiary who is entitled to the income generated by the trust.  Or the beneficiary may have a future or contingent interest, such as a remainder beneficiary before realizing any benefit from the trust.

FEDERAL ESTATE TAX:

• The tax imposed by the federal government for the privilege of leaving your estate to the extent of the deduction from taxes derived at the federal level for state taxes.  Each of us has a $5,120,000 unified equivalent exception from estate and gift taxes in the year 2012. This figure is intended to go up each year indexed to inflation.

FIDUCIARY DUTY:

• A high standard of care and loyalty that the trustee owes to the beneficiaries of the Trust.

IRREVOCABLE TRUST:

• A trust that cannot be terminated or modified.  Revocable trusts are often used when the goal of the Trustor is to accomplish a completed gift so that asserts in the trust will not be included in the Trustor’s taxable estate (however, the gift itself may be subject to tax).

REVOCABLE TRUST:

• A trust that can be modified or amended by the Trustor.  Normally, a transfer to a revocable trust is not a taxable event and the trust is still considered part of the Trustor’s taxable estate at death.  An example of a revocable trust is a living trust designed for the purpose of avoiding probate.

TRUST:

• Think of a trust as a gift with strings attached to it.

TRUSTEE:

• The person who has been appointed by the Trustor, or as otherwise provided in the trust instrument to handle the administration of the trust. The trustee normally has the responsibility to manage the affairs of the trust invest the trust responsibility.

TRUSTOR:

• Also known as Settlor.  The Trustor is the person who has created the trust.

Article Written by: Michael L. Gianelli