Trust Administration

Trust administration begins when a trust is first created and funded.  It continues until the trust is terminated either by the express terms of the Trust or upon depletion or distribution of all its assets. When an individual or a couple establishes a trust, a separate and distinct entity is created. The person creating the Trust is called the “Grantor” (also known as a Settlor, Trustor, Owner, or Creator).  The person or institution that holds and administers the property in trust is called the “Trustee”. The person for whose benefit property is held in the trust is the “Beneficiary”. In most cases, the same individual or couple who establish a revocable living trust initially holds the position of Grantor, Trustee and Beneficiary until they are incapacitated or die.  Upon their death, living trusts become irrevocable trusts that distribute assets much like a will would do so, but without probate fees, delays, or court involvement.

Properties administration of the Trust, both during the Trustor’s lifetime and after death, is necessary and important if the desired goals and intentions of the Trustor are to be achieved. A properly funded Trust provides an excellent vehicle for the quick and simple transfer of assets to the intended beneficiaries of the Trustor upon death, without the delay and expense of a probate or other court proceeding.

The most common administrative error is the failure of the Trustor during his or her lifetime to transfer assets to the Trust, or to properly title assets transferred to the Trust. A Trust can be deemed invalid because of the failure to fund the Trust with assets. When assets are not properly transferred to the Trust during lifetime, it can cause an administrative nightmare for the Trustee after the death of the Trustor. This may include the initiation of a probate or other court proceeding, which defeats the intention of the Trustor in creating the Trust. Trust administration is intended to be free from court supervision.

It is important to note that the Trustee has a fiduciary duty and must adhere to the standard of care spelled out under California law. Any individual who is serving as a Trustee should become familiar with the duties and obligations required by law. A Trustee who breaches his or her fiduciary obligations may be held personally responsible for any loss or injury occurring to the beneficiaries (both present and future).
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Trust administration occurring upon the death of the Trustor(s) may include, but is not limited to, the following:
  • Immediate review of the Trust, Will and assets by an attorney to determine any tax implications or requirements that are time sensitive
  • Preparation of an inventory of all property owned by the Trustor, including property that will pass outside of the Trust, property that will be transferred to the Trust by Will, and property titled in the Trust
  • Procurement of date of death values of all property. This may include professional appraisals of certain real property
  • Preparation of a list of all debts at the date of death, including funeral and last illness expenses, mortgages and liens on real property
  • Prudent management, protection, and investment of the property, including maintenance of appropriate property and liability insurance
  • Payment of various debts and Trust expenses
  • Preparation and filing of California and federal estate tax returns. These returns are due nine months after the date of death
  • Preparation and recording of affidavits for the real property to establish the Successor Trustee, notification of the county assessor of the changes in real estate ownership resulting from the Trustor’s death, and filing documents required to avoid property tax reassessment. These are due 45 days after date of death
  • Preparation and filing of income tax returns for the income the Trustor received before date of death. The returns are due next April 15. Earlier estimated tax payments may be necessary
  • Preparation and filing of one or more California and federal fiduciary income tax returns for Trust. These may be required annually, with the returns being due on April 15 of each year
  • If appropriate, allocation of assets to Subtrusts. California law currently provides that the allocation of assets may be accomplished on a non pro rata basis (each community property asset does not have to be fractionalized); however, the Trust must be carefully reviewed to ensure that the terms stated in the Trust do not override this type of allocation
  • If appropriate, actual transfer of property to the various Trusts, or to the beneficiaries of the Trust
  • Making Trust distributions to beneficiaries, including distributions of income to a surviving spouse or an income beneficiary, as determined by the terms of the Trust. The Trustee should become familiar with the Revised Income and Principal Law of the State of California
  • Preparation of periodic written reports to the beneficiaries on the financial status of the Trusts when appropriately requested by them
The importance of proper Trust administration cannot be overstated. The failure to properly fund Subtrusts, prepare fiduciary tax returns, properly allocate assets, prepare Trust accountings, make prudent investments, or make Trust distributions can have disastrous consequences. If you are currently serving as a Trustee, or named as a Successor Trustee, it is crucial that you obtain advice from qualified professionals who are familiar with current tax law, current developments in Trust law, and the administration of Trusts.
 

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