So, you just found out that you are the trustee of your relative’s trust. What do you do? This blog gives an overview of the steps that a trustee needs to take to administer a trust after the settlor (i.e., creator of the trust) passes away. In general, a trust administration is the orderly administration of a trust after settlor or the settlors pass away. It can either be the administration and distribution of one or more trusts for the benefit of a surviving spouse after one spouse passes away or the administration and distribution of a trust to the beneficiaries after a single settlor passes away or both settlors pass away. This particular blog will focus on the administration of a trust created by one settlor.
In general, a trust administration takes between six months and one year to complete. There are many factors that can lead to a delay in the administration of a trust. One factor that always causes delays in the trust and increases the attorney’s fees and costs associated with it is the presence of difficult parties. Most trust administration issues can be resolved by the parties with appropriate dealings outside of the court. However, like any contested matter, the more that that trustee has to go back to court to get administrative issues resolved, the more the trust administration process will be delayed. Another factor that can delay the trust administration process is a difficult asset, such as a hard to sell timeshare or other trust asset. Finally, one additional factor that can delay the trust administration process is a formal accounting in a case. Because the court accountant and the court typically take months to approve a final accounting, this almost always delays the trust administration process considerably. For this reason, unless it is unavoidable, I always encourage the trustee to do an informal accounting with the beneficiaries, rather than a formal accounting approved by the court.
After the settlor passes away, there are several things that need to be done to make sure that his or her trust is administered properly. First, it is important to meet with an attorney as soon as possible after the settlor passes away. Depending on the type of trust that you are dealing with, there may be deadlines to make certain tax and other elections that need to occur within a certain time frame after the settlor’s date of death. In general, I recommend meeting with the attorney within 30-60 days after the settlor’s death.
In the initial meeting with the attorney, he or she will generally cover the following items:
A. Review Trust Documents and Related Documents. First, the trustee needs to understand the trust itself, and any amendments thereto, to determine what the distribution provisions state, and if there are any other important provisions in the trust that affect the administration of the trust. In addition, it is important to review and understand the settlor’s will to make sure that it is a “pour-over” will that works in conjunction with the trust.
B. Understand Fiduciary Responsibilities. Second, the trustee needs to understand the role of the trustee in the administration of the trust. Often, if the trustee is also a child of the trustor, the child may also be a beneficiary of the trust as well as the trustee. The trustee acts in a fiduciary capacity for the benefit of all of the beneficiaries of the trust, and cannot act to benefit any one beneficiary or group of beneficiaries to the detriment of other beneficiaries. In addition, the trustee does have some responsibility to make sure that valid debts of the trust are paid by the trust if there are sufficient funds to do so. Finally, unless an agreement is reached between the beneficiaries of the trust to do otherwise, the trustee is required to follow the terms of the trust, including any amendments thereto, as written.
C. Identify Assets and Liabilities. At the initial meeting with the attorney, it is also important to create a complete list of all of the assets and liabilities of the settlor and of the trust. Typically, the attorney asks for a list of the assets owned by the decedent at the date of death and also asks for how these assets were titled and for the date of death values for these assets. For bank accounts and investment accounts, it is also important to ask whether there are any payable-on-death (“P.O.D.”) designations for how these account pass upon the death of the account holder. For 401(k)’s, IRA’s, annuities, and life insurance policies, it is also important to ask about the beneficiary designations for these types of assets. Next, for all of the assets, look for an account statement, deed, certificate of title, or other ownership document to demonstrate how such assets are titled. Finally, for any of the settlor’s liabilities, including mortgages, car loans, credit cards, or other debts, look for the latest statement for these assets, so that you have a clear picture on the liability side too.
D. Understand the Tax That May Be Due. Next, it is important for the trustee to understand the potential tax liabilities of the settlor and of the trust. There may be estate tax issues, income tax issues, and gift tax issues from gifts made by the settlor prior to his or her death. I recommend that you consult with a qualified accountant about these tax issues.
E. Determine Whether a Family Distribution Agreement is Needed. At the initial meeting, discuss with the attorney the family dynamics. Is anyone likely to object to your serving as the trustee, to the validity of the trust, or to the distributions set forth in the trust? Is anyone excluded? Are there any rifts in the family? For example, sometimes, mom and dad may have wanted to exclude one child for their own reasons, but the siblings get along fine and want to make sure that all of them are treated equally in the distributions. Alternatively, sometimes one or more of the beneficiaries are “well off” in comparison to their siblings and agree to redirect their share to a less fortunate sibling. In cases such as these, if all of the applicable beneficiaries are in agreement, they may want to do a family distribution agreement.
F. Understand the Notices and General Trust Administration Process. Finally, the trustee must know the timeline and process for the trust administration. Below is a quick overview of the key things that need to be done in a trust administration.
1. After the initial meeting, the trustee will need to obtain a Tax ID number for the trust and open a trust checking account if one has not already been opened. In order to do this, banks often ask for an Affidavit of Successor Trustee or Acceptance of Successor Trustee, and a copy of the trust itself, to confirm that they are dealing with the right person on behalf of the trust.
2. In addition, after the initial meeting, the trustee will need to create an Asset Chart for all of the assets in the name of the trust (or that should go into the trust). As is discussed in above, the date-of-death values are important for purposes of determining whether the trust is subject to federal estate taxes, establishing the new stepped-up income tax basis for the asset, and assisting in the distribution process from the trust.
3. Next, the trustee must send notice to the beneficiaries of the trust pursuant to A.R.S. § 14-10813, which needs to be done within 60 days of appointment if the trust has become irrevocable.
4. Further, the trustee must address creditor claim issues that arise in the administration of the trust.
5. Next, the trustee must “administer” all of the assets of the trust according to the terms of the trust. If mom or dad had a house that needs to be sold, then the trustee can list the house and sell it. If mom or dad had an investment account that needs to be liquidated, then it can be liquidated and deposited into the trust checking account. If an asset, such as a car, is in mom or dad’s name and needs to be transferred into the trust, it can be transferred though opening a probate case or through a small estate affidavit, and then it can be sold.
6. After the 4-month creditor’s claim period has ended, provided that all of the assets in the trust have been properly administered, the trustee will need to prepare a trust accounting from the settlor’s date of death until the date of the proposed distribution. The accounting should list all of the administrative expenses and taxes that have been paid, and all of the anticipated administrative expenses and taxes yet to be paid and will typically include a “holdback amount” to take care of these final expenses. A.R.S. § 14-10817 provides that a trustee may send out a proposal for distribution and give the beneficiaries 30 days to object to same, or such beneficiaries waive their objection. If there are no objections to the proposed distribution, then the trustee can make the proposed distributions to the beneficiaries, making sure to retain the “hold back amount” for final expenses.
7. Finally, after all taxes and expenses have been paid, and all distributions have been made, then I recommend having the trustee sign a Termination of Trust document. This Termination of Trust is the final document that the trustee signs at the end of the trust administration process.
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