Trust Administration in California
Unlike probate, a trust administration is not usually a court supervised process, although trust administrations may involve court proceedings in the probate court. Nevertheless, many important provisions of the California Probate Code apply to trust administration. Many of these are contained in what is known as the "Trust Law." Other statutes and the common law also apply to trustees as well as the tax laws that govern trusts and estates specifically. Being a trustee is a substantial responsibility, with many duties and obligations imposed by law and the trust instrument.
Notification by Trustee to Beneficiaries and Heirs at Law
One of the first specific duties of the trustee after a trust becomes irrevocable by reason of the death of a settlor, is to provide the notification required by Section 16061.7 of the California Probate Code. The notification must be given within 60 days after the death of a settlor of a trust which causes the trust to become irrevocable. The notification must be sent to the beneficiaries of the Trust and also to the heirs at law of the decedent who are those persons who would inherit the estate if the decedent had died without a will or trust (intestate).
The notification is intended to provide information about the identity, mailing and physical address of the trustee, and the trustee's telephone number. But it also must contain other language, including notice of the recipient's right to receive a copy of the terms of the trust and a statutory warning that the recipient has only 120 days from service of the notification to bring a contest to the terms of the Trust. The effect of this Notification is to shorten the statute of limitations for bringing a contest to the Trust.
The trustee should provide copy of the terms of the trust with the notification because doing so prevents the recipient from requesting one and extending the period of bringing a contest to the trust an additional 60 days from receipt of the copy of the terms of the trust.
The notification is sent not only to the beneficiaries of the trust, but also to any heirs at law of the decedent settlor. Heirs at law are the biological and adoptive next of kin of the decedent, and these are the persons who would inherit the estate if there was an intestacy because the trust instrument and will were invalid.
If a trustee fails to provide the notification, that trustee is liable for all damages, attorney's fees and costs caused by such failure, except to the extent the trustee has made reasonably diligent efforts to comply.
Identifying and Marshalling the Trust's Assets
The trustee must also promptly start the process of gathering all available information about the decedent's assets, liabilities, income and expenses.
This includes identifying how the decedent held title to the various assets – are they held in:
· The name of the trust
· Joint names
· Decedent's individual name
You will need to establish values for the decedent's assets by appraisal where necessary. You will also need to identify the assets which pass by beneficiary designation and ascertain who the beneficiaries are. These include:
· Retirement plans and accounts
· Life insurance policies
The relevant companies need to be contacted to ascertain the beneficiaries of the accounts or policies. These may or may not be the trust itself.
You will need to verify that all assets titled in the decedent's individual name, and not in the trust, do not exceed $150,000.00. Otherwise, a probate may be required for such assets.
You as trustee must take possession and control of all of the decedent's assets. For financial accounts, this means changing the title of the account to reflect your position as the trustee of the trust and providing the taxpayer identification number of the trust. All income and receipts (dividends, refunds, interest, etc.) must be deposited in an interest bearing trust bank account or accounts until the trust is terminated. For real property, you must record an Affidavit Death of Trustee, and also notify the County Assessor's office of the death of the property owner and file any necessary claims for exclusion from reassessment, such as the Parent to Child Transfer Exclusion.
You will need to keep all assets adequately insured.
A trustee must keep accurate and complete records of the transactions of the trust. This is extremely important because a trustee is obligated to account to the beneficiaries and can be compelled to do so in court proceedings. At the very minimum, you must keep a listing of all expenses and all income and receipts of the trust. Records of expenses are not limited to check registers, but must contain all deductions from the trust assets whether by automatic bank payments and withdrawals or any other form of payment. A trustee must also keep invoices and other statements which provide evidence of the proper nature of the expense. A trustee must be prepared to account for every penny received and disbursed through the trust.
If you fail to keep proper records and books of account, the burden of proof will be on you as trustee to establish the propriety of every charge against the trust estate.
The California Probate Code and most trust instruments require a trustee to account at least annually to the beneficiaries of the trust. Although beneficiaries may waive an accounting for past periods, they cannot do so for future time periods. The contents of an account are prescribed by the Probate Code and it should be noted that if an account is to be submitted to the probate court for approval, there are additional requirements regarding their content and format that are very specific.
Duty to Keep Beneficiaries Reasonably Informed
In addition to the duty to account, a trustee must keep beneficiaries reasonably informed about the trust and its administration. Trustees must be aware that beneficiaries are entitled to ask questions and receive answers about the trust administration.
Taxes and Returns
A trustee is responsible for the filing of the decedent's personal income tax returns and other returns that may be required such as a gift tax return. One of the first things a trustee must do is ascertain whether an estate tax return is required. Also, a trustee must file annual income tax returns for the trust itself which is a separate taxable entity requiring a taxpayer identification number. A trustee requires the services of a competent tax advisor and preparer experienced in fiduciary returns.
Other Duties of a Trustee
A trustee is subject to strict and onerous standards in carrying out the trust. There are many duties imposed by law including the duty of loyalty to the beneficiaries, which means that you must conduct yourself in accordance with the highest good faith standards towards the beneficiaries. Actions taken by the trustee must be made in the sole interests of the beneficiaries, not the trustee. There is an absolute prohibition against commingling any trust assets with the trustee's own assets and accounts. That means you must not deposit any trust funds into your personal accounts.
There are duties to invest the trust property and the trustee can be liable for simple or compound interest if this is not done. Special rules govern investment strategies required when there are both income and principal beneficiaries of the trust, including residuary beneficiaries. A trustee who invests and manages trust property must do so as a prudent investor would. It is necessary to carefully review the trust instrument for any restrictions on investment powers.
You must use your special skills if you have them for the benefit of the trust. Otherwise you are obliged to use ordinary care, diligence and skill in the administration of the trust.
There are numerous other specific duties imposed by the Probate Code and other legislation.
Distributions to Beneficiaries
Do not distribute anything to the beneficiaries until you have consulted with an attorney and are certain that all debts, expenses and costs of administration have been paid or provided for and until after the expiration of the 120 day contest period. Beneficiaries should be asked to sign a receipt, and asked to approve the accounting the trustee has provided to them.
A trustee is entitled to reasonable compensation for his or her services as trustee. You must be prepared to justify the fee taken by logs or diaries of time spent on the trust administration.