What Is Trust Administration?
A Revocable Living Trust is an estate planning document often used to avoid probate and provide for efficient and cost-effective administration of one’s estate. The creator of the living trust is referred to as the Settlor. In establishing the Revocable Living Trust, the Settlor nominates a trustee to administer the trust and carry out the distribution of the Settlor’s assets upon his or her death. Settlors often appoint themselves as the initial trustee or trustees during their lifetime and designate successor trustees to serve upon the Settlor’s passing, or upon his or her incapacity. Because the Settlor act as trustee during his or her lifetime, he or she can control the assets the same as if he or she owned the assets individually.
After creating the Revocable Living Trust, the Settlor funds the trust by titling all estate assets in the name of the trust. Because the Revocable Living Trust owns the assets, the trust avoids probate. The named successor trustees take over for the deceased Settlor and distribute the Revocable Living Trust’s real and personal property according to the terms of the trust agreement. Many formal steps must be followed to ensure proper administration of the trust, to carry out the Settlor's wishes, and follow state law. This process is known as trust administration.
The Initial Steps of Trust Administration
Under state law, within 60 days of the Settlor’s death, the named successor trustee of the Revocable Living Trust must provide formal notice to the beneficiaries of the trust. Notifying the beneficiaries and heirs of the administration of the trust is crucial as sending the notice provides a 120-day period for beneficiaries and heirs to contest the trust document. Any beneficiaries or heirs wishing to contest the trust must do so within the 120-day period or forever lose their right a contest.
How to Administer Real Property
Revocable Living Trusts often hold title to a Settlor’s real property. The named successor trustee is tasked with follow formal steps to vest title in the successor trustee and thereafter manage or sell the real property. The successor trustee should file with the county recorder’s office an Affidavit of Death of Trustee and a certified copy of the Settlor's death certificate to provide official notice of the Settlor’s death and the successor trustee’s authority to act on behalf of the trust. Failing to do so may cause a cloud on title which could affect the chain of title to the real property making the property unmarketable. Further, the successor trustee should file with the counter assessor’s office a Preliminary Change of Ownership Report within 150 days of the Settlor's death. Failure to file the Preliminary Change of Ownership Report may result in financial penalties to the trust and result in a breach of duty by the successor trustee. This could result in the removal of trustee for failure to act in the best interests of the beneficiaries due to the loss of trust assets. After all required documents are filed with the appropriate agencies, the successor trustee can manage or sell the real property.
Collecting Trust Property
After all appropriate forms have been filed, the successor trustee should obtain from the IRS an employee identification number (EIN) for the trust. The EIN is required to open bank accounts and file the trust’s final taxes. The successor should collect and preserve all personal property titled in the Revocable Living Trust. Such personal property may include financial accounts, investment accounts, vehicles, home furnishings, and other personal belongings owned by the Settlor. The successor trustee should be careful to place all financial assets in a trust account and keep the assets separate from the successor trustee’s own assets. If the successor trustee locates assets titled in the Settlor’s individual name, and therefore not properly funded in the trust, he or she may petition the Court for an order deeming the assets trust property. Petitioning the court for such an order pulls the assets into the trust allowing the successor trustee to administer the assets outside of probate. Because any assets left titled in the Settlor’s name may require a probate to administer the assets, doing so may save the trust time and money. After all assets have been collected, the successor trustee may elect to obtain appraisals for all trust assets.
Payment of Trust’s Debts and Taxes
A successor trustee is responsible for paying all the trust’s valid debts and taxes. Under state law, unsecured creditors must file a claim against the trust within a strict 1-year statute of limitations. A creditor’s failure to file a claim within the statute of limitations will result in the denial of all claims against the trust.
If the total value of the trust’s real and personal property exceeds $12,060,000.00, a federal estate tax may be levied against the trust. In such a case, the successor trustee should file with the IRS Form 706 within nine months of the Settlor’s death. This Federal estate tax reporting is in addition to the normal income tax reporting (IRS Form 1040) required to report the Settlor’s income for the last year of the Settlor’s life. Because a successor trustee may be held personally liable for the trust’s debts and taxes, it is advisable for the successor trustee to seek professional guidance from an experienced estate planning attorney and tax professional.
Duty to Account and Distribute Trust Assets
After all debts and taxes are paid, the successor trustee should account to the beneficiaries of the Revocable Living Trust all financial activity conducted during the trust administration. This accounting allows the trust’s beneficiaries the opportunity to examine the financial status of the trust to ensure that strict compliance with state and federal law has been met. After providing the accounting to all named beneficiaries, the trustee can distribute the trust’s real and personal property according to the terms of the trust.
Trust administration can be a complex process. Because state law provides that a successor trustee may be liable for any losses to the trust’s beneficiaries resulting from the successor trustee’s actions, it is wise for successor trustees to obtain professional guidance from an experienced estate attorney and tax professional.