What Is Trust Administration?
Trust administration is the legal process which occurs after the settlor of a trust has died.
Remember, there are three main parties to a trust: the settlor, who places assets into the trust; the beneficiaries, who will eventually receive those assets; and the trustee, who is tasked with distributing the assets.
During the process of trust administration, the trustee carries out the terms of the trust and distributes the property within the trust to the beneficiaries.
Your role in the trust administration process, therefore, will vary depending on which of these parties you are.
If you are the settlor, and you have created a trust as your form of estate planning, then trust administration will be the process by which your estate plan is implemented. However, the actual trust administration will not occur during your lifetime, and so you will not be able to exert direct control.
This is why it is so important to plan your estate carefully. To ensure that the trust administration goes as smoothly as possible, you must structure your trust to control for all the potential problems that you can foresee, and choose a trustee who you know you can count on.
If you are a trustee, you will be in charge of the actual administration of the trust. However, your power is not unlimited. As a trustee, you are considered a fiduciary, and with a fiduciary duty to the beneficiaries.
Your fiduciary duty requires you, not only to fulfill the terms of the trust and follow state law, but to consistently act in the best interest of the beneficiaries. You must place their best interest above your own, if and when the two come into conflict.
If you fail to do this, and instead use the trust to enrich yourself at the expense of the beneficiaries, then they may sue you for the damages you cause them.
Unfortunately, some trustees do disregard fiduciary duty.
That is why, if you are a beneficiary, it is important that you be familiar with trust administration. Although you will not be directly responsible for the administration of the trust, you should still know how the process works so you can know whether you are being shortchanged.
Trust Administration versus Probate
Trust administration can be likened to probate, which is the process that occurs after a person dies without a trust (either because they had a will or because they left their assets to go through intestate succession).
We wrote a probate guide in a previous article, and there are many similarities between probate and trust administration. In both processes, the decedent’s leftover debts are paid and their property is distributed to their beneficiaries. Many of the steps that a trustee must take in trust administration are similar to those which an executor must take in probate.
However, trust administration differs from probate in a few important ways.
For one thing, while probate is overseen by a system of probate courts, trust administration is not directly overseen by any court or other authority.
This has several ramifications for the participants in a trust, and many of them are good. First of all, it affords the parties involved in a trust more privacy. Since probate is a court proceeding, it is open to the general public, which means that your private finances will become a matter of public record after your death. Trusts, on the other hand, are not open to the general public, so you can keep your finances confidential.
For another, trust administration is generally a simpler and more straightforward process than probate. Probate typically takes several months to years, and assets usually cannot be distributed until the very end, but trust administration can be completed much more quickly. In addition, trust administration is generally less expensive than probate; there are fewer administrative, bureaucratic, and legal fees that you must pay.
As a result of all of these advantages – speed, savings, and privacy – many people consider trusts a superior option to wills. But there are a few potential pitfalls to a trust. If a dispute emerges, it may be easier to solve in a probate proceeding, because authorities are on hand to adjudicate the dispute. Trusts will only go to court if a major problem arises.
Ultimately, you must consider the various pros and cons of both trust administration and probate, and decide on the estate planning method that is right for you.
Ongoing Trusts Explained
Although trust administration tends to be a fairly quick process, there are some circumstances in which a trust can take much longer to administer than a will.
This is because a trust can be structured so that property remains in the trust for a very long time after the death of the settlor, rather than being immediately distributed. A trust which continues in this way is known as an ongoing trust.
There are a variety of reasons why a trust may be ongoing, including:
• To provide asset protection from an ex spouse or a creditor.
• To keep assets for a sale beneficiary until they reach maturity or even for a lifetime.
• To pay for educational expenses.
• To pay for contributions to charity.
• To provide for the disability of a beneficiary.
• To provide for a pet.
As you can imagine, the existence of an ongoing trust significantly complicates the role of trustee. In such cases, administering a trust can take years or decades.
However, it’s not quite as daunting as it sounds. Although the trust may last for years, most of the difficult logistical issues can be solved in a relatively short period of time, and as the trustee, you will often be entitled to receive compensation for your services from the trust itself.
The Steps of Trust Administration
Step 1: Give Notice to Trust Beneficiaries.
If you are the trustee, then you are required at the start of the trust administration process to give notice to all of the beneficiaries who are set to inherit property in the trust.
The requirements for giving notice vary from state to state. In our home state of California, notice must be given within 60 days of the death of the settlor.
The notice itself must contain several items. It must inform the beneficiaries that the settlor has died, and therefore the trust is now irrevocable (i.e. it can no longer be changed). It must also inform them that you are in charge of trust administration and that you plan to distribute the assets soon.
Finally, it must inform them that they have a right to see and challenge the trust. If the beneficiaries do decide to challenge a trust, then the time period in which this can be done also varies. In California, they will have 120 days from receiving notice to mount a challenge (although if you do not give them notice, they will have much longer). You must include this date in your notice.
Step 2: Take Inventory and Collect Assets.
Once notice has been given, the next thing that you will need to do as trustee is figure out what you are actually administering.
This might sound like a simple step, but it can take a while to compile a list of all the assets that are in the trust, particularly if the decedent did not keep their information properly organized.
Typically, you must take a full inventory of all of the settlor’s documents, including titles to property, insurance documentation, stock or bond certificates, bills, and banking records.
Once all the assets have been identified, you must marshal them, or bring them under your control. In the case of physical property, you must take the asset into your possession, while with less tangible assets, you may complete some formal documentation. You must also review the titles of each of the real estate property.
Remember, during the process of trust administration, you are responsible for the assets, so you must ensure their safety throughout.
Step 3: Value Assets.
Once all of the assets have been collected, you must figure out their value. This will provide the groundwork for you to pay taxes on the assets later. You will likely need to hire a professional appraiser to complete this step.
Assets are typically valued according to their worth on the date of the settlor’s death, as opposed to the day they were purchased. In some cases, however, you may be able to opt for a later valuation date: 6 months from the day of death. This will be determined by fair market value, which is the amount that a willing buyer and seller would agree on if the asset was being sold.
Step 4: Pay Debts and Taxes.
Before any of the assets in the trust can be distributed to the beneficiaries, you must pay all of the trust’s expenses, including both unpaid debts and taxes.
Some debts, such as student loans, expire when the settlor has died, but many others, including medical bills and credit card debt, will continue to exist. As trustee, you have a duty to inform all of the settlor’s creditors that the settlor has died and make arrangements to pay them when necessary.
Regarding taxes, there are a couple of types of tax which you may need to pay. The first are income taxes from the last year of the decedent’s life. The second are estate taxes, which specifically target the estates of recently deceased people. (Taxes may vary from state to state)
If there is not enough money in the trust to pay these expenses, then you can liquidate some assets, such as real estate, to help pay the debts. If there are still not enough assets even after this, then the settlor’s debts simply will not be repaid in full. Instead, there will be a process in which some creditors get priority over others.
In this situation, the beneficiaries will inherit nothing, but even then, you won’t have to worry about debt collectors chasing you. Neither the trustee nor the beneficiaries will be held personally liable for the settlor’s debts.
Step 5: Manage the Estate.
During the period between the death of the settlor and the distribution of assets to the beneficiaries, you cannot just let the assets sit and gather dust. Your fiduciary duty requires you to manage these assets properly.
If there are liquid assets, you have a duty to invest them, so that they earn interest. At the same time, you cannot place them in a high-risk investment that makes it likely you will lose the assets, even if this yields a potentially higher return. Legally, you are required to act as a reasonably prudent person would.
With regards to other property, such as real estate, you must solicit tenants for the property. If you cannot rent it, then you may need to sell it rather than allow it to sit vacant.
Throughout the trust administration process, you are also required by law to keep a full accounting of the trust.
Step 6: Distribute Assets.
Once all of the logistical matters have been settled, then it is time to distribute the assets in the trust.
As trustee, you will have the responsibility of crafting a distribution plan, which conforms to the terms of the trust and to state law while minimizing, to the greatest degree legally possible, the amount of taxes and other expenses owed by the trust. Each of the beneficiaries must consent to the plan of distribution before it can be implemented.
In the course of the actual distribution, you must transfer titles to the beneficiaries, as well as any tangible property that was in the trust. You must also provide the beneficiaries with a K-1 tax form, which informs them how much they owe in taxes due to income generated from the trust and sale after the death of the settlor.
When to Hire a Trust Administration Lawyer
Trust administration is complicated, and because there is no probate judge on hand, there are many more potential pitfalls for a trustee than for the executor of a will.
It is likely, that points of confusion will arise in the process of trust administration. Unless you are an expert in these matters, something will probably come up to throw you for a loop. To make matters even worse, human dynamics are always volatile, and disputes can erupt even in a loving family. A lawyer is essential to at least the initial process and most likely throughout the entire administration.
If you face a dispute, whether as a trust administrator or a beneficiary, then you should not hesitate to speak to a trust attorney. Even a brief consultation may clear up many of your concerns, and you may be surprised at how quickly an experienced attorney can bring light
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