Basics of Administration of Trusts in California
Appropriate trust administration is important when assets are held in trust and the beneficiaries are dependent on it. The trustee is held to a fiduciary standard, and compliance with the various duties is essential in minimizing litigation and will make the administration process run more efficiently.
At Giammichele Law, APC, our trust administration team in Orange County will listen carefully to each client's unique needs and will be sensitive to the emotions trust administration triggers. We represent trustees in a variety of simple and complex trust matters. Contact us at 949-339-1845 to schedule a Consultation.
What Is Trust Administration?
When trusts are created, the terms for their administration are contained within the trust instrument itself. The person who creates the trust is known as the trustor (or settlor), and the person whom the trustor appoints to administer the trust is called the trustee. The person or persons who receive the benefits (assets) of the trust are called the beneficiaries. The trustee administers the trust by following the terms of the trust as set forth by the trustor and acting in the best interest of the beneficiary (or beneficiaries).
Often, the substantive trust administration begins when the trustor passes away, but this is dependent on the trust and its terms and conditions.
How Is a Trust Administered in California?
There are certain steps and procedures that should be followed in order to properly administer a trust. While the specific tasks may differ by the state law applicable to the trust and pursuant to the terms of each trust, some of the more common elements of the process are described below.
Know Your Trust
A trustee needs to be aware of everything there is to know about the trust they are tasked with administering. Reading the terms of the trust is a good place to start. The trustee will also need to gather all documentation they can obtain that will help them to know exactly what they are managing. This can include:
- Financial statements (i.e., checking, savings, brokerage, retirement)
- Deeds to real property
- Rental agreements
- Life insurance policy
- Certified copies of the trustor's death certificate
There may be other documents the trustee needs to understand the trust. Having experienced legal counsel to assist in the administration can help focus your efforts and ease the time you expend in the administration process.
Secure Trust Assets
After ascertaining what the trust assets are, the trustee will need to secure (or marshal) the assets. This may entail ensuring the assets are properly titled, as well as taking an inventory of the assets. The trustee will also need to determine what the assets are worth. The valuation of trust assets is important for issues such as compensation, estate taxes, income taxes/capital gains, and simply for informative purposes to the beneficiaries.
Trust assets come in a variety of forms, including life insurance proceeds, real property, investment accounts, personal property (such as jewelry), claims against third parties, and intangible assets.
Trustees are often required to open a bank account in the name of the trust. This bank account can hold assets while the trust is administered and assists in paying the expenses of administration. It will also provide a way for the trustee to show that they properly handled the assets of the trust.
Part of the trust administration process is notifying any of the beneficiaries who are named in the trust, heirs at law, or others that may have a claim to trust assets (i.e., former beneficiaries). Beneficiaries need to know who the trustee is, how to contact the trustee, and the terms of the trust. In California, this initial notice is called a Notification by Trustee, and must be sent out within sixty days of the trust becoming irrevocable. A trust administration lawyer in your area can advise you on this and other state-specific issues.
Notify Creditors and Pay Debts
The trustee should try to determine to whom the trust or the trustor may be indebted, and notify them of the existence of the trust and that they are the trustee. The trustee should obtain copies of any and all claims against the trust and investigate them to ensure they are a valid debt that needs to be paid. Having experienced legal counsel can greatly assist in sifting through potential creditor claims and determining what claims are valid and whether negotiations to settle the claims are appropriate.
Additionally, by the time the trust administration is underway, there may be a need to reimburse one or more third parties for funeral or cremation expenses. While there are some limits to this, it is important to ensure that only appropriate creditors and other costs of administration are paid in a timely and orderly fashion.
Distribute Trust Assets
After the administration tasks are completed, it is time for the trustee to distribute the assets of the trust to the beneficiaries. Generally speaking, before that happens, the beneficiaries must be provided with an accounting of the trust administration. If they agree with how the trust was administered, the trustee can request that the beneficiaries approve the accounting, or the trustee may elect to seek court approval of the accounting. Oftentimes, the accounting will include a proposed distribution schedule that will reflect what each beneficiary is receiving as part of their distributive share.
Once it has been determined that the trust was properly administered, the terms of the trust will dictate how the trustee distributes the assets. There may be some room for discretion given to the trustee, or the trustee may not have any discretion. It all depends on the way the trustor set up the trust. It is always important to consult with legal counsel as to the distribution to ensure that you are properly distributing the trust assets.
Important Aspects of Being a Trustee in California
Because the trustee has quite a lot of power, the trustee also has a lot of responsibilities under California law. That said, a trustee cannot refuse to carry out the terms of the trust and cannot act in bad faith. While the trust may have some provisions limiting the trustee's liability, there are limits to such provisions. When deciding whether you want to serve as a trustee, you should consider the following:
- Time. It will require a lot of the trustee's time to administer the trust. A trustee is tasked with many different responsibilities specific to the trust, like filing income and estate tax returns, selling real estate, maintaining property and records (income and expenses), and finding and notifying creditors and beneficiaries, among other things.
- Skills. Do you have the right skills or expertise to administer the trust? Mistakes and mismanagement can happen when the trustee does not quite or fully understand what to do and how to carry out their responsibilities. Sometimes, more complex trusts will require more analysis and administration.
- Cost. Most trustees, like professional fiduciaries or trust companies, charge fees. You should be aware of what compensation you are entitled to--which may be limited by the trust instrument. While a family member appointed as trustee may not charge a fee, they are typically entitled to be compensated but may have to hire an attorney, and that will have an additional cost. These and more are things to consider. The burden could be a lot.
Many times people choose close friends or family members as trustees, but you may want to consider someone with the time and expertise even if that will cost more than a family member. In the end, it may save you and your loved ones time and money. Depending on the terms of the trust, you may be able to appoint or nominate a more experienced or skilled trustee to administer the trust. Moreover, if there is discord among family members, sometimes it is a better decision to appoint a professional fiduciary or trust company to administer the trust because distrust among family members could lead to prolonged litigation.
Common Problems with Trust Administration in California
Unfortunately, problems frequently occur in trust administration. Some of the more common issues are described below. The fundamental issue creating these problems, however, is typically poor drafting of the trust.
Beneficiary Death or Incapacity
Beneficiaries may have passed away or become incapacitated since the trust was created. The trustee needs to ensure all beneficiaries are still living and able to receive their distribution. If not, the trustee will likely need advice from counsel or instructions from the court on how to proceed. Sometimes, the trust will have specific provisions about how assets are distributed if a beneficiary is deceased at the time of distribution, and other times the California Probate Code has default provisions to account for such scenarios.
When trusts are not reviewed and their terms are not kept current, it is possible that some of the language used will become irrelevant. When this happens, the trustee will typically seek court direction on the best way to proceed.
Beneficiary Disagreement / Breaches of Fiduciary Duty
Sometimes, a trustee will take certain actions which the beneficiaries find disagreeable. When this happens, it might lead to a beneficiary filing a petition with the court, seeking to surcharge the trustee for the breach. In such cases, the beneficiary may also be able to recover their attorney's fees, depending on the severity of the breach and the potential recovery.
This is especially true when the trustee has discretion over the distribution of assets and a beneficiary disagrees with how the trustee uses that discretion. Another example is when a beneficiary does not agree with the actual terms of the trust and contests it. Litigation could ensue. While trust contests are less common due to changes in law pertaining to trust contests, it is always a concern for trust administration.
With all these problems, delays occur. Delays are costly. It is best to avoid these problems by consulting with legal counsel to ensure that the actions taken in trust administration are in compliance with the law.
Contact a Trust Administration Attorney in Orange County Today
At Giammichele Law, APC, our Orange County trust administration team handles all types of trusts and helps clients understand the trust administration process and handle the various different issues that may arise in trust administration in order to complete the administration and distribute the assets to the beneficiaries. Contact us today by filling out the online form or calling us at 949-339-1845 to schedule a Consultation.