Estate Administration and Probate
Family members commonly believe that their deceased loved one properly planned because the decedent had a will, had created and funded a trust, or had designated certain individuals as beneficiaries. In fact, sometimes the decedent’s plans may actually have a negative impact on the family with regard to estate taxes, and/or Medicaid planning strategies for the surviving spouse. If this occurs, experienced elder law estate planning attorneys can advise you about post-mortem planning techniques that may rectify the situation and create more favorable tax consequences for surviving family members. Assets that were “exempt” for Medicaid while the spouse was living may now be “available”, such as the home. It is always a good idea to review the estate plan after the first spouse dies.
Unlike a will, a trust is a private document and need not be filed with the probate court on death. Nonetheless, the successor trustee must still take steps to administer the trust: Beneficiaries must be contacted and kept informed; the grantor’s assets gathered and invested; any debts paid; potential creditors notified; taxes filed and paid; assets and/or income distributed in conformity with trust provisions to beneficiaries, etc.
Successor trustees often lack the time, resources or knowledge to personally administer the trust, and therefore may call upon legal, accounting and investment professionals for assistance.
Successor Trustee’s Obligations
Below is a summary of the basic obligations of a successor trustee of a trust.
Show loyalty of all trust beneficiaries. Even if the successor trustee is himself a beneficiary, as trustee he has the duty of loyalty to all the other beneficiaries, including the contingent beneficiaries.
Deal impartially with beneficiaries. The successor trustee may not favor the lifetime income beneficiary over the interests of the remainder beneficiaries who will take after the death of the lifetime beneficiary.
Make the trust property productive of income. This duty is violated if the successor trustee keeps large amounts in a checking account that does not pay interest and does not grow in value. There may be other trust assets which do not produce income, such as a vacant home. These assets must be disposed of or made productive within a reasonable time, since they are considered “wasting” assets which deplete the estate. The trustee may be liable for failing to convert “wasting” assets into productive assets.
Invest only in prudent investments. The prudent investor rule requires:
• Exercise reasonable care and caution as part of an overall investment strategy which incorporates risk and return objectives reasonably suitable to the trust.
• Diversity of investments, unless specific reasons are present not to diversify.
• Review at investment and implementation of a formal investment plan.
• An investments strategy that considers both the reasonable production of income and safety of principal, consistent with the fiduciary’s duty of impartiality towards the beneficiaries and the purposes of the trust.
Account to beneficiaries and keep beneficiaries informed. Upon commencement of the trust administration, the successor trustee must inform all income and remainder beneficiaries of his acceptance of the trust. If a beneficiary requests it, the successor trustee is required to provide that beneficiary with a complete copy of the trust document, including any amendments as well as relevant information about the assets of the trust and the particulars relating to administration. In addition, even without request, all beneficiaries must be provided with an annual statement of the accounts of the trust.
Keep trust assets separate. The successor trustee must keep the assets of each trust separate and keep his personal assets separate from the trust assets. This requires separate bank accounts, brokerage accounts, and safe deposit boxes for trust assets. It is particularly important that you keep the assets of the deceased spouse’s Credit Shelter Trust (also known as the AB Trust or Bypass Trust), if they had one, separate from all other assets, since these assets will pass tax-free at the death of the surviving spouse. If the surviving spouse, acting as trustee, comingles any other assets in with these assets (or even simply takes the assets out of the trust and mixes them with her personal assets), in addition to breaching fiduciary obligations, the successor trustee will have subjected these otherwise exempt assets to taxation when she dies.
Avoid conflicts of interest and self dealing. The successor trustee cannot buy assets from the trust or sell his personal assets to the trust. He cannot favor himself as a beneficiary at the expense of any other remainder or potential remainder beneficiary. He cannot make any distribution to anyone or any withdrawals from the trust unless specifically authorized by the trust to do so. Conflicts of interest and self-dealing are often vague and ill-defined. If you are a trustee and have any concern as to any specific action or situation, consult with an experienced attorney.
Preserve the trust assets and uphold the trust. The successor trustee is liable if trust assets are lost, misplaced or destroyed because of inattention or negligence. The successor trustee should always be certain that all trust assets are appropriately protected and insured.
File tax returns and pay any tax due. Each trust has a tax year, which like the personal tax year, ends annually on December 31. The trust must have a taxpayer identification number and file a tax return no later than April 15 of the year following. The income tax return for the trust is Form 1041, the Fiduciary Income Tax Return. If this is not filed annually and timely, penalties and interest may be assessed. There may be other tax returns and taxes, like the decedent’s personal tax return, which the trust may be required to file, and the successor trustee is responsible for doing so.
We recommend that successor trustees consult with a qualified and experienced Certified Public Accountant. You should not assume that your long-time CPA is necessarily experienced or qualified, since fiduciary taxation differs significantly from taxation of individuals and corporations, the types of accounting that CPA’s are generally most familiar with. Before deciding on a CPA for the trust, determine whether that individual has experience and qualifications in this specialized area.
Distribute income. Income generally includes interest earned on bank accounts, CD’s, bonds or mortgages, and dividends on stocks and mutual funds. The current income beneficiaries are entitled to all of the income annually. Beneficiaries cannot choose to take less than all of the income, and the trustee is under an obligation to distribute it. What is income? Generally, it includes interest earned on bank accounts, CD’s, bonds or mortgages, and dividends on stocks or mutual funds. Certain types of income may also consist of principal as well as income. If this is the case, the portion that is income is distributed and the portion that is principal is retained. If there is any question about what is principal and what is income, consult with the trust’s CPA.
Handle trust expenses. The administration of the trust necessarily requires certain expenditures. Example of expenses include CPA fees, legal services, the cost of insurance or real estate taxes on real estate owned by the trust. Every check written by the successor trustee (except to pay himself trust income) and each direct charge to a trust’s bank or brokerage account, is considered a trust expense. Like receipts, expenses must also be appropriately apportioned between the income side and the principal side.
Delegate investment functions if necessary. In many instances, individual trustees are not equipped to comply with their investment responsibilities. In these cases, investment professionals may be retained. The successor trustee is obligated to exercise reasonable care, judgment and caution in selecting an investment agent. Trust administration specialists may be found through brokerage houses, banks and some law firms. Note that “delegating” differs from merely obtaining investment advice. It contemplates turning over the investment functions to an advisor as opposed to simply seeking advice, and then acting or not acting on that advice. Even if investment functions are fully turned over to an agent, the successor trustee is still required to monitor the agent’s investment performance.
A successor trustee should not assume that he has satisfied his investment responsibilities just because he has consulted regularly or occasionally with a stockbroker. Further, stockbrokers are often unaware of the prudent investor rule and fiduciary duties of a successor trustee.
Good record keeping. Keeping accurate, up-to-date and comprehensive records is one of the most difficult jobs a successor trustee must perform. If the successor trustee becomes disabled or dies, another person must be able to seamlessly step into his shoes and understand the current status of trust matters. Trust records are also vital because the trustee must be able to explain any trust matter if the IRS or remainder beneficiary requests it. The CPA selected to handle the trust can be very helpful in setting up a sound accounting and record-keeping system. If keeping records is too burdensome for the successor trustee, he can retain the trust department of a bank, the CPA or the law firm to do the work on a fee basis.