Eight Steps for New Trustees
by James L. Cunningham Jr., Attorney at Law
I realize that you have just faced the difficult truth of a loved one passing away.
Unfortunately, I must tell you that another difficult truth awaits: If you were named as the Trustee of an estate, it can be more than a little stressful going through a loved one’s things, finding their financials and deeds, paying their debts, paying their taxes, administering the Will and Living Trust they left behind, and distributing assets to heirs in a fair and legal way.
It’s often a long process, requiring a year or more, and I’m even more sorry to tell you, it’s a process fraught with peril.
Let’s Assume Your Loved One Left a Living Trust
This article assumes that your loved one left behind a signed Living Trust, along with what’s called a “Pour-Over Will.” If so, you should be enormously grateful. I haven’t space in this article to deal with cases in which no trust has been left behind. For such cases, please take a look at our discussions of probate. Just know that in most states, if there’s no trust, you must go to probate court—even if there’s a Will.
Every day my office works with heirs and trustees who have gotten themselves in a bind, and sometimes even legal trouble, because of the way they have misunderstood the steps they had to take, take quickly, and take in the right order on a deceased person’s Living Trust.
To illustrate the way this works, let’s imagine Scott, whose mother just passed away—a typical client of my office in California. Scott has two siblings, who are fairly close, and do want to be helpful. Everyone was devastated at the funeral, but they agreed to meet back at their mother’s house a week later to go through her things. Dad passed away years ago.
Scott & His Siblings Get an Inkling
As they stand in the silent living room, it slowly dawns on Scott and his siblings that they have an enormous job ahead of them. Where to start? One by one, they start opening drawers. Hey, here’s something–$1,000 in this drawer!
“Let’s keep this simple,” suggests Scott, “We can just split this three ways. Easy peasy.” They decide to divide it up on the spot.
Already they’ve violated the law. There’s been no accounting, no inventory, the estate’s debts have not been paid, and no legal process has been followed on distributing that money.
Step 1: Finding All the Important Documents
Scott and his siblings do know that their mother and father created a California Living Trust, and it’s….somewhere. They have a vague idea of what a Living Trust is, and that it’s important. Along with a Last Will and Testament, of course. They rummage around until they find a thick binder labeled Estate Plan. Sigh of relief: here are all the docs. And they’re signed! If they weren’t signed—a common problem—they’d be useless.
“First question,” asks one of the siblings, “who is the trustee?” They leaf through, and discover the trustee is Scott. The others turn and look at Scott. Why him? Indeed, the other siblings might be upset, but in fact, an enormous burden has now been placed on Scott’s shoulders. Even legal liability for his next actions.
If Scott understood the full scope of what he now must do, along with the personal liability he now faces, he would immediately contact an estate attorney to help with trust administration. Why? Because estate attorneys aren’t just for writing up wills and trusts, they’re for administering trusts effectively after someone passes away.
Because he’s in California, Scott would also make sure he found an attorney knowledgeable specifically in California Trust Administration.
The Estate Plan documents must now be guarded with great care, as they represent everyone’s legal rights and responsibilities to the assets. If the other siblings are beneficiaries, they might rightfully ask for a copy.
If the Estate Plan is located just after someone died, and the deceased left any written funeral, cremation, burial, or memorial instructions, you must also locate and guard those immediately.
Step 2: Listing All Assets, In or Out of the Trust “Box”
As Trustee, it’s now Scott’s job to make a detailed list of everything that is held within, or was left out of his parent’s California Living Trust.
If I were Scott’s attorney, I would explain that the Living Trust is like a box with instructions written on the side. I would help him understand that list, find the stuff in the box, and give him the steps to move forward. I’d also help him take those steps.
Let’s take a quick look at the “box.”
Assets, including real estate, bank accounts and brokerage accounts are put into the box we call a Living Trust to make them easy to pass on to the trust’s “beneficiaries”—without any court involved. The writing on the side of the box instructs the Successor Trustee what to do with the items in the box after someone dies. Assets are “put” into the box by deeding real estate to the trust, and by the changing the account holder on a financial account to the name of the trust.
Since personal items like furniture do not have deeds or documents of title, a separate document named the “Assignment of Personal Property” transfers those items to the trust. A properly structured Living Trust plan will often include this document. But many attorneys who aren’t expert lawyers will nor provide their client with this document. Sometimes a “Pour-Over Will” which is a specialized Last Will & Testament tied to trust, can transfer the items of personal property to the trust. However, if the property is over a certain value, Scott wil have to go to Probate Court.
Scott’s list must include all these deeds, bank accounts, credit card accounts, utilities, loans, investments, contracts, business assets, utility bills, mortgages, personal loans, tax returns, medical bills, as well as the funeral bill. Indeed, if his mother’s records aren’t perfect, Scott may not find out about some debts and assets until months later, when all the statements have come in the mail, or creditors realize his mother has died.
As Scott begins to make his list, he also realizes that some things are not in the trust, and that those items will take special attention, and may even be a huge problem. If his parents were wise, for example, they would not have put their IRA accounts into the trust. Inherited IRAs are a subject too complex for this article, but know they are fraught with danger, and like life insurance, generally should not be placed in a Living Trust. On the other hand, Scott’s parents might easily have accidentally left a real property out of their trust. Errors like this definitely require the help of an attorney, and might well force Scott and his siblings into probate court.
When it comes to Life Insurance, the person or people named as beneficiaries get the death benefit on the death of the insured. Typically this is the person who took out the policy of life insurance. These beneficiaries of the life insurance policy must make a claim on the policy to get the death benefit – the money. This is not Scott’s job, but it is likely that Scott will be involved in the process in addition to the people inheriting the life insurance.
We’ll talk more about things “not in the box” near the end of this article.
When Scott makes his list, he needs to keep it available to the other beneficiaries of the trust, in this case his brother and sister.
Step 3: Carefully Review the Provisions of the Will and Living Trust
Again, if you’re lucky, the decedent created a Living Trust to hold all their stuff, and a Pour-Over Will to put everything else into the trust after they died. As Trustee, you, like Scott, must read the Living Trust, very, very carefully. Recognize that when all the original grantors passed away, the trust immediately become irrevocable. Even though you are now the Trustee, you cannot change it, and you are legally bound to its provisions. Sometimes, when one spouse passes away, all or part of a living trust may also become irrevocable. Keep some key questions in mind as you read:
- Are there special instructions regarding the loved one’s funeral, cremation, or burial?
- Who gets the loved one’s personal effects?
- Who gets any specific bequests?
- Who gets the loved one’s residuary trust?
- What was the date and location where the trust agreement was signed?
- Who signed the trust as witnesses and Notary Public?
The savvy move is to write down a summary of these and other important points that you can refer to easily.
Step 4: Meet With a Trust Attorney
As I said, you can and should work with a Trust Attorney to help you with Trust Administration on anything but the simplest estates. Not only will you spare yourself enormous hassles and errors, but working with an attorney will greatly reduce your personal liability as the Successor Trustee.
If Scott were my client, I’d tell him that his agenda with me might be pretty broad, and include:
- Determining the accurate value of each asset of the estate.
- Resolving any outstanding debts and expenses.
- Strategizing on reducing or eliminating estate and other taxes.
- If in California, working to prevent a reassessment of real estate under Proposition 13.
- Fully administering a trust in conjunction with his family’s existing advisors and fiduciaries.
- Strategizing on the complex issues involving retirement accounts.
- Distributing assets to the proper beneficiaries as quickly and efficiently as possible.
Why does Scott need to pay an attorney? Well, as you might already see, there are a lot of important things Scott doesn’t want to get wrong. Getting them wrong could lead to lawsuits, enmity among siblings, and worse. Plenty of estates are completely lost to legal fees among siblings as they fight things out in courts.
Without professional help, it’s pretty easy for Scott to improperly account for assets, or get the date-of-death values wrong. It’s also pretty easy for some terrible tax disasters to occur, especially with things like his parent’s retirement accounts.
Step 5: Value the Assets as of the Date of Death
A vital responsibility of a Trustee is to establish date-of-death values for all your loved one’s assets. You can see how time will be of the essence in this job.
All financial institutions where the deceased’s assets are located must be contacted to obtain these date-of-death values. For assets including real estate, personal effects including jewelry, artwork, collectibles, and closely held businesses, that’s a different job—possibly requiring a professional appraiser.
We’re talking about the value of everything, here. The value of all of the decedent’s assets will need to be established, including those passing outside of the trust, in order to determine if any estate taxes or inheritance taxes will be owed, as well as increases in value after the date of death, when assets are liquidated.
Assets likely to move outside of the trust may include life insurance, IRAs, 401(k)s and annuities with named beneficiaries.
Step 6: Pay the Bills
Yes, the bills of someone who has passed away must be paid. The estate owes this money, not Scott, but all those debts must be settled before there can be a distribution of anything to Scott and his siblings. And yes, that will delay a distribution—another reason to seek professional help.
This is also the time that Scott, as the Successor Trustee, will need to evaluate whether trust assets, such as real estate or a business, should be sold.
The Trustee is also responsible for paying the ongoing expenses of administering the trust, such as legal fees or accounting fees. Then there are ongoing expenses like utilities, insurance premiums, mortgage payments, and homeowner’s or condominium association fees.
Step 7: Pay the Taxes of the Deceased and of their Estate
Scott is now responsible for filing his mother’s final income tax return which is the IRS Form 1040. Then, if the Estate earns any income at all after her death, Scott must file a separate income tax return on behalf of the Estate, both state and federal. The federal form is IRS Form 1041. This is required to be filed if the trust or estate has more than $600 in income. IT is an optional filing if its less than $600 in income.
Not a DIY project.
Step 8: Distribute the Remaining Assets to the Beneficiaries
One of the very last steps, only to be taken after all of the above has been settled, is to distribute trust income or property to trust beneficiaries, strictly according to terms of the Will and trust.
This can be a big job. You need to have a clear accounting available for all the beneficiaries. You will need to complete transfer deeds and other change-of-title documentation. You will need to work closely with each financial institution involved.
Sometimes the trustee is supposed to hold onto assets for beneficiaries and heirs such as minor heirs, irresponsible beneficiaries, or loved ones with special needs. Alos, some people who inherit do so in a way that protects the inheritance from divorce, creditors and taxes.
Once again, to avoid problems, including personal liability for screw-ups, I strongly advise you to work with an estate or Living Trust Attorney along with a good accountant, and if the assets are significant, a financial advisor. If you’re in California, make sure any lawyer you find is an expert California Living Trust attorney, not someone who does this as a sideline.
What If An Asset Is Not In The Box? Approaching Probate
You will recall that when Scott created his list way back in Step 1, he found a number of assets which had never been put into the “box” of the trust. Scott really does need to talk to an attorney about these items, and in order to get control of such assets he may very well need to open a court-administered probate. Probates can be protracted and expensive, and avoiding probate is one of the primary purposes of a Living Trust.
The probate experience does vary greatly state by state. As a California Estate Planning Attorney I can give you a little good news: California has implemented an easier and expedited court procedure which can transfer certain assets into a trust after a death so that the estate can be administered without further delay.
Heggstad Petition in California under California Probate Code Section 850
Let’s say that Scott’s mother inherited a home from a sibling which was not in her Living Trust when she died.
California Courts allow what is known as a Heggstad Petition, named after a case, Estate of Heggstad, (1993) 16 Cal. App. 4th 943, which first created the concept. A Heggstad Petition is a magic elixir of sorts that keeps families out of a year-long probate ordeal.
Using the Heggstad case as precedent, courts allow Trustees to file an administrative petition asking that assets found outside of the trust be properly transferred to the trust.
“How do I do that?” Scott might well ask. I would explain to him that the petition must show that the specific asset is mentioned in the trust, and that the trust creator (called a “Trustor” or “Grantor”) intended that the property be in the trust. Courts will look to language in the trust specifically mentioning the asset.
In some trusts, the real property is not specifically mentioned. A recent case called Ukkestad v. RBS Asset Finance, Inc. (2015) 235 Cal. App. 156 loosened the requirement that the asset be specifically mentioned if the trust states that “all personal and real property…wherever situated” be held in the trust.
The Ukkestad case makes the process easier, but it’s still preferable to have a specific reference to the assets subject to the petition. As Ukkestad is a relatively recent case from 2015, it’ll take some time to see how other courts will interpret and implement this rule of law.
What You Don’t Know Can Hurt You
Please be aware that I have not given you a comprehensive checklist for your new and vital role as Trustee—I’ve just given you the highlights.
Few people have the background, training, or knowledge to administer a trust without making some serious mistakes. Unfortunately, many new trustees get far into the process before they realize they’ve gone off track and need an attorney to help out. All too often that happens only after siblings have become estranged, unnecessary taxes have been paid, and laws have been broken.
CunninghamLegal has more than 25 years of experience handling the intricacies of California trust administration, and we would love to help you get this right—so that the legacy of your loved one brings support and comfort to the living, instead of hassles and heartache.
About the Author
Attorney James L. Cunningham, Jr. is a Specialist in Estate Planning, Trust, and Probate Law, as certified by the State Bar of California Board of Specialization. As an attorney for over 25 years, Jim has helped countless families and individuals in all areas of estate planning.
