Trust planning is popular in estate planning and is a crucial part of many estate plans. Even so, the concept of trusts and how they work can be a mystery to many and, to add to the mystery, many people choose friends or family members to serve as Trustee in the event of disability or death. That isn’t a bad thing but non-professionals should get some guidance on what steps they should take in the process of administration.
What Every Trustee Should Know
1. A Trustee Must Follow the Terms of the Trust
Legal title vests in the Trustee but the Trustee can’t just do whatever they want. The trust provides specific direction on how trust funds are to be used. In the case of a revocable trust that becomes irrevocable at death, there is usually some direction regarding paying bills and expenses and then distributing trust assets.
2. Trustees Must Keep Accurate Records and Provide an Accounting
A Trustee still has to account. While many like the idea of using a Trust to “avoid probate” that doesn’t mean that the job is any easier or less work than that of an Executor going through probate. A Trustee is required to gather assets, report to beneficiaries, account for income and expenses, and provide supporting documentation for all aspects of the administration. The only significant difference is that this information is reviewed and approved by the beneficiaries of the trust rather than the court.
3. Irrevocable Trusts Have Separate Tax Filing Requirements
A Trust that has become irrevocable due to the death of the creator (called either a Settlor or Grantor) is a separate legal entity with a separate taxpayer identification number and it must file a separate income tax return. This is different from an estate tax return which is only filed for estates with a value of more than $15 million – instead this reports income, such as interest and dividends, and expenses that are earned or expended during the administration of the trust. It must be filed annually until the trust administration is complete and the trust has terminated.
4. Having a Trust Doesn’t Always Avoid Probate
Probate may still be necessary. Even when a person has been careful to title all of their assets in the name of their trust or they have named their trust as a beneficiary on all assets, many times there are still assets that require probate. This is due to things that are outside of the control of the trust creator. Examples include insurance premium refunds, some income tax refunds, the return of excess funds from pre-paid expenses like nursing care or assisted living expenses, etc.. Some states have options for a truncated probate process for small assets while others require complete administration no matter the amount.
5. Long-Term Trust Administration Requires Ongoing Planning
Trusts that are ongoing require a plan. Trusts that are established to benefit a person for a specific period of time – o their lifetime- require a plan. The Trustee needs to familiarize themselves with the beneficiary’s needs, wants, sources of income and other assets and to determine what the likely needs will be in the future. Then the plan needs to be revisited periodically to determine what adjustments need to be made so that the needs of the beneficiary are met. In addition to the needs of the beneficiary and the terms of the trust, the Trustee must also consider and balance the needs of the remainder beneficiaries.
Get Guidance from an Experienced Trust Administration Attorney
Serving as a Trustee can be a rewarding way to honor someone’s wishes and provide for the people they cared about—but it is, first and foremost, a job. It carries real legal duties, ongoing responsibilities, and potential personal liability if those duties aren’t met. The five points above are only a starting point; every trust is different, and the right course of action depends on the specific terms of the document and the laws of your state. Before taking action, a newly named Trustee should consult with an experienced estate planning attorney and other qualified professionals to understand exactly what the role requires—and to avoid costly missteps along the way. Contact our team today to schedule a consultation!