What Every Lawyer Should Know about Trust Administration
by Jacqueline Real-Salas
(County Bar Update, March 2007, Vol. 27, No. 3)
What Every Lawyer Should Know about Trust Administration
By Jacqueline Real-Salas, a partner with Calleton, Merritt, De Francisco & Real-Salas, LLP in Pasadena, where she practices in the areas of estate planning, trust administration, probate, and conservatorships. In addition to her J.D. degree, she holds an LL.M. in Taxation. The views expressed are her own.
One of the most rewarding aspects of trust administration work is that no two administrations are alike. Although some of the process is repetitive, each administration will vary depending on the estate planning documents, the type and size of the assets, and the dynamics between the people involved. A general overview of the routine steps typically involved in the administration of a trust after the settlor’s death follows.
1. Educate the client about the process, and assign responsibilities.
Shortly after being retained to represent the trustee of the trust, a detailed letter should be sent to the client explaining the trust administration process, the importance of administering the trust in a timely fashion, and the client’s duties and potential liability in his or her capacity as trustee. This letter also should confirm the trustee’s, attorney’s, and CPA’s responsibilities during the process. It is good practice to send a letter to the CPA and other parties involved confirming their respective roles in the administration. Further, the client should be advised to maintain detailed records of all receipts and disbursements so that a proper accounting can be provided to the beneficiaries when the time comes. If the trustee expects to collect fees, he or she should be reminded to keep accurate time records.
2. Gather information early in the process.
Gathering information about the decedent’s assets, liabilities, and income is one of the most tedious phases of the trust administration process. Therefore, the trustee should get an early start on this. The attorney should carefully review all relevant estate planning documents, property and buy-sell agreements, and any prior gift, income, and estate tax returns. If “tax-sensitive” retirement assets are involved, the beneficiary designation forms and plan documents also should be reviewed. A spreadsheet showing the assets and liabilities of the decedent should be prepared, together with a list of all trust beneficiaries and heirs at law. Once the assets have been identified, appraisals establishing their value as of the date of death and the alternate valuation date (or the date of an earlier sale or distribution) should be obtained.
3. Carry out ministerial tasks, and calendar important deadlines.
The decedent’s original will must be lodged with the superior court of the county where the decedent’s estate may be administered. (Cal. Prob. Code §8200.) If the trust became irrevocable upon the death of a settlor or if there was a change in trustee of an irrevocable trust, the Notification by Trustee under Probate Code Section 16061.7 must be served within 60 days from the date of death. Other important notices that may need to be given include the Medi-Cal notice to the Department of Health Services, which must be given within 90 days from the date of death (Cal. Prob. Code §§215 and 19202), and filing of the Change in Ownership Statement with the County Assessor’s Office, which is due within 150 days from the date of death.
The trustee must decide whether to make the Internal Revenue Code Section 645 election to treat income received during the administration period as taxable to the decedent’s estate. Using IRS Form SS-4, a new taxpayer identification number should be obtained and provided to the trust’s payors. Further, the IRS should be notified of the fiduciary relationship by filing a Form 56.
There are several important dates that must be calendared. These include the deadlines for filing the estate tax return Form 706 and making a qualified disclaimer, both of which are nine months from the date of death; the alternate valuation date, which is six months from the date of death (or the date of an earlier distribution, sale, or other disposition); the deadline for filing gift, personal income, and fiduciary income tax returns, which is April 15 of the following year unless a Section 645 election is made; the date the first trust accounting is due; the various deadlines applicable to retirement assets; and the dates when the relevant statutes of limitation will expire. Note that if the trust owned a business entity, additional deadlines may apply. A comprehensive administration checklist can be found in CEB’s California Trust Administration Section 13.2.
4. Get the work done.
Now that steps 1 through 3 are complete, the estate tax return, if necessary, should be prepared. The trustee should develop a plan for meeting the trust’s cash needs if a tax is due, such as determining whether a deferral of taxes will be requested under Internal Revenue Code Sections 6161 through 6166, and orderly liquidating assets as needed. (Note that, in most cases, payment of the tax must be made when the return is initially due.)
If the trust owned real estate, the affidavit of death of trustee and related documents, including any applicable real property tax reassessment exclusion forms, should be prepared and recorded or filed as appropriate.
A spreadsheet showing a tentative allocation of assets between subtrusts or beneficiaries should be prepared for the trustee’s review, and preliminary distributions should be considered. The income tax consequences related to the timing and distribution of certain assets must not be overlooked. The trustee should be reminded of the new income tax basis of the trust assets based on date of death or federal estate tax values, and the income tax consequences of delaying distributions when the trust contains pecuniary gifts.
5. Distribute and tie up loose ends.
Once all the tasks described above are complete and the trustee has provided any necessary accountings to the beneficiaries, the final distributions should be made, and receipts should be obtained. It is always wise to hold back a reserve to cover any taxes or other liabilities that are reasonably anticipated. The reserve should be distributed once the statute of limitations on each item of concern expires. At the end of the administration, a closing letter should be sent to the client outlining any remaining tasks for which the trustee is responsible.
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