April 13, 2010

Trust Administration

In the typical estate plan for married couples, a couple will draft a living trust in which the surviving spouse inherits everything of the deceased spouse. Thereafter, upon the surviving spouse's death, the successor trustee will administer the trust in accordance with the terms of the trust. Most commonly, the surviving spouse's estate will be distributed to his or her children or grandchildren. This process is quite similar to probate in that an inventory of assets is taken, debts and taxes are paid and the remaining assets are distributed.

Instead of focusing on the entire trust administration process, I will touch upon some major issues that are addressed in most, if not all, trust administration cases.

1. Notice

The successor trustee must send a notification to current beneficiaries and heirs at law when a revocable trust or any portion of it becomes irrevocable because of the death of one or more of the settlors or because of a contingency as specified in Prob C §16061.(a)(1) or when there is a change of trustee of an irrevocable trust.

2. Lodging of the Will 

The custodian of the decedent's original will must (1) lodge the original will with the clerk of the county where the decedent resided at the time of death and (2) mail a copy of the will to the named executor within 30 days of learning of the death. Prob C §8200.

3. Updating Title

If the trust held real property, an affidavit of death of trustee would need to be recorded with the County Recorder’s Office so the successor trustee can acquire title to the property. Also, a Preliminary Change of Ownership Report (PCOR) must be filed within 150 days of death. Rev & T C §480(b).

4. Debts

The trustee would also need to ascertain the trust's creditors and pay off any outstanding debts. This might include credit card bills, mortgage payments and various utility bills. This can be done through the collection of the trust’s mail over a period of time.

5. Taxes

In terms of income taxes, IRS Form 56 (Notice Concerning Fiduciary Relationship) must be prepared and filed to notify the taxing authorities that the trust is now irrevocable and has become a separate taxable entity. Also, a separate taxpayer identification number, an EIN, would need to be obtained for the trust.

6. Appraisals

Formal written appraisals would need to be obtained for real property, personal property, intangible personal property and business interest in order to obtain a basis for those assets in terms of capital gains. In particular, the tax basis of those aforementioned assets is pegged to the fair market value of it on the decedent’s date of death. IRC §1014

7. Retirement Benefits

The trustee would need to prepare and mail letters to employers, plan administrators, and IRA sponsors concerning retirement benefits since retirement benefits are often intentionally excluded from being included in a trust.

Again, these are not all the steps that are taken in the trust administration process. Rather, these are the steps that are very common to most, if not all, trust administration cases.