The average person has had little experience dealing with trusts and often has many questions upon becoming a trustee for the first time. The purpose of this article is to provide a general overview of your duties and responsibilities as trustee.
After the Settlor’s death, the Trust continues as a management and distribution vehicle that will exist only as long as is necessary to identify and collect trust assets, pay debts and taxes, appraise trust property, and distribute the trust assets to the beneficiaries (or in further trust, depending on the terms of the Trust).
Depending on how quickly assets and liability information can be assembled, you may be able to make preliminary distributions of a portion of the trust estate within a few weeks. After you have obtained all appraisals and can project the expected tax liabilities and expenses with more accuracy, you may distribute more of the trust estate, making certain to reserve sufficient funds for payment of estate taxes, income taxes, administrative expenses, attorney and trustee fees, debts and liabilities, etc.
Under the Trust Law, you owe a duty to the beneficiaries to make them aware of the existence of the Trust and to keep them reasonably informed of the Trust and its administration. State law also requires that you provide the beneficiaries with certain information on reasonable request and that you give a full accounting and report of all trust transactions not less often than annually or at the termination of the Trust or on a change of trustee (see Probate Code section 16062), unless the Trust instrument or a beneficiary waives this requirement in writing.
You must keep careful records of all trust transactions. In particular, you must keep an accurate bookkeeping ledger, with descriptive notations of all income and receipts, noting for each entry the date, the person to or from whom payment was made or received, the nature of the payment, and the amount. All disbursements for trust expenses should be made by check. You should never pay cash for any trust expenditure. You should keep a file or set of files in which you keep a copy of the trust instrument and your financial records for the Trust, including bank statements, statements of income received, bills for expenses, bank deposit receipts, canceled checks, copies of tax returns, and copies of correspondence relating to the Trust.
Under the terms of the Trust and the Trust Law, you are entitled to reasonable compensation for your services as Trustee. In determining reasonableness, factors such as the amount of time spent in trust administration and the size of the trust estate may be considered. You do not have to accept a trustee’s fee. If you do, you should know that it is reportable as taxable income.
You should obtain a taxpayer identification number for the Trust. You should transfer the title on all bank and brokerage accounts standing in the name of the Settlor to your name as Trustee. Use only the new taxpayer identification number on such accounts and not the Settlor’s or your own social security number.
Depending on the size of the estate, estate tax returns may be required and estate taxes may be payable. Under current law, an estate tax return is required in any case in which a decedent’s gross estate exceeds $5,430,000 in value. The estate tax returns, if required, and any tax due, must be filed within nine (9) months following the date of death.
As part of the process for collecting asset values, you will need to obtain appraisals for values of trust assets. To determine the necessity for and in connection with the preparation of the estate tax returns, you will need to know the fair market value of all assets in the Trust or owned by Settlor outside the Trust at the time of death. For real property, closely held business interests, and tangible personal property, qualified appraisals will be required. For federal estate tax purposes, you may elect to use the values of the assets of either the date of death or at the “alternate valuation date,” which is either 6 months after death or, for assets sold or distributed before that date, the date of sale or distribution. For federal and state income tax purposes, all of the property in the Trust will receive a new income tax basis equal to the fair market value at the date of death (or the alternate valuation date, as explained above). This new basis is the measuring point for any capital gains in the event you sell any property of the Trust or for any depreciation deductions pending administration.
Final state and federal personal income tax returns will be required for the period of January 1 through the date of the Settlor’s death. Such returns will include income generated by the assets of the Family Trust before the date of death. Income generated by the assets in the Trust after the date of death is reportable on the fiduciary returns.
As your attorney, my job is to assist you in carrying out your duties as Trustee. I will help you collect and value assets, pay debts and taxes, and prepare the necessary transfer documents in connection with the eventual distribution of trust property to the appropriate beneficiaries. I can also prepare any accountings and reports to be given to the beneficiaries, if required, and can give you advice concerning tax matters and prepare any required estate tax returns.