How to Administer a Trust

As a general overview, the administration of a Trust usually has several phases:

Notice of Administration

Typically, formal Notice of Administration is provided by the Trustee to the Beneficiaries at the beginning of the Administration. When a Trust becomes irrevocable upon death, the Trustee is obligated pursuant to California Probate Code § 16061.7(f) to provide this formal notice within 60 days of the date of death. This Notice addresses two issues: it satisfies the Trustee’s legal obliation to provide Notice of the Irrevocable Trust, and it let’s the beneficiaries know what to expect during the Administration.

Notice of Death

Notice of Death must also be provided to various institutions and agencies. The primary concern is usually to ensure that institutional payments, like social security, don’t continue to be disbursed to the deceased.

Affidavit of Death of Trustee

With respect to real property, Notice of Death must be formally provided to the public by the recording of a formal document referred to as an Affidavit of Death of Trustee. This is required whenever a Trustee of real property deceases, even if the real property is not going to be sold at that time. For example, if two spouses hold the family home in a Trust, after the first spouse dies the Affidavit of Death of Trustee must be recorded - even if the surviving spouse is not going to sell the property.

Trust Assets are Gathered

This is the part of the Administration that requires the most work, and usually the most time. Bank accounts must be formally closed, Brokerage Accounts must be closed or transferred, Life Insurance proceeds must be collected. All of these institutional transactions require substantial amounts of paperwork - and that’s only after the assets have been identified by the Trustee. The deceased’s paperwork must be reviewed to search for assets. Personal effects and tangible property must be sorted through and distributed. The family home and other real properties must be prepared for sale, and sold. This is, generally, a lot of hard work.

Distribution

Most Trusts do not specify at what stage of the Administration distributions are required. While it is typical for Trusts to include provisions withholding distributions to minors, substance abusers, or other individuals with special needs, in a situation where the beneficiaries are competent adults the timing of the distributions is usually left to the Trustee’s discretion. That means that the Trustee is usually not required to wait until “the end” of the Administration to make distributions. Often times, they don’t. It isn’t unusual for a little money to be disbursed in the beginning, and then the rest at the end. Or maybe a lot in the middle of the Administration, and a little at the end. Or maybe most of the money right at the beginning. It just depends upon the nature of the assets in the Trust, and what the Trustee feels is appropriate.

Accounting

The Trustee has a duty to Account to the beneficiaires annually and/or at the termination of the Trust administration (Probate Code § 16062). This is not a “profit and loss statement” generated by Quickbooks, it is a formal legal accounting that must comport with the specific requirements of the law (Probate Code § 16063). This final accounting is significant. It satisfies the Trustee’s legal duty to account to the beneficiaries, and also - as a practical matter - answers the question of “what happened” to the assets of the Trust Estate. While beneficiaries may waive their right to receipt of an accounting (Probate Code § 16064), in most cases the final accounting is a valuable process that diminishes the potential for disputes and provides closure to the Administration.

Estate Taxes

The State of California does not have an Estate Tax, or an inheritance tax. Gifts made pursuant to death are not taxable to the giver or the receiver at the State level.

But, the United States does have an Estate tax (but not an inheritance tax). Assets owned by an individual are taxable upon their death by the Federal Government, but only as to amounts (as of tax year 2020) over $11 million dollars per spouse. Each spouse’s exemption amount is portable, and can be transferred at death to the surviving spouse, provided that certain tax documents are timely filed with the IRS.

This means that as of 2020, and beyond, a married couple’s Trust Estate can be valued up to $22 million dollars before the Federal Estate Tax will apply to the remaining amounts left in the Estate. (Disclaimer: Tax laws and exemption amounts are subject to change at any time based upon the whim of Congress.)

Decedent’s Tax Returns

As part of the Administration, the Trustee will be responsible for ensuring that individual tax returns are filed for the Deceased person for the year in which they died.

Additionally, the Trustee will be responsible for ensuring that tax returns are filed for the Trust Estate. At the time of death, a typical Trust becomes irrevocable. At the time that a Trust becomes irrevocable, it becomes a taxable entity.

Thus, tax returns for the Trust Estate must be provided for every year that an irrevocable Trust exists.