This page will provide an overview of the following: (1) the powers and duties of the trustee of a typical trust; (2) tasks requiring immediate attention upon the death of a settlor (i.e., the creator of a trust), and (3) typical ongoing tasks required of a trustee throughout the period that a trust is in existence.
1. Powers and Duties of a Trustee
A trust is a legal relationship in which one or more persons (the trustee(s)) holds legal title to property and manages it for the benefit of one or more persons (the beneficiaries). The basic duties of a trustee involve the collection, management and investment of trust assets and the accumulation and distribution of income and principal pursuant to the trust. A trustee is obligated to follow the instructions of the trust; use ordinary care and diligence when performing his or her duties as trustee; invest the funds of the trust in a reasonably prudent manner; avoid commingling the trust funds with the trustee's own personal funds; and avoid conflicts of interest between the trustee and the trust beneficiaries. A trustee can be held personally liable to the beneficiaries for his or her failure to comply with these duties.
2. Tasks Requiring Immediate Attention upon the Death of a Settlor
a. Notification to Beneficiaries: The trustee is first required to notify all heirs and trust beneficiaries of the settlor's death and the existence of the trust. If the beneficiaries request it, the trustee must send them a copy of the trust.
b. Inventory and Appraisal: The trustee must prepare an inventory of all of the decedent's assets and determine their fair market value as of the date of the decedent's death. The value of cash-type investments and marketable securities can be easily determined. However, with certain types of property (jewelry, artwork, real estate) it is often advisable to hire a professional appraiser. An appraisal of the trust assets is often necessary for the following reasons: (1) to assist in determining the amount of any estate tax owing upon the decedent's estate; (2) to assist in determining the cost basis in the trust assets, in the event that the assets are later sold for a capital gain; and (3) to assist in determining how to allocate the decedent's assets among the various trusts and/or beneficiaries that may have arisen as a result of the decedent's death.
c. Set Up Trust Checking Account and Record-Keeping System: In addition to preparing an inventory of all assets owned by the decedent, a trustee should immediately set up a trust checking account and begin properly accounting for all trust receipts and disbursements. This will assist the trustee in preparing periodic accountings of the trust.
d. Payment of Claims and Administration Expenses: Trustees are empowered to pay routine administration expenses out of the trust estate, including taxes, accountant and attorney fees, and expenses related to the maintenance of trust property. However, there may be debts or liabilities incurred during the decedent's lifetime for which the trust property may also be liable. In some cases, a trustee may wish to utilize an elective procedure to shorten the period in which the decedent's creditors may bring claims against the trust property. This procedure requires publication of a notice of the decedent's death, as well as notifying all known creditors by mail. This is similar to the manner in which creditor claims are handled in a probate proceeding.
e. Tax Matters: Various tax matters must be dealt with at an early stage. Estate tax returns must generally be filed within nine months after the decedent's death, if the decedent's taxable estate exceeds the federal estate tax exemption amount. The decedent's final income tax return must also be prepared. A taxpayer identification number and related forms must be filed with the IRS and Franchise Tax Board on behalf of the trust. Finally, if the decedent owned an interest in any real estate, it is necessary to notify the county assessor within six months of the date of death.
f. Allocation of Trust Assets to Beneficiaries or Sub-Trusts: Trust assets must frequently be allocated among various sub-trusts of the decedent's living trust. Also, the trust instrument may call for certain assets to be immediately transferred to the beneficiaries of the trust. The above may involve changing title to the trust assets by executing instruments of conveyance, such as deeds or bills of sale.
g. Transfer of Non-Trust Assets: If the decedent owned any assets such as jointly-held property, retirement plans or Totten trust accounts, title to the above assets may need to be changed. If the decedent owned an IRA, it may be advisable to look into the possibility of rolling over the IRA or otherwise distributing the IRA funds. Also, it is necessary to apply for any life insurance benefits owned by the decedent.
3. Ongoing Tasks Required of a Trustee
a. Annual Accounting to Beneficiaries: A trustee is generally required to prepare an annual accounting for the trust and distribute it to the trust beneficiaries. The accountings must contain information about the income, expenses, gains and losses generated by the trust. They must contain an inventory of all assets of the trust, including their fair market value and tax basis. The accountings should also contain various schedules pertaining to sales of trust property, liabilities of the trust, distributions to the trust beneficiaries, and so on.
b. Income Tax Returns of Trust: In general, any irrevocable trust earning at least $600 in gross income in any taxable year must file a fiduciary income tax return (IRS Form 1041) for that year. State fiduciary income tax returns must also be filed annually in most cases. Such returns are due on April 15 of the following year, similar to personal income tax returns. A trustee's failure to ensure that the required returns are filed could cause him or her to be personally liable for penalties and interest.
c. Managing Trust Investments: A trustee is given broad discretion over the choice of investments of trust assets. At the same time, he or she is expected to manage the trust assets in a reasonably prudent manner, to appropriately diversify the trust investments, and to manage the trust so as not to unduly favor either the income or principal beneficiaries of the trust.
d. Disbursements to Beneficiaries: A trustee is required to make distributions of income and/or principal to the trust beneficiaries in accordance with the terms of the trust instrument.
e. Professional Consultants and Fees: A trustee entitled to hire outside consultants (attorneys, accountants, bookkeepers, investment consultants) as is reasonably necessary to assist him or her in administering the trust. The fees for these consultants are generally paid out of the trust assets as administration expenses. A trustee is also entitled to receive from the trust reasonable compensation for his or her duties as trustee. This compensation may be in the form of an hourly fee, or it may be a percentage of the principal balance of the trust.
An irrevocable trust is often a useful device for managing property and, in many instances, saving taxes. However, it must have adequate management and record-keeping procedures. Once these procedures are properly established, most trusts can be managed by individual trustees with minimal assistance from accountants and attorneys. Nevertheless, being a trustee is a substantial responsibility, and a trustee should not hesitate to seek professional investment, accounting or legal assistance whenever questions arise.
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