What is Trust Administration?
Trust administration is very similar to probate except it involves a private administration of the affairs of the deceased person and not a public administration through a probate. Often, the timeline to complete a trust administration is shorter than probate because there are fewer hurdles to overcome as a result of it being handled privately.
Although trust administration is done privately, do not make the mistake and assume there is nothing to do when someone passes away because they had a trust. There is always something to do. To that end, please review our section on the four administrative steps that need to be undertaken each time someone passes away regardless of how the assets are owned.
Next, in 2009 Arizona significantly changed its trust law and the duties of a successor trustee during a trust administration. Because the law is relatively new, there has been little court guidance about what is expected of a successor trustee. Although is not a formalized process like probate, there are numerous requirements that previously did not exist. Many professionals (CPA’s and financial advisors) are unaware of this change and mistakenly believe that nothing has changed. This is a trap for the unwary and a large source of litigation between successor trustee(s) and beneficiaries. In short, the Arizona Trust Code cannot be ignored during an administration, and if one has not done this before one should get legal guidance to avoid exposing oneself to personal liability.
A Trustmaker Needs to Be Empowered to Act on Behalf of the Trust
If you are a nominated trustee, the first place to start is to review the trust agreement itself and see what it is asking you to do. Once you have a general understanding of the outcome to be achieved, one needs to decide if you want to serve and, if so, be empowered to legally act as the successor trustee to begin the administration process. If you cannot prove you are the proper trustee, no one will transact business with the trust because they do not know if you are actually the person in charge. Even the original trustmaker had to be able to demonstrate that they were the trustee of his or own trust to anyone who asked. Now that the original trustee is unavailable to continue serving as trustee, any successor will have to be show that they are the proper person to take over the trust affairs. The trust agreement will explain who is next in line to replace a trustee. Once that person is known, and agrees to serve, in order to prove he or she is the proper successor trustee, most attorneys create a “Certificate of Trust” that details the trustee’s appointment, the circumstances surrounding how they came to be appointed, and where in the trust agreement it sets this forth. Obviously, each trust agreement and personal circumstances as to how someone became a trustee is unique, and the certificate of trust needs to clearly set forth this information so someone else can reasonably rely on the fact that they are dealing with the correct successor trustee in connection with trust matters.
Further, a trust is simply a contract made between the trustmaker and the trustee that provides instructions as to how things are supposed to happen at either the death or disability of the trustmaker. If a trustee is not empowered to act, no trustee can handle even the simplest of trust activities. As a result, every good trust agreement should contain a “powers” provision that specifies what a trustee can do. If a specific power is not listed, the presumption is that the trustee cannot do that particular activity. This trustee powers provision in the trust agreement also should be referenced in, and attached to, the certificate of trust discussed above. From this information, people with whom the successor trustee does business can rely on the fact that they are dealing with the correct person as well as they have the power to undertake the activity in question.
A Successor Trustee is a Fiduciary, and Needs to Act as One
When you agree to serve as successor trustee, you also agree to act in a fiduciary manner for the benefit of the trust beneficiaries. This means that you are willing to put beneficiary interests before your own even if you happen to be a beneficiary too. Fiduciary law does not demand absolute perfection in judgment, but it does demand absolute loyalty, absolute impartiality, absolute honesty, and absolute disclosure, even if that disclosure hurts. You are serving for the benefit of someone else other than yourself, and thus need to act fairly and prudently. Favoring one beneficiary (including yourself) over another is dangerous even if the trust allows it. Favoring one beneficiary over another is favoritism, and favoritism never plays well before a court or a jury! If you are the beneficiary being favored, greed and favoritism for your own benefit is going to turn a jury against you twice as fast and hard as only one of them.
A trustee’s duties include the duty of loyalty and impartiality, duty to preserve assets, duty to account. Generally, it is not doing one of these things that get most trustees into trouble. A word about each:
Loyalty and Impartiality – Do not enter into a transaction that benefits you at the expense of the trust. If a conflict arises between the trust and a third party, always put the trust first.
Preservation – Collect and protect the assets so that the trust assets are preserved for the benefit of the heirs. This includes being careful that the trust assets are not at market risk where they could suffer any losses during the trust administration. This also means avoiding mixing your own personal assets with the trust assets you are administering.
Accounting – Beneficiaries are entitled to an accounting of what transpires during the trust administration. Keep detailed records of all assets received, held, and disposed of, and all receipts and disbursements, giving the date, amount, and explanation of each. In addition, at least one time per year, each qualified beneficiary must be given the right to examine the books and records of the trust. The Trustee would be wise to get the trust beneficiaries to sign receipts for the accountings as they are rendered.
A Trustee Must Follow the Arizona Uniform Trust Code Requirements
The AZ Uniform Trust Code (UTC) imposes some substantial duties on a trustee after someone passes away. For instances, a trustee must not withhold information from qualified beneficiaries. These heirs are entitled to a copy of the planning documents (last will and testament, trust agreement, and any trust amendments), notice, and inventory and accounting information as soon as 60 days after death. This information should include how to make objections, how to file a creditor claim, contact data for the trustee, and inquire about a beneficiary's tolerance for having trust assets exposed to financial market risks. In certain instances, the Arizona Attorney General also is required to be notified when a charity is a beneficiary.
The UTC requires continuing disclosure throughout the trust administration. For example, additional accountings are due at least annually and at the conclusion of the administration, and a beneficiary should have the opportunity to seek judicial review. If a trust administration has assets located in other states besides Arizona there may be additional requirements imposed by each state where the asset is located. If you are the successor trustee, tread carefully here because if you do not follow each states' statutory requirements, you could be personally liable to the beneficiaries for any harm they suffer as a result.
Do the Assets Line Up With the Instructions?
Ninety percent of the trust based plans our office reviews at the time of an administration reveals that the assets do not line up with what was intended by the trust itself. More simply, the assets are not owned by the trust and therefore the trust does not control (at least initially) the distribution. Generally, if the assets line up with the trust planning, it will be less expensive to go through the trust administrative process than probate. However, there are still many things that need to be done by the successor trustee before the assets of the trust can or should be distributed to the beneficiaries. If the assets are titled to someone or something else, then the administration is more complicated. Understanding the ownership of the assets is critical in understanding how they are to be properly distributed. If you are interested in learning more about how title impacts distribution, please watch our webinar “Are You an Heir”.
Does a Trustee Need to Do a Division?
Many trusts established by a husband and wife require a division of the trust into two sub-trusts when the first spouse passes away. This is required in order to take advantage of the deceased spouse’s estate tax exemption or what we call the estate tax coupon. The coupon amount is set by Congress, and is the amount of assets one can leave to heirs before estate taxes are imposed. If one leaves everything to his or her spouse at death, then the deceased spouse’s assets become includable in the survivor’s estate in addition to any assets they themselves own when they die. This is tax inefficient and wastes the deceased spouse’s coupon if assets are passed this way. In order to capture the benefits of both spouses’ coupon, a couple needs to plan for it in their estate plan and the survivor needs to properly allocate the assets (the division) between the two sub-trust shares at the conclusion of the trust administration. The Internal Revenue Service is particularly interested to see if this step is accomplished when the first spouse dies as it often generates additional revenue for it when it is not done. A trustee will know they need to do this if they find trust language stating the trust needs to be divided on the first death. Thus, a trustee needs to be looking for this and make the proper division to avoid losing one coupon. You can download and listen to a greater discussion of this topic on our audio Estate Planning 101 presentation.
If the division is not done, and either the planning goals (for instance the surviving spouse wants to change beneficiaries or remarries) or the law changes it is a recipe for a dispute. Beneficiaries who were once in and may have been later removed are going to feel jilted. Beneficiaries who were not originally in, now are and at risk of losing the benefit of what may have been intended. The trust agreement will instruct the surviving trustmaker what he or she can do to modify the planning after the first spouse dies. The wise trustee makes sure that all the steps are properly completed to avoid causing a dispute later should circumstances change. And, if the survivor is not authorized to make such a change should he or she be advised not to make it.
What is Portability and How Does it Work?
Any unused portion of an estate tax coupon from one spouse can be transferred to the surviving spouse. For example, when the first spouse died, if the trustee only used a portion of his or her estate tax coupon when they did the division of the assets between the sub-trusts, the difference between what was used and the full coupon value can be transferred to the surviving spouse increasing the survivor’s ability to shelter assets from further estate tax. This is called portability. The end result is the survivor gets an increased coupon amount and solves many problems that are created when assets pass outside the trust tax planning provisions because they were not correctly titled. However, to capture this benefit, one has to affirmatively elect portability. This is done by filing IRS Form 706 within nine months of the spouse’s date of death. The current version of Form 706 is 28 pages long and requires the help of a Certified Public Accountant (CPA) to complete it. Not all CPA’s do this type of work and if they do it incorrectly, the successor trustee is potentially at risk for not hiring a person with requisite skill and knowledge to provide this assistance to the trust.
Concluding the Administration
Once the final tax returns are filed and closing letter received, it is time to distribute the assets according to the terms of the trust. If there is a surviving spouse, be sure to retitle the assets to the correct sub-trust share and complete the division to preserve the estate tax coupons. If there is not a surviving spouse, the trust will direct the trustee how to make a distribution to the heirs. Absent clear instructions, a trustee should seek guidance to make sure it is properly done. Finally, a trustee is going to want to have each beneficiary sign a receipt and release that acknowledges that person has received everything that he or she is supposed to receive and that the beneficiary releases the trustee from any further responsibility in connection with the trust administration.