To hear estate planning attorneys talk, you would think a revocable, living trust cures all ills. And yet, so many trust cases find their way to Court—the one place the settlor hoped to avoid by making a Trust in the first place.
While all Trusts can potentially wind up in Court—that venue should be avoided. And the best way to avoid Court is to properly administer the Trust in the first place.
Trust administration is the process that takes place after the settlor (or settlors if it is a jointly created Trust) dies. Trusts don’t magically transfer assets at death, there is a process that must take place to take the assets from the Trust to the ultimate beneficiaries.
A Trust administration is nowhere near as difficult as a probate (sometimes called a probate administration) because, in California, all probates must be done in Court—with all the necessary rules and formalities that go along with probate administration. To administer a Trust, is a whole lot easier, but that’s not to say there is nothing to do.
1. Knowing the Trust Document. A proper Trust administration starts with the Trust documents itself. The Trust should specify what is to occur after the Settlor’s death. This includes paying debts, paying taxes, and distributing property to the named beneficiaries. The Trustee needs to thoroughly read and understand the Trust terms (or have them explained if the terms are difficult to understand—and most are difficult to understand since they are drafted by lawyers).
2. Gathering Assets. The Trustee then must “marshall” the assets of the Trust. This means gathering the assets, finding them, and putting the Trustee’s name as the successor Trustee of the Trust assets. A bank account, for example, held in the old Trustee’s name must be transferred into the name of the new Trustee. Same for brokerage accounts, stocks and bonds, and even real property (where you typically use an Affidavit Death of Trustee to put the new Trustee on title).
3. Administering the Assets. Once the assets are “marshaled” they must be administered. This means different things for different assets. For example, real property may need to be appraised and then sold. Stock and bonds may need to be liquidated, personal property may need to be sold. The administration of assets varies greatly from case to case depending on the type of assets involved and depending on what the Trust requires.
The Trustee is given a “reasonable” time to administer the Trust assets and get them into a condition so that a final distribution to the beneficiaries can be made. There is no hard deadline by which a Trustee must act—the “reasonable” standard is subjective. But typically Trust administrations can take from 6 month to 1 year, or more in complex Trust cases.
During the Trust administration, the Trustee is allowed to make a preliminary distribution to beneficiaries. This allows beneficiaries to receive at least some of their property before the Trust administration is complete.
4. Final Distribution and Reserve. Once the Assets are ready and all creditors have been paid (including all taxes), then the Trust is ready to be distributed. The Trustee must distribute the Trust assets in a “reasonable” amount of time. However, the Trustee is allowed to retain a “reasonable” reserve—everything seems so reasonable. Or at least is should seem reasonable. Where Trustees get in trouble is when they take too long or try to retain too much at the end of the Trust administration.
In fact, there are many points along the way in which a Trustee can be at odds with his or her beneficiaries. And it can be difficult to work through because the beneficiaries are the ultimate owners of the Trust property, but they are NOT the current owners. The Trustee alone has the only say in the what, where, how, why and when of Trust administration.
Yet if a Trustee acts at all times in a “reasonable” way, then the problems can be minimized and the administration can be handled with minimum dispute. The problem, of course, is when a Trustee is NOT acting reasonably…but they think they are. Or when a Trustee is acting reasonably…but the beneficiaries think they aren’t. Differences of opinion on what is reasonable can fan the flames of litigation.
So just where do Trust administrations go wrong? That’s the subject of our next post on Trust Administration.