Top Six Pitfalls of Trust Administration.
Trusts have understandably become very popular for estate and disability planning. They are excellent tools which will carry out your wishes and reduce costs associated with court administration and estate taxes. In general, a trustee’s job is much easier than a court-appointed executor. But it is still a job! All trustees are legally responsible to the beneficiaries to properly administer trusts. As with any job, acting as trustee can either be done well or poorly. This article focuses on the six most common pitfalls in acting as trustee.
1. Getting the property appraised
When the creator of a trust dies, it is the trustee’s duty to put together an inventory of all trust assets and to get qualified appraisals of the asset’s fair-market value. This appraisal is important for two reasons: The first is because the fair-market value is used to determine whether or not there are any estate taxes owed. The second reason is because the assets receive what is referred to as a “step-up” in basis in the property. When trust assets are sold by the trustee or trust beneficiaries, there may be capital gains taxes due on the profit from the sale. The profit is calculated by deducting the basis and the costs of sale from the gross proceeds. What is left over is subject to capital gains taxes. Because the trust assets receive a “step-up” in basis at the fair-market value as of date of death, there is often no capital gains tax at all. The trustee’s failure to get qualified appraisals, which will be used for computing taxes, may create liabilities for both estate taxes and capital gains income taxes. If a trustee created those liabilities because of failure to do their job, they can be held personally liable to both the estate and the beneficiaries.
2. Sending notice to the beneficiaries
The Probate Code requires that the trustee shall send a notification to the beneficiaries whenever a revocable trust becomes irrevocable, such as the death of one or more of the creators of the trust. The notification by the trustee must be served not later than sixty (60) days after the death of a trust creator.
A trustee who fails to serve the notification, as required by the statute, is responsible for all damages, attorneys’ fees and costs caused by the failure to comply. Moreover, service of the notice limits the time within which a beneficiary may bring an action to contest the trust to not more than one hundred twenty (120) days from the date the notification is served on the beneficiary. This simple action reduces liability to both the trust and the trustee.
3. Clearing title to real estate
When the creator of a trust dies, the trustee must record a certification of trust and an affidavit of death in each county where the decedent owned real property. Until the trustee takes this step, they have no authority to either borrow against the property or sell it.
The trustee is also required to prepare and file a preliminary change of ownership report with the county assessor of each county where the decedent owned real property. This form must be filed even in non-probate transfers, “including a transfer through the medium of a trust,” within one hundred fifty (150) days after the date of death.
I have seen instances where the trustees failed to take this action and something later happened to the trustees. It is much more difficult for the beneficiaries to try to pick up the pieces when the trustees are not available. More often than not it requires having to file a petition with the court so as to be given authority to do what the trustees should have done in the first place. The trustee’s failure may also create problems with re-assessments resulting in increased property taxes.
4. Funding sub-trusts
Most family trusts provide that, upon the death of the first spouse, the assets are transferred into at least two sub-trusts. The purpose of these sub-trusts is to preserve the estate tax exemption available to each spouse, while giving the surviving spouse the use of assets and the rights to receive income and other distributions. The trustee’s failure to transfer assets into sub-trusts can result in estate tax liabilities and may frustrate the decedent’s wishes as to how the assets be distributed.
Because the trustee acts as a fiduciary to the trust estate, the trustee can be sued by the beneficiaries for the damages caused by failing to carry out their duties.
5 Keeping separate accounts and records
One of the biggest problems that arises is when a trustee fails to maintain proper records of all trust accounts. The law requires that the trustees regularly account to the beneficiaries for all income, expenses and distributions. Accountings limit the trustees’ liability to the beneficiaries. Failure to account makes the trustees liable for their actions and may result in their being removed as trustee.
6. Tax returns
When the trust’s creator dies, the trust is required to file annual income tax returns for the balance of its existence. In addition, the trustee must file estate tax returns for those estates at or exceeding the exemption limit. The estate tax return is due nine (9) months after the date of death, unless an extension is obtained. Failure to file either return will result in the levy of penalties and interest against the estate. Trustees who fail to see to it that the returns are filed in a timely fashion will be personally liable for the cost to the estate.
Conclusion
As you can see, being a trustee requires organization and a willingness to seek help in getting the job done. It is true that trusts can be easier to administer than a probate estate, but that is only the case when you schedule each step and take it in a timely fashion.
The best way to make sure you do not fall into any of these of pits is to use other resources such as accountants, attorneys and appraisers with whom you can review your action plan.
If you accept the job, take care of business!
By Christopher C. Jones © March 2004
