Trust administration in California begins with a required probate code notice to all trust beneficiaries and heirs of the settlors. California Probate Code Section 16061.7 states that such notice must be sent within 60 days of the death of a settlor and allows the recipient of the notice to request a copy of the trust. After receiving the mailed notice, the recipient has 120 days from the date of mailing to file a trust contest. If no contest is filed within a 120 days, then the notice recipient may forfeit their right to file a contest. But if no notice is mailed, the statute of limitations in which a trust contest could be filed is much greater, and could be up to at least four years.
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Trust administration requires that a trustee to adhere to specific guidelines in the handling of the trust estate. The rules and guidelines to trust administration can be complex and the responsibilities associated with trust administration should not be taken lightly.
Trustee Notice Requirements
In accordance with California Probate Code Section 16061.7 trust administration requires effective notice:
- The notification by the trustee is usually required to be served on each beneficiary and each heir of the deceased settlor.
- The notification by trustee shall be served by mail to the last known address or by personal delivery.
- The notification by trustee shall contain the following information: the identity of the settlor or settlors of the trust and the date of execution of the trust instrument; the name, mailing address and telephone number of each trustee; the address of the physical location where the principal place of administration of the trust is located; and, any additional information that may be expressly required by the terms of the trust instrument.
- A notification that the recipient is entitled, upon reasonable request to the trustee, to receive from the trustee a true and complete copy of the terms of the trust.
As part of the initial trust administration process, you will be required to provide decedent’s original which is lodged with the court. California law requires that a decedent’s will be lodged with the court for safekeeping, even if no probate is going to be opened.
Trust Administration of Real Property
In those cases where the trust holds real property, a number of steps must be followed to vest title in the successor trustee so that the property can be managed, sold, or distributed as part of the trust administration.
- An Affidavit of Death of Trustee and Consent of Successor Trustee should be recorded against each real property held in the Living Trust. This Affidavit is recorded with a certified copy of the death certificate. When it is recorded, it changes the title of the property from the trustee (usually the settlor) who has died and into the names of the new trustee(s).
- A Preliminary Change of Ownership Form must be completed and recorded at the same time. This form informs the county recorder why the Affidavit is being recorded.
- Exemption form must be sent to the county assessor’s office if the Living Trust will transfer the ownership of the real property from parents to children or in any other manner exempt the property from property tax reassessment. A grandparent/grandchild exclusion is also available for the portion of the property passing to a grandchild if their parents are deceased.
Trust Administration of Other Assets
As the administrator, you will need to identify all of the other trust assets, e.g. bank accounts and investment accounts, and have the title to those assets transferred into your name as successor trustee. In order to accomplish this, you will first need to obtain a federal tax identification number for the trust. It is essential that you obtain a federal tax ID number for the accounts that are in the name of the trust so that any income earned from those assets is reported correctly to the IRS.
Transference of Trust Accounts
Once you have obtained a federal tax identification number, you should have all trust accounts transferred to your name as successor trustee, using the new identification number.
Often, the trust administrator will discover that all of the decedent’s assets were not placed in the trust. This means that those “non-trust” assets are subject to probate. One the ways this is avoided is to include a “pour-over provision in a will. This provision directs that any assets not placed into the trust during the deceased’s lifetime will be put into the trust at death and distributed according to the terms and conditions of the trust. If the proper documents are in place, a simple petition can be filed and a probate can be avoided.
Certification of Trust
To assist you in collecting the assets and transferring them to your name as successor trustee, you will need a Certification of Trust, which will identify you as successor trustee and set forth the scope and extent of your powers. The Certification will also set forth how title to the assets should now be held and will recite the new tax identification number to be used for all trust accounts. You will want to present this Certification to any financial institution holding trust assets in order to have the assets transferred to your name.
Once you have all of the assets identified and under your control, be sure to prepare an inventory of all trust assets and obtain appraisals for trust assets that do not have a readily ascertained value. Assets such as real property should be appraised immediately from the date of death.
Trustee’s Duty to Pay Settlor’s Debts and Taxes
As a successor trustee, it is your obligation to pay the settlor debts and taxes owed by the estate. If the total value of the settlor’s estate is more than the exemption amount (currently $5,000,000) then it will be necessary to file IRS form 706 federal estate tax return. The total value of the settlor’s estate includes the value of both trust assets and no-trust assets.. Remember that this exemption is affected by gifts the decedent made during their lifetime.
IRS Tax Form 706
The IRS requires that the federal estate tax form 706 be filed within nine months of death. The form is filed in addition to an Income Tax Return form 1040 which must be filed for the year the deceased passed-away and for every year the trust continues after the death of the original trustor. For a married couple, after the first death, there is generally no estate tax payable, due to the unlimited marital deduction.
IRS Income Tax Returns
The successor trustee is responsible for filing the last income tax returns for the decedent. When filing, all assets owned by the deceased must be valued as of the date of death. Remember, the successor trustee may be held personally liable for unpaid taxes and should make sure that all tax liabilities are satisfied prior to distributing the trust assets to the beneficiaries of the trust.
A Living Trust is only revocable while the settlor(s), the person(s) who created the Living Trust, are alive and well. Once the settlors lose capacity or passes away, their Living Trust becomes irrevocable. The California Probate Code requires that a successor trustee who is administering an irrevocable trust prepare and render an accounting of their actions and administration of the trust. To satisfy that legal requirement, you must keep detailed accounting records of the trust and should deep track of all the trust money you are spending to wind up the decedent’s final affairs and maintain records of all deposits and disbursements from the trust.
A successor trustee can begin distributing trust assets after all of the assets have been identified and valued, all debts and taxes have been paid, all tax returns filed and tax liabilities satisfied, and an accounting has been prepared. Distributions to beneficiaries must be done according to the terms of the trust.
A trust can direct the trustee to distribute trust assets outright to the various beneficiaries or that the assets be held in trust for beneficiaries. Assets to be held in trust will require the trustee to establish sub-trusts for those beneficiaries. The successor trustee is required to identify any sub-trusts and to ensure that those sub-trusts are properly funded.
A subtrust is created when married couples have a living trust that contains an AB or ABC trust. When the first spouse dies, the deceased spouse’s assets remain in trust and available for use by the surviving spouse. Keeping the decedent’s assets in trust avoids transferring them to the surviving spouse’s estate and shelters the assets from future estate taxes.
The living trust holds all assets jointly for both spouses while they are alive. After the first death, the trust is split into two or three subtrusts, depending if it is an AB or an ABC trust. For an AB, the subtrusts are the Survivor’s Trust and the Family Trust. For an ABC, added to the Survivor’s Trust and the Family Trust is the Marital Trust. The Survivor’s Trust is created to hold the Surviving Spouse’s assets. The deceased spouse’s assets are generally split between the Family Trust and Marital Trust. The Family Trust is not part of the surviving spouse’s estate upon death. This trust can pay income to the survivor, and the survivor can also have access to the principal under certain circumstances. The above scenario cannot be used for IRAs and retirement funds, which must be held in the owner’s name.
The purpose of the agreement is to protect the successor trustee while obtaining an agreement among the beneficiaries for the final distribution of trust assets. This agreement , when properly prepared, recites key components of the trust administration which include:
- Identifying the successor trustees;
- Outlining the distribution provisions;
- Reciting distributions;
- Proposing a final distribution plan;
- Obtaining consent from beneficiaries for final distribution and waivers of accounting.
Potential Issues Between Beneficiary and Trustee
A trustee can prepare a formal accounting of their actions and seek court approval of those actions and of the proposed distribution scheme. By petitioning the court for such approval, the trustee minimizes the risk of future litigation, since a beneficiary who does not object in the court proceedings is typically barred from later complaining about your administration of the trust, if you have properly disclosed your actions.
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