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I recently met with a client to discuss setting up her trust. When we began discussing who she would want as her trustee, she immediately said she wanted her sister to be her trustee. I always appreciate clients who know the terms they want in their estate plan, but I always inquire as to their reasons for selecting a specific person. This client told me that her sister named my client as her trustee. My client then explained that it was payback for my client’s sister naming my client as the trustee of her own trust. I found her reasoning to be humorous and not all that unusual. I’ve had many clients similarly express a desire to “burden” a certain friend or family member with the task of administering their trust.
The idea that being a trustee and administering a trust is a burden reserved only for your worst enemy is a common sentiment among my clients. My impression is that most clients fear trust administration because it is something they do not understand. For most people, the process of trust administration is something they might have to deal with once in their lives. As a result, few clients have the chance to really understand trust administration to a level that no longer makes it seem intimidating. Marie Curie once said: “Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less.” My goal with this article is to provide more understanding, so you can fear less when it comes to being a trustee.
For a trustee, knowing what the big picture looks like can provide an overall roadmap to make sure a trust is properly administered. As a general rule, the trustee’s job is to gather up assets, pay obligations, and make final distributions.
When explaining a trust to a client, I often describe the trust as a box that we put our assets in. As part of setting up the box, the creators of the box prepare a set of rules for how the assets in the box should be handled. The trustee’s job is to read the rules and follow them. With that in mind, the first place a trustee should start is the trust itself. While an attorney would never put unnecessary provisions or directions in a trust (/s), there are certainly some parts of the trust that are more important than others. A trustee should carefully review the trust to ensure that they understand the provisions that appoint them as trustee and the provisions that detail distributions from the trust.
Trustees should also ensure that they understand the powers that they have as trustees. On more than one occasion I’ve had to deal with a trustee who believed they could do whatever they want. The reality is the trustee must adhere to the provisions of the trust and to state and federal law. Moreover, trustees are fiduciaries, meaning they must act in the best interest of the beneficiaries of the trust.
Lastly, trustees should become familiar with the other estate planning documents. Specifically, the trustee should review any wills signed by the creators of the trust and verify whether the will is a special type of will known as a “pour-over will.” Pour-over wills are part of most estate plans that utilize a trust because they ensure that any property not moved into the trust will be assigned to the trust when the creator of the will dies. Trustees should also look for a certification or affidavit of trust that can be used in lieu of the full text of the trust when dealing with financial institutions.
Often when I’m meeting with clients for the purpose of setting up a trust, we spend a long time discussing who their trustee should be. One of the things that I emphasize is that the client should pick someone who is organized and detail oriented. If you fall into that category, this is your time to shine. A lot of time, energy, and hard feelings can be foregone if you get things organized from the start.
The best way to stay organized is to use a system that works for you. When I help administer trusts, I like to use a spreadsheet that lists all the trust’s assets and liabilities. There are hundreds of Excel templates online just for this purpose. I recommend that the trustee look through a few and find something that will work for them. I also like to have a binder that has a copy of the trust, multiple death certificates, and space to add bank statements, insurance policies, real estate information, and other important documents that I’ll need during the process of administration. I also like to keep a separate space in the binder where I can keep track of the time and expenses that I’ve incurred during the administration.
The purpose of this step is to set the trustee up for success. Record keeping can become tedious, but if the trustee has a system in place to keep track of important information, it is more likely that the trustee will actually keep track of the information and have it available if a beneficiary requests it.
With a binder and spreadsheet prepped and ready, the trustee can begin the process of gathering up the trust’s assets. Trust assets usually include real estate, bank accounts, life insurance proceeds, retirement accounts, investment accounts, vehicles, and personal property. Trustees should obtain records of all assets and place copies of deeds, account statements, life insurance benefits, vehicle titles, and other financial records in their binder and record the balances in their trust spreadsheet.
When requesting information about accounts, trustees should be prepared to provide proof of their authority to deal with other institutions on behalf of the trust. Usually, this means providing proof of death by a death certificate and proof of authority in the form of a copy of the trust. If the creator of the trust signed a certification or affidavit of trust (see above) the trustee should utilize the certificate or affidavit of trust rather than the full text of the trust when dealing with third-party institutions like banks, life insurance companies, and title companies.
It almost always makes sense for the trustee to open a separate bank account for the trust for purposes of holding assets during the administration process. In order to do so, the trustee will need to obtain a tax ID for the trust. The tax ID can be obtained online through the IRS. However, some trustees may find it easier to consult with a certified public accountant (CPA) to obtain the tax ID.
In an ideal world, the trustee would be able to gather up all assets before making payments from the trust; in the real world, delays in obtaining and/or liquidating assets may result in the trustee having to pay off certain obligations before all assets have been gathered up. The trustee should diligently seek out all obligations and make sure that copies of any loans, credit card balances, bills, and other fees are placed in the binder and recorded in the spreadsheet. Often, creditors will ask for a death certificate and copy of the trust. If a trustee will seek compensation for their efforts as trustee, the trustee should keep track of the time they spend working on trust administration, the miles they drive, and any out-of-pocket expenses. The trustee should take reasonable steps to ensure that the obligations of the estate are paid from the trust’s assets.
One obligation that should not be forgotten about is that the creator of the trust will need to have a final income tax return prepared on their behalf. It is also possible that an estate return will be necessary. The trustee should coordinate with the personal representative to ensure that a final income tax return is prepared and filed. In addition, the trustee should consult with an experienced CPA regarding any taxes owed by the trust.
Once the assets have been gathered up and the obligations of the trust have been paid, it is time to start giving stuff away. As a practitioner, I will usually send out an accounting of the trust prior to any distributions to show the beneficiaries of the trust every asset and expense of the trust. I will also include an estimated amount that will be distributed to each beneficiary. I will then request that each beneficiary sign off on the accounting. The purpose of sending out the accounting is to be as transparent as possible with how the trust was administered. The accounting allows for trustees to review records and ask questions. Where appropriate, I also make my trust administration binder available electronically for the beneficiaries to review.
Once the beneficiaries sign off on the accounting, the trustee can begin making distributions to the beneficiaries of the trust. The first place to start is a personal property memorandum, assuming one was left by the creator of the trust. A personal property memorandum is a list of specific gifts left by the creator of the trust. For example, it might specify that a certain child receives the family piano or that a granddaughter should receive an engagement ring.
Once the personal distributions have been made, the trustee’s job is to distribute the remaining property according to the terms of the trust. Often, this will be equally among any living children of the person who created the trust. That said, each trust has its own quirks and exceptions, so it is critical that the trustee read the provisions regarding distributions from the trust carefully.
Have you been appointed as a trustee? Or are you hashing out the details of your estate plan? Our qualified estate planning attorneys at Pearson Butler are here to help. Contact our full-service Utah law firm online or at (800) 265-2314 for a free consultation.
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