When you become the Successor Trustee of someone’s living trust in California — either upon their incapacity or upon their death — you immediately assume important legal responsibilities towards both the beneficiaries and the Settlor’s creditors. This article gives you a general understanding of what to do.
Your first step is to “safeguard the trust assets against theft, vandalism, and waste”. To assert control re-title the assets into your name as successor trustee. Re-titling entails an “Affidavit of Successor Trustee” and a “Certification of Trust”. These require proof of the existing trustee’s incapacity (e.g., one or two doctor’s letters of incapacity) or death (i.e., a certified death certificate), as relevant, and of your authority to step-in (i.e., the trust with any amendments). If the Settlor is deceased a “statutory notice of change of trustee” is required to be mailed to the trust beneficiaries and heirs within 60 days. Lastly, here, if the Settlor is deceased, you may need obtain a federal taxpayer identification number for tax reporting purpose should the trust continue into a subsequent year after the Settlor died.
Once in charge, you must understand the trust’s terms. If vague or defective, then you may need to petition the court for instructions, or to petition to reform the trust either to correct a drafting error or to conform the trust to the true intentions of the Settlor. Your primary duty is “to administer the trust for the exclusive benefit of the beneficiaries strictly according to the terms of the trust” as relevant to the trust. Typically, during periods of the Settlor(s)’s incapacity , this means satisfying the Settlor’s health, maintenance and support needs. It may also entail gifts to others, to churches or charities. The trust may authorize you to use your discretion (independent judgment) regarding distributions to beneficiaries (such as in the division of personal effects, or how much to spend on them). Make sure that your discretion is appropriate so that it cannot be characterized as self-dealing or neglectful. If you are also a beneficiary, recognize the inherent conflict of interest and do not allow self-interest to cloud your judgment.
Be advised that you have a duty “to keep the trust assets productive” and to invest them according to the standards in the trust or else in the Probate Code. Generally speaking, assets are invested to earn a reasonable rate of return with a reasonable level or risk, balancing the competing interests of the current beneficiaries (to receive income) and remainder beneficiaries (to inherited appreciated assets), that is income vs. appreciation.
In addition, you owe a duty to the Settlor’s creditors (including the IRS and CA FTB). That is, any debts and on-going expenses owed personally by Settlor are answerable by the living trust. You must make reasonable inquiry as to such debts and taxes and, when settling a decedent’s trust, to keep a sufficient reserve.
No matter what, keep a diary and meticulous records of any and all expenses (including invoices) paid out of the trust, receipts of income (e.g., interest) , other property received (e.g., refunds, inheritances) your reimbursable costs, your millage, the time you spend, and your decisions while you are trustee. If an accounting is or becomes required then you will need these to prepare an inventory and appraisal. The accounting reveals all the trust’s financial activity between when the prior trustee ceased being trustee and the end of the accounting period.
Settling a deceased settlor’s trust may entail funding further trusts, such as special needs trusts (for disable beneficiaries) or the irrevocable bypass trust that holds the deceased spouse’s share of the estate and the revocable survivor’s trust which holds the surviving spouse’s estate. Often, however, a deceased spouse will leave assets outright to the surviving spouse or children.
If some of the Settlor’s assets were inadvertently “left out of the trust” then, you may need to probate the “pour over will” (if the Settlor is deceased) to transfers them into the trust, or else, if the assets are sufficiently described in a schedule of “pledged trust assets” to a declaration of trust, then you may petition the court to transfer the assets by court order into your name as trustee.
Lastly, as a non professional trustee do not expect to administer the trust alone. Hire professional assistance, including qualified attorneys, accountants, tax preparers and appraisers, as needed.
Editor’s Note: Dennis A. Fordham is a living trust attorney licensed to practice law in California and New York. He earned his BA at Columbia University, his JD at the State University of New York at Buffalo, and his LLM in Taxation at New York University. Dennis concentrates his practice in the areas of estate planning and aspects of elder law. His office is at 55 1st Street, Lakeport, California. He can be reached by e-mail at dennis@dennisfordhamlaw.com or by phone at 707-263-3235.
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