The average person has had little experience dealing with trusts and often has many questions upon becoming a trustee for the first time. The purpose of this memo is to try to anticipate your questions by providing you with a general overview of how trusts work and your duties and responsibilities as trustee. Through our experience in helping people administer trusts, we have found that many individuals have a lack of understanding concerning the way living trusts operate following a death. It is true that a living trust in many cases drastically reduces the costs and delays involved in passing on assets at death. A living trust accomplishes this feat by avoiding probate. However, even without a probate, there are many administrative chores which have to be completed, legal documents to be prepared, tax returns to be filed, and other matters which take some time and cost money. One of the primary goals of this memo is to give you a better understanding of this trust administration process.
For most clients, an estate plan includes a living trust, pour over wills, durable powers of attorney and advance health care directives. It also includes a schedule A to list the assets you have including real estate, bank accounts and business interests like S corporations, partnerships and LLCs. We prepare the deeds to transfer your real estate to your trust and ensure that those deeds are properly recorded with the appropriate county recorder’s office. This is a complete package.
WHAT IS A TRUST?
A trust is a legal relationship, usually evidenced by a written document known as a “Declaration of Trust” or “Trust Agreement,” whereby a person, called a “Settlor”(also known as the “Trustor” or “Grantor”), transfers property to another person, called a “Trustee,” who holds the property for the benefit of another person, called a “Beneficiary.” The same person may occupy more than one position at a time. For example, in the typical living trust, as long as a Trustor is alive, he or she is also the Trustee and Beneficiary. Upon the death of a Trustor, in the case of a married couple then the surviving spouse continues as the Trustee, or in the case of a single person, a “Successor Trustee” (child, friend, bank, etc.) takes over as Trustee and follows the Trustor’s instructions, which are set forth in the Declaration of Trust or Trust Agreement, concerning the distribution of property and the payment of taxes and expenses.
LIVING TRUSTS AND PROBATE AVOIDANCE
Although living trusts have been around for centuries, only recently have they achieved a high degree of popularity among the general public. The reason for this surge in popularity is that living trusts help to avoid “probate.” “What is probate, and why is everyone trying so hard to avoid it?” The short answer is that probate is a court-supervised procedure for collecting a deceased person’s assets, paying debts and taxes, and distributing the property to the decedent’s beneficiaries (either according to the instructions the decedent set forth in his or her will or as determined by state law if the person died without a will). The probate process usually takes a minimum of eighteen (18) months to complete, although it often takes longer in larger or more complicated cases. Probate is not a tax. When people refer to the high costs of probate, they are usually referring to the fees for the attorney and personal representative. In California, these fees are calculated as a percentage of the gross (not net) value of the assets in the estate. For example, let’s say that D, who is not married, dies owning one asset, a house worth $1,000,000 with a mortgage of $600,000. D has a will which leaves the house to D’s two children, A and B. A is named as executor. The probate fees for this case, based on the $1,000,000 gross value of the house, would be as follows: $23,000 to A’s attorney (plus any “extraordinary fees” which are billed hourly) and $23,000 to A (if A decides to take a fee), for a minimum total fee of $46,000. These fees are calculated without regard to the $600,000 mortgage, since the fees are charged on the gross (not net) value of the estate. One of the reasons living trusts have become so popular in recent years is that real estate prices in California have sky-rocketed, leading to much larger estates and, hence, higher probate fees. In states where real estate prices are lower or where attorney’s fees for probate work are based on an hourly fee schedule rather than a percentage scale, living trusts are not as common as they are in California. Living trusts avoid probate with respect to those assets that are owned by the living trust at the time of death. In other words, living trusts avoid the court procedure otherwise required to transfer assets to a person’s beneficiaries at death. However, as we will explain below, even though no court procedure is involved, that does not mean there is nothing to do. The living trust makes administration much easier, but does not do away with administration altogether. For example, assets still have to be collected and managed pending distribution to the beneficiaries, appraisals of assets have to be made, and debts and taxes have to be paid, tax returns may be required and legal documents must be prepared in connection with the distribution of the trust property to the beneficiaries. These activities are very similar to a probate. The major difference is that, with a living trust, everything is handled privately, without court supervision, which makes for a faster, less expensive administration process. Post-death administration of a living trust will take time and cost money because of legal fees, accounting fees, asset transfer fees, and your own Trustee fees if you decide to accept any. The beneficiaries of the Trust will also have to understand that the process may take longer than they anticipated. However, by comparison to probate, these delays and costs are substantially reduced, often resulting in time savings of many months and costs savings of fifty to ninety percent.
WHAT IS THE COURT INVOLVEMENT?
There is also a popular misconception that the existence of a living trust avoids all possibility of court involvement. This is true only if all of the deceased Trustor’s assets were properly funded into the living trust. For example, under California law, if there are certain assets held outside the trust which exceed $150,000 in gross value, a probate will be required for those assets in order for you, as Trustee, to collect those assets and add them to the trust. Moreover, if at any time a beneficiary of the Trust believes that the Trustee has acted improperly or without regard for the beneficiary’s interests, the beneficiary may file a petition with the court to force the Trustee to make a full report and accounting or to redress an alleged breach of trust, including removal of the Trustee or surcharge against the Trustee. Finally, circumstances may arise where there are questions about whether the Trustee should or should not take certain actions (such as selling a business interest or real property, commencing litigation, etc.). In such a case, it may be advisable for the Trustee to petition the court for instructions whether to proceed in a certain way. The beneficiaries will be given notice of the hearing and will be provided with a copy of the petition that describes the proposed action. The matter will then be addressed in open court and the beneficiaries will have an opportunity to appear in court and be heard. By obtaining an order from the court in this manner, the Trustee may be able to cut off the beneficiary’s right to complain about the particular action if he or she fails to appear in court. Such a petition provides protection for the Trustee if there is a fear that the Trustee’s decision will be second-guessed by a beneficiary. Also, if there is hostility between the Trustee and the beneficiaries, it may be advisable for the Trustee to seek court approval of the Trustee’s accountings in order to minimize any potential arguments with the beneficiaries.
WHAT IS THE ATTORNEY'S ROLE?
As your attorneys, our job is to assist you in carrying out your duties as Trustee as described in this memo. We will help you collect and value assets, pay debts and taxes, and prepare the necessary transfer documents in connection with the eventual distribution of trust property to the appropriate beneficiaries. We will assist your CPA in preparing the allocation schedules for the various Trusts. If any court action is necessary, we will represent you in that action. The exact nature and scope of our services is set forth in the separate engagement letter that you have signed.
WHY USE THE LAW OFFICES OF W. BAILEY SMITH FOR TRUST ADMINISTRATION?
We have over 40 years experience drafting and administering trusts. Our years of experience help us try our best to make your estate plans rigorous and withstand your wishes even in the face of a challenge. Please call (949) 756-0684 for your complimentary consultation today.