What is Trust Administration and What Does a Successor Trustee Do?

When a loved one dies and they have a trust, the process of trust administration will need to be undertaken. Many lawyers make trust administration appear simple at the time their client signs the trust document without fully explaining what will need to happen after their death. This is dangerous because often the client never discusses trust administration with the designated Trustee. The person or people that will serve as Trustee need to understand what should happen at the time of death of the person creating the trust.

Over the years, it has been our experience that clients sometimes have unrealistic expectations about how their trust will work when a death occurs. Clients sometimes think that the trust doesn't need any further attention and that everything will happen “automatically” or they don’t realize that they will need the help of an attorney and CPA to administer the trust. These are common misconceptions.

There are administrative duties and expenses that revolve around trust administration that families and Trustees need to understand. One of the most frequent misunderstandings happens when there is a joint trust between a husband and a wife and the trust provisions call for the trust to be split into sub-trusts (most commonly between a Survivor’s Trust and a Bypass Trust). The most common reasons for having this type of trust are estate tax savings, asset protection for the surviving spouse, and divorce-remarriage protection for the first to die’s half of the estate. What is key to remember is that by having a trust, the person or couple setting up the trust will avoid probate (provided the trust is properly funded) and there could be estate tax savings as a byproduct of the estate plan.

Also, probate in California is expensive (often 3X to 5X more than the expense of a trust administration), time consuming (18-24 months on average), and it’s open to the public’s prying eyes.

The first thing that happens in a trust administration, if there is a call for a division of the trust or allocation into sub-trusts for beneficiaries, is that an “administrative” trust with its own tax identification number needs to be set up. This is for accounting purposes. The trust will likely need ...the person or couple setting up the trust will avoid probate... to pay for funeral and possibly last illness expenses of the deceased Grantor as well as bills and other administrative expenses like attorney and CPA fees. Typically, the successor Trustee will set up a new bank account in the name of the “administrative” trust to track all expenses.

There are many other things that can happen in a trust administration.

Some of these things could include:

1. Notifying trust beneficiaries and heirs at law of the death of the Grantor;

2. Obtaining an IRS Tax ID Number(s) for the trust and/or sub-trusts;

3. Filing a final income tax return for the decedent;

4. Filing a death tax return;

5. Filing a trust income tax return annually for as long as the trust is held open;

6. Publishing a legal notice in a local newspaper regarding the death of the Grantor of the trust;

7. Marshalling all of the assets together and protecting the trust assets;

8. Depositing the decedent’s Will with the County Clerk of the Court

9. Opening a bank account for the trust;

10. Paying financial and last expenses of the decedent;

11. Collecting life insurance policy proceeds;

12. Determining if a formal probate needs to be opened with the court for any assets not titled in the trust;

13. Notifying all banks and financial institutions of the death and that they are the nominated Successor Trustee;

14. Notifying the V.A. (if applicable) and Department of Health Services of the death;

15. Determining Beneficiary status of all the decedent’s retirement accounts. For most 401Ks and IRAs, a stretch out is available for the beneficiary if the proper steps are taken;

16. Obtaining valuations on all property as of the date of death of the decedent including real estate and business interests;

17. Determining if an estate tax is due at the federal or state level on the decedent’s Estate;

18. Paying off all of the debts of the Grantor of the trust from the assets of the trust;

19. Paying ongoing expenses of trust administration such as legal and CPA expenses, etc.;

20. Liquidating assets where necessary to pay off the debts of the Grantor;

21. Investing assets of the trust in a safe and prudent manner during trust administration;

22. Distributing the trust assets to the beneficiaries after all of the above has been completed.

The above is not an exhaustive list. There are often additional considerations and tasks in an estate that need to be analyzed and dealt with. The above are simply a list of common items a Trustee might be called to do.