The first step to serving as a trustee: be informed

on Jul2
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If someone has passed away and named you as their successor trustee, congratulations may or may not be in order.

Considering that the grantor picked you above everyone else to handle the settlement of their estate, it is very much an honor. However, serving as a trustee can also be a thankless job. If there are complications, it could prematurely age you with stress and steal the precious time you have from everyone and everything you love.

Therefore, before agreeing to serve as a trustee, you should understand the expectations and potential issues.

Aside from being a set of instructions for you to be a successful trustee, the quality and clarity of trusts vary and can make your job as a trustee easier or more difficult.

The task is often tedious and confusing, and the legalese can be intimidating. However, in this case, you must follow the instructions, and the instructions are in the trust documents. You cannot wing it or assume you know what the trustor (also called grantor or decedent) wanted. You cannot just do what you think is right.

Your opinions here really do not matter. And, no matter what, you cannot allow beneficiaries to convince you to ignore the trust. You may be financially liable for the results if you do not follow the trust’s instructions.

Fortunately, the trust will often offer protections and benefits to you as a trustee, like compensating you for your time and protecting you from malcontent beneficiaries. Here is a sample of sections you might find particularly useful if you review the document yourself.

Hiring professionals

No one should expect you to be a legal or financial expert to serve as a trustee. Therefore, the trust should state that you have the power to employ and pay reasonable fees to accountants, lawyers and investment experts for advice relating to the trust. There is no reason for you to go at this alone.

The cost to the trust is worth having everything handled the first time correctly because mistakes can be expensive. When someone states they do not need professional help because a trust is simple, my response is there is no such thing as a simple trust. There are many ways a trust administration can be mishandled, and the trustee will be the one with the liability.

It may be a surprise that the trustee, and not the beneficiaries, are the client of the professionals you hire. You do not need to hire the attorney who drafted the trust or the other professionals used by the decedent; it is your choice who you want to work with.

Beneficiaries are immediately comforted when they see professionals involved, and, as a result, they are less likely to cause problems. The attorney can reduce your potential liability by limiting interactions and possible confrontations with beneficiaries. The administration will go smoother and be faster. Make sure the attorney you hire is a trust attorney. Your neighbor who handles personal injury cases or divorces will probably not provide accurate advice.

Trustor and beneficiaries

This section will probably list the beneficiaries, how the trust assets should be distributed, and when the trust will end. There might also be specific and charitable bequests.

Be sure to see your attorney early to discuss when you need to send notifications to the beneficiaries. Obtain current contact information and Federal I.D. (Social Security) numbers from the beneficiaries. The attorney and accountant can help you with the distributions and ensure you receive receipts from the beneficiaries.

Discuss with your attorney and your trust accountant the number of beneficiaries (several vs. just you and another sibling), particular issues with beneficiaries (like drug addiction or disabilities), and if any of the beneficiaries might be troublesome or hamper the administration of the trust.

Sometimes, trusts can be poorly written, vague, and contain typos or other errors that can lead to confusion. If you are unsure about anything at all, be sure to bring it up to your attorney. The attorney will advise you if it is necessary to ask the court for clarification.

Search the trust for a “No Contest Clause.” This clause is designed to discourage disgruntled beneficiaries from contesting a will or trust. Here is an example of how the clause works. If the trust states an adult child is to receive $20,000, they might think twice about contesting the trust, even if they believe it is unfair, because if they sue and lose, the no-contest clause means they would receive nothing.

Trust administration after death of grantor

Accountings: This section will include how often you must provide an accounting to the beneficiaries. Some trusts specify how formal the accounting should be. For example, some will specify that just a trustee-prepared informal accounting is required, and other trusts may require a formal “court” accounting.

Some trust documents include language that waives the accounting requirement, but the trust cannot waive the accounting in California. Discuss with your attorney if it is possible to request beneficiaries sign a waiver of accounting or if they will sign an agreement to an informal accounting (or even just bank and brokerage statements). A waiver will reduce trust accounting fees, which can be expensive.

The trust documents rarely describe the taxes that must be filed (although it may mention that you must file them). Most CPAs and tax preparers do not specialize in trust tax returns, and if the person you hire does not understand the intricacies of trust and estate tax law, the mistakes can become expensive. Since there is no license for trust accounting, request a copy of their vitae or resume and make sure they have a CPA license or LLM (A Master’s in Tax Law).

When you meet with the trust accountant, hopefully early in the administration, make sure they explain to you the various tax elections and notifications that can be filed that may save time, taxes, and fees. The trust accountant can help you with the filing of the final income tax return of the decedent and with the request for tax refunds to be deposited to the trust. Some trust accountants can also help with asset searches, marshaling (gathering) assets, especially bank accounts, and often provide referrals to appraisers and investment advisors.

Resignation and removal of a trustee: This section discusses who may remove and replace you as a trustee, the steps they need to take to remove you, and how you can resign. Contact an attorney soon if you are unable to serve or if you have decided that all of this is not worth the trouble.

Compensation: You should not be expected to settle the trust for free, and please do not feel guilty about paying yourself for your time and effort. The terms of the trust may explain precisely what compensation the trustee is entitled to, but most trusts do not provide specifics or a formula.

With no guidance from the trust document, the laws in most states usually require that trustee compensation be “reasonable” without giving more details. Under California Probate Code, an executor typically receives a percentage of assets based on the estate’s size and calculated with a formula. Keep records of your time and any out-of-pocket costs on behalf of the trust starting on Day 1, and discuss your compensation with your attorney before paying yourself.

I have found acting as a trustee and working with trustees particularly rewarding. It is commendable work: You are fulfilling the wishes of someone who is no longer here to do it themselves.

Michelle C. Herting, CPA, ABV, AEP, specializes in tax planning, trust administrations, and business valuations. She has three offices in Southern California.

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