Navigating the Maze of Trust Administration

Trust administration is a necessary process that occurs after the death of either one or both settlors. To protect the successor trustees, there are many things that must be done to ensure proper administration. Fortunately, working with an attorney, your investment advisor and accountant for trust administration is a straightforward process that will give the successor trustees a great peace of mind throughout the administration.

Trust administration begins with a required Probate Code notice to all trust beneficiaries and heirs of the settlors. California Probate Code Section 16061.7 states that such notice must be sent within 60 days of the death of a settlor and allows the recipient of the notice to request a copy of the trust. After receiving the mailed notice, the recipient has 120 days from the date of mailing to file a trust contest. If no contest is filed within a 120 days, then the notice recipient may forfeit their right to file a contest. But if no notice is mailed, the statute of limitations in which a trust contest could be filed is much greater, and could be up to at least four years.

As part of the initial trust administration process, your attorney will also ask you to provide him or her with the decedent’s original will so it may be lodged with the court. California law requires that a decedent’s will be lodged with the court for safekeeping, even if no probate is going to be opened.

There are four major areas of concern and mazes through which the successor trustee must travel. They are, in chronological order, as follows:

  1. Directing yourself to a competent attorney knowledgeable in trust administration;
  2. Listing and acquiring appraisals of all the decedent’s assets; both community property and separate property.  (NOT separate property of the successor trustee);
  3. The Federal Estate Tax Return (IRS Form 706);
  4. Funding the Trusts. (This is the bottom line of what Trusts are all about.)

The appraisals must be done accurately and honestly. Assets fall into different categories and dictate the type of appraisal. For example:

  1. For bank accounts, stocks and bonds – the date of death figure, including any accrued interest from the last statement, is necessary. Call banks and brokers for the exact title of the accounts and the account numbers.
  2. For all real estate – a licensed appraiser must be hired to do a date-of-death or six-months-later appraisal. He or she will charge according to size, zoning and location of the property. You have your choice of the higher or lower appraisal (“D” Day or six months later). That is an individual matter based upon your need or wish to sell or hold property among other things.
  3. For automobiles, a Blue Book date-of-death appraisal is required.
  4. For art collections or any collection of value over $3,000.00, a licensed appraiser is required.
  5. For household furnishings you may inventory and do it yourself or you may have a licensed appraiser.
  6. For jewelry and antiques of significant value, a licensed appraiser.
  7. To complete the picture of assets you must itemize all “D” day debts. This is tedious and the gas bill, electric bill, credit card bills, telephone, medical, cable TV, etc. In addition, all funeral expenses and eventually all estate expenses such as attorney and accountant fees.  In other words all the unpaid bills outstanding on the exact date of death and all estate expenses. Document such in a notebook or spreadsheet and allow for a few months to get this done.

Federal Estate Tax Return (IRS Form 706)
The United States Estate (and Generation Skipping Transfer) Tax Return, or “706 form” is your next destination in the maze.  The executor of a decedent’s estate uses IRS Form 706 to figure the estate tax imposed by Chapter 11 of the Internal Revenue Code. It is also used to compute the generation skipping transfer (GST) tax imposed by Chapter 13 on direct skips. It must be filed nine months to the day following the date of death. (You may/should get a six month’s extension by filing Form 4768.) Your CPA should keep you on track and see that it is correctly filled in.

Final Destination- Funding the Trust
You cannot and should not fund the Trusts until you have filed the 706 or at least have come to your final set of figures. The Family Trust per se ceases to exist at the moment of death of the first of the original Trustees to die. The Trust then “trifurcates” into separate Trusts which will probably be the Bypass Trust (exemption or non-taxed gift to your heirs), the QTIP or Qualified Terminal Interest Property Trust (which is now an irrevocable Trust representing the decedent) and the Survivor’s Trust which continues to be revocable or amendable. From now on each separate irrevocable Trust will require a separate Income Tax filing every year. They must be properly funded in accordance with the intentions and exact wording of the Trust and in a manner that will conform to IRS rules and establish that you have accurately divided the assets with fairness.  This is the real bottom line of what Trusts are all about.

Your attorney, investment advisor and CPA should work together with you on making these decisions and properly recording the assets into the different Trusts.  Then one day a letter will come saying it has all been approved by the IRS and you can finally relax.

This is just a brief overview and is not intended to be specific legal advice. Each situation and estate is unique and independent legal advice should be obtained for your particular circumstance. There are several more steps to trust administration as the above is a simple overview.  Advice of counsel must be obtained.