The Basics of Trust Administration

Glossary

Trust – A trust is a legal agreement that grants a third party, or fiduciary, the authority to hold and manage assets for the beneficiaries of an estate.

Trustee – A trustee is a person who coordinates the administration of the trust, manages the trust’s assets and is responsible for distributing the assets to the trust’s beneficiaries.

Settlor – A settlor is a person who creates a trust to specify how they want their assets distributed upon their death and to which beneficiaries.

Beneficiary – A beneficiary is an individual or entity identified in a trust as being entitled to receive benefits from the estate.

Heir – An individual who is entitled to receive a share of assets in the event of the settlor’s death based on state laws.

Introduction

When a person passes away and a trust document is in effect, the trust must be administered according to the wishes of the settlor. Trust administration has many steps.  Often, an attorney is called upon to help create a trust and administer it when the time is appropriate.

One benefit of trusts is that they avoid probate, which involves legally disposing of someone’s assets when they pass away. In probate, courts are called upon to make decisions that may or may not be in line with the desires of the deceased. A trust outlines these wishes beforehand, protecting the assets of a settlor until they can be distributed to beneficiaries, ensuring a smoother transfer.

Whether you are a [MS1] trustee or beneficiary, understanding the basics of the trust administration process is essential for ensuring the wishes of the settlor are upheld and all beneficiaries and heirs receive their rightful inheritance.

What Is Trust Administration?

Trust administration is the process of managing and overseeing a trust—this can include accounting for and managing trust assets, distributing trust assets to beneficiaries, and ensuring the transfer of property in accordance with state law.

Trust administration is detailed and typically takes about 12 to 18 months. In cases involving limited or liquid assets, the process can be faster. The timeframe will vary depending on the amount of time needed to settle debts, sell real estate, and pay trust expenses.

If you are a trustee tasked with administering a trust, a trust administration attorney can help you understand your legal responsibilities so that you can seamlessly administer the trust and fulfill your duties to the beneficiaries, the settlor, and the trust.

Who Administers a Trust?

The person who oversees the administration of the trust is the trustee. The trustee is an individual or entity appointed by the settlor when the trust was created. A trustee can be a family member, a professional like a CPA or accountant, a private fiduciary, or even a trust company. Sometimes a trust will name more than one trustee as co-trustees of the trust.

The trustee owes a fiduciary duty to a trust and its beneficiaries.  That means the trustee is required to act in the best interests of the trust and beneficiaries in every step of the process. In other words, a trustee is legally required to prioritize the interests of others over their own. They are obligated to act in good faith and exercise prudent care when making decisions in their role as trustee. Failure to fulfill their responsibilities can lead to legal liability to the trust and/or its beneficiaries.

The responsibilities of a trustee may include:

  • Gathering essential documents related to the process, such as the trust document, death certificate, and deeds to property or other assets.
  • Identifying all trust assets, including but not limited to bank accounts, investment accounts, real estate, business interests, vehicles and personal property (including cash, jewelry, artwork and other valuables) that belong, or should belong, to the trust.
  • Making trust assets productive.
  • Notifying beneficiaries, heirs, and creditors of the beginning of the trust administration process.
  • Paying debts and satisfying all liabilities of the trust. This includes income taxes, property taxes, and possibly estate taxes.
  • Pursuing any debts owed to the trust.
  • Accounting for all income to and distributions from trust assets.
  • Distributing assets to beneficiaries as set forth in the trust and closing the trust upon its final distributions.
  • In some cases, hiring professionals to assist with fulfilling the trustee’s duties.

How To Manage a Trust: Step-by-Step Guide

Successfully managing a trust involves several crucial steps, each requiring careful attention to detail and adherence to legal requirements. The following outlines these steps to help trustees navigate their responsibilities effectively and ensure the trust is administered according to the settlor’s wishes.

1. Understand the Trust Document

The first step in managing a trust is understanding the terms of the document that creates the trust. A trustee should thoroughly read the entire trust document to understand who the beneficiaries of the trust are and how the settlor wished to distribute the trust’s assets.

Upon reading the trust document, a trustee should do the following:

  • Take note of the parties identified in the trust, like beneficiaries, creditors and creditors.
  • Understand the powers granted to the trustee and any restrictions on those powers.
  • Identify assets that are or should be held by the trust.
  • Note the settlor’s instructions regarding the distribution of trust assets.
  • Identify any ambiguities in the language of the document so you can seek legal counsel to address them.

2. Inventory and Valuation of Trust Assets

To distribute trust assets, the trustee must have a detailed and accurate inventory of the trust’s assets and their respective values.

Common trust assets a trustee must identify and manage include:

  • Bank accounts.
  • Investment accounts.
  • Real estate.
  • Business interests.
  • Vehicles.
  • Personal property (including cash, jewelry, artwork and other valuables).

When valuing assets and property, the trustee should determine the most up-to-date market value. The trustee may need to hire a professional appraiser to assess the market value of trust assets.

A trustee should consult with financial professionals and tax advisors, as they are responsible for understanding the estate’s financial obligations, paying the trust’s taxes, and, if necessary, determining a responsible investment strategy.

3. Resolving Debts and Expenses

When gathering an inventory of trust assets, the trustee should also account for any debts owed. The trustee should analyze bank accounts, tax returns, and other financial documents to identify potential creditors to which the trust or its settlor owes debts.

Trustees must also manage all other expenses related to the trust, which may include property taxes, home loans, utilities, credit cards, and more.

4. Investment Management

In some cases, a trustee may manage investments on behalf of the trust. Any investments the trustee makes should be aligned with their fiduciary duty to act in the best interests of the estate and its beneficiaries.

Until investment assets are distributed according to the settlor’s wishes as expressed in the trust, a trustee must make careful investment decisions and take steps to mitigate risk. It is often important to consult a skilled financial advisor early to maximize the potential of investments and minimize risks to the estate.

 5. Tax Planning and Compliance

Trust administration requires complying with relevant tax laws, and the trustee is responsible for ensuring taxes are paid.  In most cases, a trustee should hire a tax professional to ensure all taxes are reported and paid appropriately.

6. Communication with Beneficiaries

Throughout the trust administration process, trustees must keep beneficiaries reasonably informed about the trust, its assets, and any actions taken with estate assets—including decisions regarding selling property, managing investments, and paying taxes or debts related to the estate.

Communicating with beneficiaries is crucial for ensuring transparency and clarity throughout the process—this communication also minimizes the risk of disputes regarding trustee actions and can alleviate beneficiaries’ concerns surrounding mismanagement or breaches of fiduciary duty by the trustee.

7. Record Keeping and Accounting

Trustees must keep detailed records of trust assets, income earned, expenses paid, and distributions made to beneficiaries. Those records are important for ensuring transparency with beneficiaries and, if necessary, a court tasked with determining whether a trustee has acted appropriately.

8. Distribution  to Beneficiaries

Ultimately, a trustee is obligated to distribute assets to trust beneficiaries according to the trust’s terms. 

The most common types of trust distributions include:

  • Outright distributions – This type of distribution allows for the distribution of assets without any restrictions, either as a lump sum or periodically.
  • Distributions in trust – These distributions require the trustee to hold trust assets to distribute them to beneficiaries over time, which may include yearly distributions or waiting until beneficiaries reach a certain age.
  • Discretionary distributions – Discretionary distributions give a trustee authority to decide from a predetermined group of beneficiaries which ones they distribute to and how much they will receive.

In some cases, trustees may also be able to carry out a partial distribution of assets to beneficiaries and heirs on a preliminary basis while gathering and selling assets or paying debts so they can receive a portion of their inheritance earlier in the process.

Challenges and Common Pitfalls in Trust Administration

Trust administration can be a complex and contentious process, especially with the whirlwind of emotions that can exist within a family after an individual passes. These circumstances can lead to a variety of potential challenges for trustees.

One of the most common challenges is managing disputes that arise between beneficiaries, heirs, and other interested parties.

Another common challenge is the complexity of the trust itself, its distribution directives and its assets.

With the various standards a trustee must follow, a lack of knowledge can often lead to mistakes and pitfalls.

Some common mistakes in trust administration include:

  • Poor or inaccurate recordkeeping – Failing to maintain records about asset transactions, expenses, and distributions can leave beneficiaries uninformed and raise concerns about the management of the trust.
  • Lack of communication – A trustee should keep interested parties reasonably informed about progress in trust administration and report to beneficiaries.
  • Improper asset management – Improper management involves managing assets with negligence or bias. It may include making irresponsible investment choices, selling property below market value, or making financial decisions that benefit the trustee personally.
  • Negligence in tasks associated with managing the trust—This involves a trustee’s failure to uphold important responsibilities in managing the estate, such as failing to pay necessary expenses.
  • Breaches of fiduciary duty—A breach of fiduciary duty is a failure to act with integrity in managing an estate. It may include self-dealing, misappropriation of funds, and confidentiality breaches.

Any of those mistakes can derail the trust administration process and compromise the integrity of the trust and the settlor’s wishes. To avoid them, trustees can benefit from the guidance of an experienced trust administration attorney who can help them understand their legal and procedural responsibilities. An attorney can also help resolve disputes or provide representation in litigation.

Hiring a Trust Administration Attorney

Trust administration is an important process that involves many different stakeholders and intricate legal requirements. As a result, the process requires a skilled and dedicated individual to handle all the important tasks around managing a trust. However, with the complexity of the administration process and the unique nuances that can arise, the support of a trust administration lawyer can go a long way in ensuring the smooth and fair administration of a trust.

The trust administration attorneys at RMO Lawyers have considerable experience overseeing and supporting the trust administration process. Our administration team works closely with our litigation team if a dispute arises during the administration process.

In every case, we lead with compassion and understanding, using our experience in trust administration and trust litigation to craft effective solutions.

Schedule a free consultation with RMO LLP today to learn more about how we can support trustees, beneficiaries, and other interested parties in the trust administration process.


The Basics of Trust Administration

Glossary

Trust – A trust is a legal agreement that grants a third party, or fiduciary, the authority to hold and manage assets for the beneficiaries of an estate.

Trust administrator – A trust administrator is an individual or entity responsible for managing assets held in a trust and distributing them to beneficiaries in accordance with the trust creator’s wishes.

Trustee – The person who coordinates the administration of the trust, manages the assets within it and is responsible for distributing these assets to the identified beneficiaries.=

Settlor – A person who creates a trust to specify how they want their assets distributed upon their death and to which beneficiaries.

Beneficiary – Any individual identified in a trust as someone who is entitled to receive benefits from the estate.

Heir – An individual who is entitled to receive a share of assets from the trust in the event of the settlor’s death based on state laws.

Introduction

When a person passes away and a trust document is in effect, the trust must be administered according to the wishes of the settlor, or trust creator. Trust administration has many steps, and often, an attorney is called upon to not only set up a trust but also administer it when the time is appropriate.

One benefit of trusts is that they avoid probate, which involves legally disposing of someone’s assets when they pass away. In probate, courts are called upon to make decisions that may or may not be in line with the desires of the deceased. A trust outlines these wishes beforehand, protecting the assets of a settlor until they can be distributed to beneficiaries, ensuring a much smoother transfer.

A trust administrator is the person or entity responsible for managing responsibilities surrounding the estate, protecting assets, and distributing them to the beneficiaries named in the trust document. The trust administrator who handles these tasks is typically known as the trustee.

Whether you are a settlor, trustee, or beneficiary, understanding the basics of the trust administration process and how to manage a trust is essential for ensuring that the wishes of the trust creator are upheld and all beneficiaries and heirs secure access to their rightful inheritance with as little disruption to the process as possible.

What Is Trust Administration?

Trust administration is the process of managing and overseeing a trust—this can include accounting for all the assets in the trust, managing these assets, distributing them to the beneficiaries, and ensuring the transfer of property in accordance with state law.

The trust administration process is detailed and requires several steps, from gathering all assets belonging to a trust to distributing these assets to all beneficiaries identified in the trust. Typically, the full process takes about 12 to 18 months. In cases of simple distributions, this process may be shorter. The timeframe will vary depending on the amount of time needed to settle debts, sell real estate, and pay expenses around the trust.

If you are a settlor, it is a good idea to consult a trust administration attorney. They can help you ensure that your assets are accounted for and will be properly transferred to beneficiaries in accordance with your wishes when you pass away. 

If you are a trustee tasked with administering a trust, a trust administration attorney can help you understand your legal responsibilities so that you can seamlessly administer the trust and fulfill your duties to the beneficiaries, the settlor, and the trust. 

Who Administers a Trust?

The person who oversees the administration of the trust is the trustee. The trustee is an individual or entity appointed by the settlor at the time the trust was created to be responsible for managing a trust. A trustee can be a family member, a professional like a CPA or accountant, a private fiduciary, or even a trust company. A trustee should have an understanding of their duties, have strong financial management skills, and be able to act with integrity.

Your choice of trustee likely depends on the needs and complexity of the trust. If there are limited assets and a small number of undisputed beneficiaries, you may consider choosing a family member or trusted acquaintance. However, if you have significant or diverse assets and numerous beneficiaries, it’s likely a better option to choose a professional trustee with experience in trust administration to ensure a smooth distribution.

The trustee has a duty, known as fiduciary duty, to act in the best interests of the trust in every step of the process. When serving as a fiduciary, one is required to prioritize the interests of others over their own and conduct themselves with integrity. 

Fiduciaries are obligated to act in good faith and exercise prudent care when making decisions on behalf of others. Failure to fulfill these responsibilities can lead to legal consequences.

Other legal responsibilities of a trustee may include:

  • Gathering essential documents related to the process, such as the trust document, death certificate, and deeds to property or other assets.
  • Making sure all bank accounts and investment accounts have been identified, transferring those assets into a successor’s name, and reporting any income from this transfer to the IRS.
  • Notifying all beneficiaries, heirs, and creditors of the beginning of the trust administration process.
  • Paying any debts related to creditor claims and satisfying all liabilities of the trust. This includes income taxes, property taxes, and possibly estate taxes in cases where the estate meets certain thresholds.
  • Keeping detailed records to provide proof of accounting related to the property if called upon to do so by beneficiaries or the state.
  • Once all of these obligations have been fulfilled, the trustee can distribute the remaining assets in the trust to beneficiaries and close out the trust if the situation dictates.

How To Manage a Trust: Step-by-Step Guide

Managing a trust is a complex process that involves several steps and a significant amount of paperwork. In managing a trust, a trustee must be sure to do all of the following.

1. Understanding the Trust Document

The first step in managing a trust is understanding the trust document and the terms it lays out. A trustee should thoroughly read the entire trust document to understand who the beneficiaries of the trust are and how to fairly distribute assets according to the settlor’s wishes. 

Upon reading the trust document, a trustee should do the following:

  • Take note of the parties identified in the trust, like beneficiaries and creditors
  • Understand the powers granted to the trustee and any restrictions on these powers
  • Identifying assets in the trust to be distributed
  • Review instructions surrounding asset distribution
  • Highlight any ambiguities in the language of the document so you can seek legal counsel to address them

2. Inventory and Valuation of Trust Assets

To distribute estate assets fairly and effectively, the trustee must have a detailed and accurate inventory of all relevant assets and identify and develop an accounting of all assets and their respective values.

Common trust assets that an administrator must identify and manage include:

  • Real estate
  • Bank accounts
  • Investment accounts
  • Retirement accounts 
  • Life insurance policies
  • Vehicles
  • Artwork, antiques, and other personal property 

When valuing assets and property, the trustee should utilize the most up-to-date market value. The trustee may also need to pay a professional appraiser to assess the market value of important assets, like property, a home, a vehicle, or artwork, and receive an accurate accounting of their value. 

A trustee should also consult with financial professionals and tax advisors, as they are responsible for understanding the estate’s financial obligations, paying the trust’s taxes, and, if necessary, setting up a responsible investment strategy.

3. Resolving Debts and Expenses 

When gathering an inventory of trust assets, the trustee should also inspect financial records to account for any debts owed. The trustee should analyze bank accounts, tax returns, and other financial documents to identify potential creditors to which the trustor owed debts. The administrator is then responsible for notifying all creditors of the settlor’s death, soliciting creditor claims, assessing their validity, and resolving these claims using the trust’s assets.

Trust administrators must also manage all other applicable expenses related to the trust, which may include property taxes, a mortgage, utilities, credit cards, and more.

According to California Probate Code §11420, the trustee should resolve relevant debts in the following order:

  1. Estate administration expenses, like legal fees, appraisal fees, and filing fees
  2. Obligations to a mortgage, deed of trust, or property lien
  3. Funeral expenses 
  4. Medical expenses surrounding the last illness
  5. Family allowance for surviving spouse and children, if applicable
  6. Wage debts for unpaid employee wages
  7. General debts not secured by a lien

3. Record Keeping and Accounting

As trustees resolve debts, pay estate expenses, and conduct asset transactions, they must keep detailed records of the trust’s assets and how they are managed. Trustees should keep a detailed accounting of assets distributed to beneficiaries and transactions between relevant parties, such as the state and creditors.

These records are important for ensuring transparency with beneficiaries and the court. It is important to note that trustees are obliged to provide beneficiaries with an accounting upon request. 

The accounting records include:

  • Asset inventory
  • Estate transactions
  • Financial transactions
  • Communications
  • Invoices
  • Financial records 
  • Tax returns
  • Bank statements
  • Correspondence
  • Legal documents
  • Debts and expenses

4. Investment Management

In some cases, a trustee may manage investments of assets on behalf of the trust to grow the estate and its financial resources. Any investments that the trustee makes should be aligned with their fiduciary duty to act in the best interests of the estate and its beneficiaries.

The trust administrator must make careful investment decisions and take steps to avoid significant losses and mitigate risks. In this process, it’s often important to consult a skilled financial advisor early on to maximize the potential of these investments and minimize risks to the estate. 

If the settlor had any active investment accounts at the time of their death that were included in the trust, the trustee is also responsible for transferring these accounts to their respective beneficiaries in line with the wishes of the trust’s creator.

For example, if the trust outlines specific terms for when to transfer ownership of the account, such as a beneficiary’s 18th birthday, the trustee will be responsible for managing the investment accounts until the beneficiary is eligible to receive their distribution.

In some instances, the terms of the trust may call for the assets in the investment account to be liquidated and then distributed to identified beneficiaries. The trustee is responsible for understanding the wishes of the settlor as outlined in the trust.

5. Distributions to Beneficiaries

A trustee will distribute assets to heirs and beneficiaries after completing all other responsibilities involved in administering the trust. These actions may include tasks such as identifying and gathering trust assets, paying debts and taxes, managing investments, and ensuring compliance with legal requirements. 

Once these administrative duties are fulfilled, the trustee then proceeds to distribute trust assets according to the terms outlined in the trust document. In California, the trustee has the authority to distribute assets and is not required to file with the court before the distribution process occurs. 

During the distribution process, the trustee should follow the provisions of the trust document to distribute these assets fairly among the appropriate parties. Trustees must be aware of any unique terms or conditions surrounding asset distribution, which will be specified in writing in the trust.

The most common types of trust distributions include:

  • Outright trust distributions – This type of distribution allows for the distribution of assets without any restrictions, either as a lump sum or periodically.
  • Distributions in trust – These distributions require the trustee to hold trust assets in order to distribute them to beneficiaries over time, which may include yearly distributions or waiting until beneficiaries reach a certain age.
  • Discretionary distributions – Discretionary distributions give a trustee authority to decide from a predetermined group of beneficiaries which ones they distribute to and how much they will receive.

In some cases, trustees may also be able to carry out a partial distribution of assets to beneficiaries and heirs as a preliminary basis while gathering and selling assets or paying debts so that they can receive at least a portion of their inheritance sooner in the process.

6. Tax Planning and Compliance

Trust administration requires complying with relevant tax laws, and the trustee is responsible for ensuring taxes are paid. Depending on the assets belonging to the settlor, a trust is liable to property or estate taxes.

If these taxes are not paid on time, the estate could be fined or penalized, harming its assets. Filing to pay relevant taxes and incurring penalties could lead to the removal or suspension of a trust administrator under claims of negligence.

7. Communication with Beneficiaries

Throughout the trust administration process, trustees have a responsibility to keep beneficiaries reasonably informed about any actions taken with estate assets—these include decisions regarding selling property, managing investments, and paying taxes or debts related to the estate.

Communicating with beneficiaries is crucial for ensuring transparency and clarity throughout the trust administration process—this communication also minimizes the risks of disputes regarding trustee actions and can alleviate beneficiaries’ concerns surrounding asset mismanagement or breaches of fiduciary duty by the trustee.

Trustees are responsible for compiling a report of transactions involving the trust at least annually. However, beneficiaries have the right to request access to trust accounting documents and other reports at any time. The court may also request reports from trustees as reasonably necessary. 

Challenges and Common Pitfalls in Trust Administration

Trust administration can be a complex and contentious process, especially with the whirlwind of emotions that can exist within a family after an individual passes. These circumstances can lead to a variety of potential challenges for trustees.

One of the most common challenges is managing disputes that arise between beneficiaries, heirs, and other interested parties. Trustees must navigate these disputes and use means like mediation or litigation to pursue an outcome that accommodates these parties as best as possible.

Another common challenge is the complexity involved in the process itself. With considerable legal nuance that can arise and various standards that trustees must follow, a trustee lacking knowledge of their duties can often lead to mistakes and pitfalls.

Some common mistakes in trust administration include:

  • Poor or inaccurate recordkeeping – Failing to maintain records about asset transactions, expenses, and distributions can leave beneficiaries uninformed and raise concerns about the management of the trust.
  • Lack of communication – A trust administrator should keep interested parties reasonably informed about progress in trust administration and report to beneficiaries and heirs at least yearly and as reasonably necessary.
  • Improper asset management – Improper management involves managing assets with negligence or bias. It may include making irresponsible investment choices, selling property below market value, or making financial decisions that benefit the trustee personally.
  • Negligence in tasks associated with managing the trust—This involves a trustee’s failure to uphold important responsibilities in managing the estate, such as failing to pay necessary expenses like estate taxes, property taxes, mortgages, or utilities. 
  • Breaches of fiduciary duty—A breach of fiduciary duty is a failure to act with integrity in managing an estate. It may include self-dealing, misappropriation of funds, and confidentiality breaches.

Any of these mistakes can derail the trust administration process and compromise the integrity of the trust and the settlor’s wishes. To avoid these common mistakes and pitfalls, trustees can benefit from the guidance of an experienced trust administration attorney who can help them understand their legal and procedural responsibilities. An attorney can also help resolve disputes through mediation or negotiation or provide representation in litigation.

Hiring a Trust Administration Attorney

Trust administration is an important process that involves many different stakeholders and intricate legal requirements. As a result, the process requires a skilled and dedicated individual to handle all the important tasks around managing a trust. However, with the complexity of the administration process and the unique nuances that can arise, the support of a trust administration lawyer can go a long way in ensuring the smooth and fair administration of a trust.

The trust administration attorneys at RMO Lawyers have considerable experience in overseeing and supporting the trust administration process. Our administration team works closely with the RMO trust litigation team if a dispute should arise during the administration process.

In every case, we lead with compassion and understanding, using our decades of experience in trust administration and trust litigation to gather the context around our client’s unique circumstances and help them craft real-world solutions. Schedule a free consultation with RMO Lawyers today to learn more about how we can support trustees, beneficiaries, and other interested parties in the trust administration process.

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About the Author

Matthew A. Bourque, Managing Attorney – Dallas & Houston

Matthew A. Bourque serves as Managing Attorney of RMO LLP’s Dallas and Houston offices. A thoughtful, diligent litigator, Matthew focuses his practice on representing heirs, beneficiaries, fiduciaries, creditors, and other interested parties in contested probate, trust, guardianship, and financial elder abuse cases. As supported by his accomplished track record, Matthew is able to calmly and expertly navigate the most tumultuous situations with relative ease while securing results for his clients that allow them to move past their dispute and on with their lives.

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