Some thoughts on trust administration.
Many of us have a pretty good idea of what is involved in a probate case when a loved one passes away because we have experienced it or because we know someone who has. We may not like it, but we know what to expect. The will must be probated. A family member heads down to the courthouse to qualify as the executor. There are probate taxes, filing fees, Commissioner’s fees, often attorney’s fees, and sometimes surety bonds. There are notice requirements to heirs (regardless of what the will says), and deadlines for an inventory of assets, certifications, probate tax returns, and detailed accountings that must be filed. All under the watchful eye of the Court through a Commissioner of Accounts who will hold the executor responsible for legal duties as a fiduciary, down to the penny. And though it is true that a very simple and modest estate can pass through probate with ease, in most cases, when faced with assets and questions in probate, we know that folks should consult with an experienced estate attorney.
But what if the assets are in a trust? Estate attorneys talk all the time about the benefits of trust planning to avoid probate and to provide long-term protections for trust beneficiaries. But when a family member dies and it is time to take care of their final business, if you are not familiar with trusts, you may not even know where to begin. You might even begin to wonder, “What do we do now?” Or even, “What’s the point of this trust anyway?”
If that might be you at some point, I hope the following few comments will help:
- There’s still a job to do. I have heard some people over the years talk about the “Revocable Living Trust” as if it is magic. As if trust administration just happens on its own and assets “automatically” belong to trust beneficiaries when a trustmaker dies. But the fact is, there is always a job to do when someone dies. Family members are left to wrap up the affairs of their loved one, pay final expenses and debts, file a final tax return, value assets, and make distributions according to instructions. The questions are: Where does the authority come from? And where are the instructions? In a probate case the authority comes from the court through the probate process, and the instructions are in the decedent’s will (or in a statute if there is no will). But for assets in a trust, the authority and instructions are all contained in the terms of the trust.
- The trustee is still a fiduciary. With a trust, administrative activity and the transfer of assets are handled by the trustee. Because trust assets are not subject to probate, the trustee acts privately, at his/her own pace, without involvement of the court. This typically means the process is easier and much more efficient. But the trustee is still legally responsible for doing the job faithfully and correctly. In other words, legal obligations are still part of the job. Article 8 of Virginia’s Uniform Trust Code (Virginia Code Section 64.2-763 and following) lays out the duties of a trustee to act with loyalty and impartiality, to control and protect trust assets, to keep records and inform beneficiaries, to name just a few. It is the role of the trustee’s attorney to provide counsel as to these duties, and to make sure that liability is released when distributions are made.
- The “Admin Trust.” When the maker of a revocable trust dies the trust becomes irrevocable, and the successor trustee, named in the document, takes control of trust assets and begins to administer the trust estate under the terms of the trust. This temporary phase, between the death of the trustmaker and the final distributions to beneficiaries, gives rise to the “Administrative Trust,” sometimes called the “Admin Trust.” Virginia Code Section 64.2-804 allows a trustee to establish authority during this phase by signing a Certification of Trust that indicates the existence and validity of the trust, the identity and powers of the trustee, and the Tax ID Number of the trust. Note that upon the death of the trustmaker the trustee will obtain a new Tax ID number (EIN) for the Admin Trust; the trustmaker’s Social Security Number may no longer be used. A properly drafted Certification of Trust for the Admin Trust will contain all the information that financial institutions and others may need in order to recognize the trustee’s authority and safely follow the trustmaker’s instructions. Simply put, the Certification becomes the trustee’s ticket to do business on behalf of the trust.
- Beneficiary Trusts. Many of our clients who choose to plan with a revocable living trust have in mind much more than just the private and efficient administration of their estates. Often, their most important planning goals are the protections of the inheritance that a trust can provide for their beneficiaries. When distributions are made to beneficiaries outright, as for example with beneficiary designations or payable-on-death provisions, or in most probate cases, the assets immediately become subject to the beneficiary’s debts and liabilities. Therefore, any claim against the beneficiary, from an accident or a failing business, or from poor financial decisions, etc., also becomes a claim against the inheritance. But if the inheritance is received in a Beneficiary Trust as provided in Mom’s or Dad’s revocable living trust, then it can be protected from the beneficiary’s existing and future liabilities. This Beneficiary Trust can also ensure that the inheritance will always remain separate property and never become marital property, and thus will never be divided between estranged spouses upon divorce. If the trust is designed to do so, it can also make sure that upon the death of the beneficiary the remaining inheritance passes to the trustmaker’s grandchildren and is never subject to a spousal claim against the beneficiary’s estate. And, of course, the trust might also be designed to protect the inheritance from the beneficiary’s own spendthrift tendencies or disabilities. Imagine an inheritance, protected from the storms of life, invested and even growing for generations to come.
Therefore, it is critical for the trustee of an Admin Trust to understand the terms of the trust and the goals of the trustmaker so that the trustee can properly make distributions that account for inheritance protections and give beneficiaries the full benefit of the trust plan.
- Retirement Accounts. When the trust is named as a beneficiary on an IRA or a qualified retirement account, the trustee should always rely on counsel to help determine if the trust provides for distributions to be stretched according to the life expectancy of each beneficiary. And if the law changes and beneficiaries can no longer take advantage of the “stretch IRA,” then counsel will be needed to determine how the terms of the trust apply under the new rules.
There are, of course, countless other provisions that might be included in a trust depending on the goals of the trustmaker. The trust might provide specifically for a special needs beneficiary. It might contain provisions designed to avoid the estate tax. It might contain uncommon or complex terms that require legal interpretation. The key, if you are serving as trustee, is to understand the process, recognize the issues, and seek out the resources that you may need for a smooth and successful administrative process. In my experience, when a trustmaker passes away, if the family has the assistance of a trusted financial advisor, tax professional, and estate attorney who communicate with each other and work together, the results are outstanding: the transition is smooth, the family is comforted and protected, and the next generation begins to enjoy the blessing of a well-planned inheritance.
If you need assistance with probate or trust administration, give us a call.