What are the Duties and Responsibilities of the Successor Trustee?
Understanding What a Successor Trustee Means
If you’ve already created your own living trust, then you probably named yourself as the first trustee of your trust. You should have, anyway. Serving as the trustee of your own trust during your lifetime is entirely appropriate and as it should be. After all, it’s your money in the trust. And, while there are many things you can do to prepare your trust and keep your assets organized during your lifetime, the real work doesn’t begin until after you’re gone. After the death of the trustor of the trust, it’s the job of the designated successor trustee to settle the estate and to manage and distribute the trust assets in accordance with the specific instructions set forth in the trust. There are quite a few things that the successor trustee must do before he or she will be finished with the job. Being a successor trustee is not as difficult as you might suppose, and any adult person who is responsible, conscientious and organized should be up to the task. If the handpicked successor trustee runs into difficulties, he or she can always consult with a professional advisor or attorney to get help with carrying out his or her duties and with settling the trust estate. What follows here is a useful and fairly concise summary of what a successor must do to successfully complete the job and fulfill the duties that come with the job of being the successor trustee. Before I describe the duties of the successor trustee, there are a few important principals to keep in mind, just so everyone knows who’s who, and what’s what, with respect to the trust document.
The first thing to remember is that the successor trustee automatically acquires legal title to or control of all of the trust assets after the creator of the trust passes away. This transfer of legal title from the deceased trustor of the trust to the successor trustee happens automatically and instantaneously, as a matter of operation of law upon the death of the trustor. There are, in fact, a few things the trustee must do to consolidate his or her position as trustee, but these steps are fairly straightforward and will be explained momentarily. After the death of the trustor, the successor trustee succeeds to the legal title of all of the trust assets, but the beneficial, which is arguably the more important type of ownership vests in the beneficiaries of the trust. The trustee, therefore, has legal title to all of the assets, and the right to manage them, if not temporarily, and the beneficiaries have beneficial title to the assets, and the right to use and enjoy the assets, subject to the terms of the trust. Because of this separation of title, legal title versus beneficial title, it is sometimes said that the trustee is actually the servant of the beneficiaries, preparing the trust assets for eventual distribution to the beneficiaries. While one role is arguably not more important than the other, the successor trustee’s primary job is, in fact, to give the beneficiaries their money, according to the terms of the trust, and as set forth in the trust instrument. The successor trustee, then, is essentially the manager of the trust assets, including income and principal, responsible for organizing and valuing the trust assets and preparing them for distribution to the beneficiaries of the trust. The trustee’s job, then, is a temporary one, in most cases, and once all of the assets are distributed to the beneficiaries, then the trust may often be terminated and the trustee’s job will be done.
What Does a Successor Trustee Do?
So let’s take a look at what the successor trustee is actually supposed to do. To sum it up simply, the successor trustee’s job is basically to 1) gather all of the trust assets, 2) pay all of the outstanding bills and taxes and expenses related to settling the estate, and finally to 3) distribute the assets to the beneficiaries as dictated by the living trust instrument. Granted, there are a few sub-steps involved in carrying out those three simple steps enumerated above, but gathering assets, paying bills and taxes, and then distributing the remaining balance is a pretty accurate overview of what a trustee is supposed to do. Now let’s break down these three basic steps into more specific steps and trustee instructions.
Read the Trust: It may go without saying, but every trustee should read the document that they are charged with administering. If there are terms or provisions that don’t make sense, or that require interpretation, then the trustee should consult a qualified estate planning attorney for assistance.
Gathering assets: The trustee can’t administer what he or she can’t find. So keeping an up-to-date list of your assets where the trustee can find it can be immensely helpful to the trustee. Each year billions of dollars of assets in the United States are lost or go unclaimed, simply because the successor trustee of the trust, or an executor of a will, did not know where to find the assets, and the assets went unclaimed and eventually escheated to the state. If you don’t leave a current list of assets, your successor trustee may just have to visit every bank in town, or keep checking the mail for months or weeks for bank statements, in order to discover the locations of your accounts. Keeping a list of assets can be extremely helpful to the successor trustee, and can save the trustee considerable time and frustration. More importantly, keeping a list of trust assets to the successor trustee can more easily find them will also help insure that no assets are left behind and that each beneficiary receives the full value of what they are supposed to receive.
Protection of Trust Assets
When the successor trustee is gathering the trust assets, he or she must include all real and personal property. In legal terms we sometimes say that the trustee’s duty is to marshal all assets for the benefit of the beneficiaries. Not a bad word really – marshal. Picture Marshal Dillon showing up with his trustee badge and a loaded six-shooter strapped to his side, there, ready to claim the assets for the beneficiaries. While this example right out of the old West may be a little bit of a stretch of the imagination, there are in fact cases, where the trustee may actually rely on a duly appointed sheriff to show up and evict a tenant or uncooperative family member from a trust property or a house so that the house can be sold and the cash distributed to the other family members. Marshalling trust asses may also involve changing the locks or building or houses so that thieves, old tenants, or even family members will not be able to enter a property and help themselves to gold, diamonds, watches, rings and other items of value. If the trustee doesn’t lock down a property quickly enough, valuable personal property will likely go flying out the door before anybody knows about it.
Once trust properties ae secure, then the trustee can go about conducting an inventory of all of the items inside each house or property. These items of personal property can then be valued and included in the overall trust estate. How those items actually get valued and distributed is the subject of another discussion, but the trustee’s initial duty is to inventory and value all real and personal property within the trust. Taking photos or listing all of the items of personal property in the primary residence can also be very helpful. Later, as valuations are completed, the dollar values of each item can be assigned.
Consolidating accounts: When gathering and marshalling assets, sometimes it’s easier to pool the smaller accounts into a single larger one. For this purpose, the trustee should obtain a tax identification number to provide to the bank or credit union where the consolidation account will be held. An attorney or an accounting can quickly obtain the tax identification number for the trustee, or the trustee may be able to do it themselves. Once the consolidation account is opened, the trustee may transfer other cash balances into the new account. If the trustee holds a yard sale or estate sale, or if the trustee sells other trust assets, then the trustee may deposit all of the net sales proceeds into the holding account. This will make the final distribution easier once all accounts and assets have been consolidated.
Appraisal and Valuation of Assets
Appraising and Valuing Appreciated Assets: The trustee must also appraise each piece of real property and each business, corporation, or limited liability company owned by the trustor. The easiest way to pin a value on any such property is to hire an experienced professional appraiser to complete a written appraisal of each such property or business. Cash accounts, stocks, bonds and mutual funds and securities must also be valued as of the date of death, but those date of death values can be easily obtained from the financial institution where the account is held. The date of death values and appraisals determined by the trustee will also serve to establish the cost basis on the date of death for each appreciated asset for income and capital gains tax purposes. Remember, too, that all appraisals should be conducted by professional, licensed, certified appraisers, and should be done in writing.
Notifications to Beneficiaries: Most states also provide that while the trustee is in the process of gathering or marshalling assets and having them valued, the trustee should also notify all of the named beneficiaries of the trust who are entitled to income or principal from the trust, that the trustor has died, that the trust is now irrevocable and that the beneficiaries will be receiving a distribution from the trust at the appropriate time and as the trustor intended. This notification of irrevocability also usually informs each beneficiary that they are entitled to a copy of the trust document upon request, or at least those portions of the trust document that concern them individually.
Paying Bills & General Cleanup: If the deceased trustor was receiving social security payments, then the successor trustee should also coordinate with the administrator of the estate to notify social security that the trustor of the trust has passed away so that social security will stop sending checks. The successor trustee should also make sure that all credit cards are canceled, so that they will not be used fraudulently by someone who may find the card. The trustee must also make sure that all of the bills and expenses related to the deceased trustor’s final illness, burial and all other outstanding bills are paid. The trustee cannot distribute the estate, or even calculate the final net value of the trust estate or the value of any particular beneficiary’s individual share of the trust estate share until all of these bills have been paid.
Trust Tax Implications
Filing Tax Returns: The successor trustee should also coordinate with the administrator of the estate to insure that all of the decedent’s final income taxes are properly prepared and filed. IN most cases this involves hiring a CPA to prepare and file the final 1040 income tax return and the relevant state income tax return. The CPA should notate on the return that this is the final return for the deceased trustor, which gives permission to the IRS to retire the social security number of the deceased trustor. Later, ultimately, after the last dollar has been distributed from the trust and the trust has no more assets, the trustee should file a final tax return for the trust to terminate and retire the trust tax identification number, if such a tax ID number was obtained.
Estate Tax Returns: If the estate is a large one, larger than the maximum amount that can be transferred free from federal estate tax, then the successor trustee and administrator must also prepare and file the Federal 706 Estate Tax Return any pay any estate taxes that are due within nine months after the death of the trustor. If this is not done in a timely manner, there would be substantial penalties to pay. Some states also have state inheritance taxes that are due, and those tax returns also must be filed, if required.
Accounting to Beneficiaries: After all of the taxes and bills have been paid, the successor trustee shall be able to calculate the final distributable amount to each beneficiary. If requested the trustee must also provide a full and complete accounting showing how the figures were arrived at and enumerating all of the income and expenses incurred during the administration of the trust estate. Some trustees can create this accounting on their own, but most find it quite useful to hire an experienced CPA to prepare the accounting for the beneficiaries.
Funds Distribution from the Trust
Distributions to Beneficiaries: Once each beneficiary’s individual share of the Trust has been determined, then distributions form the trust can occur. Beneficiaries who are entitled to an outright distribution can receive their money by check or wire or some other form of acceptable transfer immediately. Real properties can be sold and the net closing proceeds distributed, or the trustee may decide to distribute the title to a particular beneficiary Those beneficiaries who are still too young to receive their funds may have to wait until they attain a certain age. For example, a beneficiary may be an adult, older than the age of majority which is typically 18 years of age, but if the trust specifies that the beneficiary must attain a different age, say 25 or 30, before they can receive all of their funds, then the trustee will have to hold those assets in trust for a few years until the beneficiary attains the requisite age specified in the trust.
Preliminary Distributions versus Final Distributions: During the settlement of the trust estate, beneficiaries simply have to wait. It may take some time to pay all of the bills, to sell all of the assets that are going to be sold and to generally prepare the estate for distribution. Even when you think it’s done, the IRS could come back in the following hear and ask for more taxes if the IRS disagrees with the final trust tax return, or with the decedent’s final personal income tax return. One way to avoid this problem is to make a preliminary distribution to all beneficiaries, but to hold back enough money to pay any outstanding or unexpected bills or taxes, just in case there are any. This way, beneficiaries can receive most of their distribution sooner, but the trustee can hold some back just in case there are unforeseen expenses later. Once all tax returns have been accepted and all bills are paid, and the trustee is certain that there will be no additional expenses, then the trustee can make the final distribution to each beneficiary. Better to hold some back in this fashion, however, than to have to ask beneficiaries who already received and spent their money to chip back in. And, because the trustee is personally liable for fulfilling his or her duties, making preliminary distributions, and holding back a contingency account is a way to protect the trustee from individual exposure and from having to pay any bills himself or herself out of his or her own funds.
At all times prior to the distribution of a beneficiary’s share, the trustee should properly and prudently invest the funds of a beneficiary in order to generate income, and in a manner that will also protect the safety of the capital. As a general rule, the trustee should take care to avoid risky investments, maximize income, protect the principal and diversify the investments, after considering the prevailing economic conditions. This is often referred to as the prudent investor rule, which is designed to help insure that trust assets hold their value for the benefit of the beneficiaries notwithstanding the ups and downs of the market.
Estate Planning Attorneys Can Help Along the Way
To summarize, a trustee’s duties are fairly straightforward: stay organized and serve the better interest of the beneficiaries by following the steps set forth above. Most people can do it on their own if they are careful and organized. However, it’s often a good idea to hire and estate planning attorney or CPA to assist in making sure all the I’s are dotted and the T’s are crossed. Getting professional assistance to help with the fulfillment of the trustee’s duties is also typically a legitimate trust expense that the trustee can pay for with trust funds, rather than out of his or her own pocket. And, last but not least, if the trustee is entitled to individual compensation for his or her services, I highly recommend that the trustee take it. Because, believe me, by doing all of the above in a thorough and conscientious way, and by completing his or her duties for the benefit of all of the beneficiaries, the trustee will earn every penny of any compensation that they are entitled to.