It is true that settling the affairs of a loved one who created a Trust is easier and less costly than settling an estate thru Probate. But, to try to settle a Trust after the death of a loved one is like trying to represent yourself in a criminal matter. I will start this article describing things that are made better by having a Trust and then finish the article describing the reasons why you still should consult an experienced trust and estates lawyer.
One of the biggest advantages to having a Living Trust in place is the advantage of bypassing a Probate at the death of a loved one. For more information about Probate read the article Probate: Devil or Angel (create a link). A Trust avoids the Probate process in most cases because the title to the assets are owned by the Trust and can be controlled by the Trustee after the death of a loved one. You start to learn that Probate is really the process of reconnecting “the chain of title” to an asset when a loved one dies. Once you learn that then it is easy to understand the importance of a “living trust” which means the title to the decedent’s assets are transferred to the Trust and held by a Trustee while the decedent is still “living”. Absent a Living Trust, the title to the assets must be cleared and transferred by the Probate court.
A Trust also makes it possible to implement controls and restrictions on the distribution of the assets to the surviving heirs. It allows you to implement age restrictions for distributions commonly ages 25, 30 and 35. It allows you to have a Successor Trustee in place who has more wisdom and experience in dealing with finance. It allows you to implement greater creditor protection for the beneficiary while still making it possible for the beneficiary to access the inheritance. None of these advantages are possible without creating a Trust.
Yes, it is true that a Trust can be created inside of a Will. We call that a “Testamentary Trust”. But, nonetheless, it is still a Trust. And the negative is that the estate must go thru Probate to transfer the assets into the Trust after the death of the decedent. It is much better to transfer the assets into the Trust while you are still alive. Once again, that is why it is called a “Living Trust”.
Now let’s discuss where a lawyer can help in the “trust administration” process after the death of the creator of the Trust, “the Grantor” or “the Trustor”.
First, when a decedent dies, who was also serving as the Trustee of the Trust as well as the Trustor, you must “breathe life into the Trust”. The first step is to empower the “Successor Trustee” with all of the rights, privileges, powers and duties as the original Trustee. This is usually done with a legal document called an “Acceptance of Trustee”.
Next, the Successor Trustee must understand all its “fiduciary duties”. Some of these duties may be spelled out in the Trust document. But, most of these duties are prescribed by state law under the “Uniform Trust Code”. As a “fiduciary”, which is someone who holds the utmost duty of care to the beneficiaries, you must be advised of the “do’s and don’ts” of being a Trustee. What acts are deemed Conflicts of Interest. What acts are viewed as acts of Self-Dealing. There are many ways a Trustee can “stub his toe” and get into trouble as a Trustee. Especially if that Trustee is also one of the beneficiaries. If a Trustee violates (or “breaches”) any of his or her fiduciary duties, then he or she could be removed as Trustee by one of the beneficiaries. And worse, he or she could be held personally liable to the Trust for damages caused including possibly having to personally pay the legal fees of the beneficiaries which were incurred to remove that Trustee. There are many Attorneys or CPAs or others that are simply unwilling to incur the liability of taking on the fiduciary duties of being a Trustee. It is imperative that the Trustee seek competent legal advice and guidance to help fulfill these fiduciary duties.
What notices or other information must be given to the beneficiaries? Do you give them a copy of the entire Trust, or just a copy of the provisions that apply to them? Do you give them full disclosure of all the assets? What if they are only receive a specific gift of say $50,000, do we still have to disclose all the accounting records to them? And when are these notice requirements due? How fast does the Trustee need to act? Is the Trustee obligated to get the beneficiaries consent to the sales price of the house? What assets need to be appraised? What if one of the beneficiaries wants to buy the house? What if multiple beneficiaries want to buy it? Can the Trustee be held liable for giving out too much information? Not giving out enough information?
What about all the personal property of the decedent? Who controls the disposition of that? Is it the Trustee of the Trust, or is it the Executor under the Will? The answer depends on whether these personal items were transferred to the Trust or whether they remained in the estate at death. What if the Trustee is given discretion over the disposition of the personal property and the Trustee is also a beneficiary? Can he distribute any of the items to himself? Does he need approval from the others? Should he get them to sign a Waiver of Conflict of Interest? How do you value some of these items for tax purposes? What if there is a dispute among the beneficiaries over some of these items, particularly sentimental items of personal property? Should you conduct an estate sale? Is it worth it, or should the items simply be donated to charity? Should you ship the items to the beneficiaries, or should you make them come and get them? And, if you ship the items, does that come out of the general account for the Trust or should it come out of the share of that beneficiary?
And, since the Trustee is taking on this liability, it would be foolish of the Trustee to forgo compensation. Who in their right mind would take on responsibilities and duties and liabilities without being adequately compensated? Which leads to an interesting question, what compensation amount would be deemed reasonable? Only an experienced Trust and Estates Lawyer will be able to answer that. Part of the answer depends on the credentials, education and experience of the Trustee in matters such as finance, accounting, law, etc. The more experience and education one has the higher the hourly rate that can be considered reasonable. This author has recently seen the Probate Court approve $100 per hour as reasonable compensation for a Trustee. But, this person had an accounting degree and experience with income tax issues, finance, etc.
If you have little experience or don’t have at least a college degree, than “reasonable compensation” may only be $50 per hour or less. You want to make sure the attorney you hire has the knowledge and experience in dealing with trust administration to be able help you determine a reasonable compensation. Otherwise you might find yourself in a position where you will have to pay it back.
And what about the income tax issues? What assets are still subject to income tax to the beneficiaries, and which assets are not. Does the Trust need to have its own federal tax ID number and how do you obtain that? Is the Trust subject to withholding of income tax to the beneficiaries? And, is the Trust on a calendar year for income tax or a fiscal year depending on the date of death of the loved one? Does the Trust pay the income tax, or does the beneficiary? What items are deductible from the income tax? Should you sell the stocks and bonds, and if you do, are you triggering capital gains? And, do you need to hire an accountant to “keep the books” for the Trust?
There is a big difference between fiduciary accounting and income tax than there is for normal accounting and income tax for a business owner. So, just because you may have some experience with income tax for businesses, don’t think those same rules apply to a Trust. They do not. Subchapter J of the Internal Revenue Code is quite different. There are many accounting firms that don’t do 1041s or get involved with the income tax issues for a Trust. Once again, an experienced Trust and Estates Lawyer can guide you thru this. This author also happens to be a CPA as well as an Attorney which makes it helpful in advising Successor Trustees.
And what about distributions to the beneficiaries? When should they be made? Can you make a “partial distribution” or must you wait until the entire administration is finished and distribute all at once? What if some of the beneficiaries are minors or have “special needs”? What accommodations can you make for them? Should you have the beneficiaries sign a Release and Waiver relieving you of any liability prior to making the distribution? What requirements do you have for a “final accounting” and can the beneficiaries waive that? Should they waive that? How much of the distribution should be “held back” to cover selling the house or real estate? Or dealing with final income tax returns and tax issues?
In the end, and after reading this article, the more you learn about Trust Administration the more you should realize the need for competent legal advice from an experienced Trust and Estates Lawyer. And, when you compare the issues above with the issues of Probate, you will learn that the only real difference between settling an estate thru Probate Court versus settling an estate thru a Trust Administration is that the Probate process is supervised by a Court, where the settling of a Trust is not and is generally supervised by the beneficiaries. But the liability issues and the income tax issues, and all the fiduciary duty issues described above apply to both.
Most people would see the need to hire a Probate Lawyer for an estate administration thru Probate Court because of the fact the court is involved. But, the need for a lawyer is just as important in settling an estate thru a Trust Administration. In Probate Court you file a stack of papers with the Court. In Trust Administration you should be distributing a stack of papers to the beneficiaries. The liabilities and duties are the same. So maybe in Trust administration the old adage rings true: “He who represents himself in legal matters has a fool for a client.”
For more information on an Arizona Trust Administration, or if you need to file Probate in Arizona, please contact our office for a free consultation at 480-515-3716.