More and more people are dying with a Trust in place and typically name a family member or friend as the Successor Trustee. Most of the people named have no idea what their “fiduciary duties” consist of. This article will help you understand more fully what these duties consist of and what steps you need to take to carry out the terms of the Trust (“settle the Trust” or “trust administration”).
The first big question to tackle: Why do I need to hire a lawyer to help me administer a Trust? The legal answer is you don’t. However, the smart answer is that you are crazy if you don’t. And that answer lies in the definition of “fiduciary duty”. Fiduciary duty means that a beneficiary can sue you if you do not act like a “reasonable person” would act when dealing with the financial affairs of “settling a Trust”. You are held to the standard of what would a “reasonable Trustee would have done with the appropriate knowledge, skill, and expertise in settling Trusts.” The concept of “financial affairs” is embroiled in an understanding of tax laws, creditor rights, and claims, the economy, and general financial affairs, the best time to sell a home, or a stock or bond, the dynamics of the beneficiaries and the validity of the legal documents. In my younger days as a lawyer, I used to serve as a Trustee over Trusts I created for clients. No more. When I served as a Trustee, I learned that the beneficiaries could second-guess every decision I made.
Sure, the Trust spells out who will inherit the property when the administration is done. But it probably doesn’t address such issues as:
- Should I sell the real estate now, in a down market, or fix it up and hold it and sell it later?
- What about a family business? Should it be sold, passed down to the heirs, etc.? And if I elect to sell it, how do you properly value the business and what is a reasonable sales price? Do I sell it for cash, or take back seller financing? Who has the authority to run the business during this process?
- What are the tax consequences of selling the assets?
- Is it better to distribute the assets to the beneficiaries to let them sell?
- What if one or more of the beneficiaries has financial problems? Or marital problems? Or doesn’t get along with other family members? Distributing assets “in kind” to such family members can lead to many problems.
- If I have liability for making a wrong choice, can I be compensated for my time? What is “fair compensation”?
- Can I hire professionals to represent me and protect me and make sure that I fulfill my fiduciary duties? Does the Trust pay for that?
- What conflicts of interest are present if I am a Trustee and a beneficiary? Can I buy the property? Do I need appraisals? Do I need separate counsel to represent me as a beneficiary?
- Should I make distributions before or after I get the beneficiaries to “Waive Liability against Me”?
- Do I need a “formal accounting” or is an Excel spreadsheet enough?
- What duties do I have to pursue claims against other family members who may have taken advantage of the decedent while he or she was alive?
- Can I drive the family car during the administration?
- How do I properly dispose of the personal belongings? Can I give them away to family members that have asked for them? Can I donate them to charity?
The list goes on and on and on. Hopefully, you now realize that you need or should have professional help. When we represent you as the Trustee, we are actually representing the best interests of the Trust as a whole. We have the utmost duty of fairness to all beneficiaries. We have a duty to avoid conflicts of interest, self-dealing, or any activity or behavior that is beneficial to the Trustee at the expense of the beneficiaries.
Our first duty is to make sure all of the legal documents are enforceable and properly executed. We need to thoroughly understand what the documents say and properly identify and locate all of the named beneficiaries and keep them adequately informed during the administration process.
Our next duty is to safeguard and properly protect and insure all of the assets of the Trust during the administration. It is all our duty to ensure all property insurance policies are up to date and premiums are paid.
Next, we have a duty to prepare a complete and accurate “Inventory” of all of the assets. In this Inventory, we need to make sure that all real estate, family businesses, or other hard-to-value assets have been appraised. We need to determine the value of all marketable securities on the date of death of the decedent.
We need to make sure that we properly notify all creditors and give them an opportunity to present any claims they may have against the decedent or the Trust. We need to send out the appropriate Notices to all known creditors and we need to publish in a Newspaper to determine if there are any unknown creditors. We need to identify which claims are legal and enforceable and which claims are not. We need to arbitrate and settle any valid claims against the Trust and make sure that the creditors release the Trust from any further liability.
We need to deal with Federal and State Tax issues. We need to make sure all Income Taxes are paid at the Federal level as well as the State level. We need to identify which assets receive a “stepped-up cost basis” and which assets don’t. And we need to properly determine the appropriate “stepped-up basis” for each asset prior to it being distributed to a beneficiary. It is your duty as Trustee to determine this stepped-up cost basis. We need to determine the income tax consequences of IRAs, Annuities or other “Pre-Tax Assets” being named to the Trust as the beneficiary. And we need to determine whether or not there is a Federal Estate Tax or a State Estate Tax, and what the Exemptions and thresholds are for paying these Taxes. And if Taxes are owed, whose share of the inheritance do we reduce and take it from?
After all of these issues are taken care of, then we want to make a “Proposed Plan of Distribution” and send it to all beneficiaries to approve and sign off on prior to actually making the distribution. We want to give the beneficiaries a complete Accounting of all activities during the administration process. We want to hold back enough of the distribution to cover your fee as Trustee, our fee as Attorney for the Trust, and for the preparation of the final Income Tax Returns.
Now, after you have taken all of the steps enumerated above after you have received a Waiver of Liability against you and the Trust, and after all of the beneficiaries have waived the need for a Formal Accounting, then and only then are you finally in a position to close out the Trust, make all of the Distributions to the beneficiaries, and file all of the Final Income Tax Returns. Now, and only now are you 100% protected from a disgruntled beneficiary, all creditors, all tax authorities, and agencies. Now you have fulfilled all of your Fiduciary Duties, and you can feel comfortable in taking that compensation for all of your time, effort, and exposure to liability.
Now, back to our first question. Do I need to hire a lawyer? You can see that the real question is, Do I want to take on all of this liability and fiduciary duty without a lawyer? The old saying here applies. “Don’t be penny wise and pound foolish”.