The Trustee's Legal Companion
The Trustee's Legal Companion
Carol Elias Zolla and Liza Hanks
March 2015, 3rd Edition
You're the trustee. Now What?
Serving as the trustee of a living trust after someone has died can be a big task—and you probably wonder just where you’re supposed to start. The Trustee’s Legal Companion contains the help you need to get organized, get moving, and do a good job.
You’ll learn how to:
- decide whether or not to take on the job of trustee
- set up ongoing trusts for the surviving spouse, children or someone with a disability
- invest trust assets
- get help from lawyers, accountants, financial planners and other experts
- prepare accountings
- handle taxes
- develop good relationships with beneficiaries, and
- distribute trust property.
Unlike any other legal guide on the market, The Trustee’s Legal Companion is written with both the legal and the human element of the job in mind. It will help you gain peace of mind during a difficult time, while saving you time, money, and headaches. The authors, attorneys who have helped many bewildered trustees, show you, step by step, how to go through the process with confidence.
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The Trustee's Companion
1. Should You Serve as Trustee?
- Getting the Big Picture
- Trustees and Executors: What’s the Difference?
- What Kind of Trust Do You Have?
- Is There a Cotrustee?
- Is the Settlor Incapacitated?
- Are the Records a Mess?
- Can You Get Along With Beneficiaries?
- Other Issues You May Be Concerned About
- If You Decide to Say No
2. Thinking Like a Trustee
- Fiduciary Duty: It’s All About the Beneficiaries
- Get Help When You Need It
3. Working With Beneficiaries
- Communicate Well and Often
- Should You Share the Trust Document With Beneficiaries?
- What Beneficiaries Need to Know
- What Unhappy Beneficiaries Can Do
- Heading Off Trouble
- If You Are Also a Beneficiary
- If You Are Administering an Ongoing Trust
4. The First Few Months
- Get Death Certificates
- Find and File the Will
- Notify the Social Security Administration
- Notify the State Department of Health
- Identify the Beneficiaries
- Notify Beneficiaries and Heirs
- Inventory Trust Assets
- Protect Trust Property
- Get a Taxpayer ID Number for the Trust
- Get Property in Your Name as Trustee
- Review Trust Investments
- Establish a Record-Keeping System
- Get Assets Appraised
- Pay Debts and Creditors’ Claims
5. Assets That Should Be in the Trust—But Aren’t
- Trust Assets Not Listed in the Trust Document
- What Goes Into the Trust and What Stays Out
- What Does the Will Say?
- Getting Property Into the Trust
6. Life Insurance, Retirement Plans, and Other Assets Outside the Trust
- Life Insurance
- Pension Plans
- Traditional IRAs and 401(k) Plans
- Roth Plans
- Survivorship Property
- Payable-on-Death Property
7. Getting Help When You Need It
- Real Estate Maintenance
- Organizing Personal Property
- Legal Advice
- Trust Accountings
8. Managing Ongoing Trusts
- Kinds of Ongoing Trusts
- Trusts for Surviving Spouses
- Trusts for Children
- Special Needs Trusts
- Who Gets Trust Money and When?
9. Investing Trust Assets
- The Duty to Invest Prudently
- Permissible Investments
- Getting Help From Investment Experts
- The Beneficiaries’ Needs
- Balancing the Needs of Current and Future Beneficiaries
- Handling Real Estate
- What to Do With Business Assets
10. Dealing With Taxes
- There’s Always a Taxpayer
- Careful: You Could Be Personally Liable
- Tax Returns You May Have to File
- Beneficiaries and Taxes
- Missing Returns
- The Final Personal Income Tax Return: Form 1040
- The Trust’s Income Tax Return: Form 1041
- The Federal Estate Tax Return
- State Estate Tax
- Other Taxes You Need to Be Aware Of
11. Trust Accountings
- How Often Must You Prepare Accountings?
- Who Should Prepare Accountings?
- A Typical Simple Trust Accounting
- Who Gets a Copy?
- Delivering the Accounting to Beneficiaries
12. Terminating the Trust
- When Does the Trust End?
- How to Distribute Trust Assets
- Filing the Final Fiduciary Income Tax Return
- Keeping Some Trust Money in Reserve
- Receipts From Beneficiaries
- Should You Ask Beneficiaries to Sign Releases?
- Final Correspondence With the Beneficiaries
- Telling the IRS You’re No Longer Trustee
A. State Information
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
B. Sample Trust
Should You Serve as Trustee?
Getting the Big Picture..................................................................... 5
Trustees and Executors: What’s the Difference?............................. 7
What Kind of Trust Do You Have?................................................... 9
Simple Living Trusts................................................................... 10
Ongoing Trusts.......................................................................... 12
Is There a Cotrustee?.................................................................... 13
Is the Settlor Incapacitated?.......................................................... 14
Getting a Doctor’s Statement.................................................. 17
Managing the Settlor’s Trust Assets........................................ 18
Are the Records a Mess?.............................................................. 20
Can You Get Along With Beneficiaries?........................................ 20
Other Issues You May Be Concerned About................................ 22
Your Responsibility for Paying Trust Debts.............................. 22
What Happens If You Mess Up................................................ 23
Getting Paid for Your Work as Trustee.................................... 24
Getting Expert Help.................................................................. 25
If You Decide to Say No................................................................. 26
It’s an honor to be chosen as a successor trustee of a loved one’s trust. The person who chose you considered you trustworthy and responsible—someone who pays attention to detail and gets along with others. But do you want the job? You don’t have to take on the responsibility of serving as trustee—you can decline.
Most of our clients agree to act as successor trustee because they feel a sense of loyalty to the person who asked them. In many cases, the trustee is a beneficiary of the trust, the deceased person’s accountant or other adviser, or a close friend or relative.
Sometimes, however, the best thing you can do for all involved is to politely decline. If you are overwhelmed by demands on your time and energy or don’t get along with one or more of the beneficiaries, you may not in fact be the best person for this added responsibility. No one will be happy if you take on the job but are unable to give it the time and attention it requires. Accept the position only if you have the time, the patience, the organizational skills, and the sense of humor required to juggle a thousand administrative details and a few anxious beneficiaries at the same time.
Example: Karen names her friend Marjorie as the successor trustee of her living trust. Marjorie is close to both Karen and Karen’s brothers, Pete and Josh. She is married, living nearby, and working as an accountant.
When Karen dies 15 years later, Marjorie is no longer on speaking terms with either Pete or Josh, is raising three children as a single mother, and has moved across the country. When Marjorie is notified that she’s been named as successor trustee, she doesn’t accept the job. Although she loved Karen dearly, she knows that it would be difficult for her to act as successor trustee because of her limited free time, the distance, and because she does not get along with Karen’s brothers.
What about accepting, with the idea that you can quit later if serving as trustee gets to be too much work and hassle? We don’t recommend it. If you are worried that the responsibility is going to require too much of your time or put you in an uncomfortable position with respect to your relatives, our advice is not to accept in the first place. It’s true that you can always resign later on, but when you act as trustee for any period of time, you expose yourself to some personal liability that you might rather avoid altogether. Also, before you can resign you’ll have to take a number of steps to protect yourself and the beneficiaries. That all can be avoided if you decline the job now.
Think twice about taking the job if:
You don’t get along with the beneficiaries. If you don’t like the people you’re managing the trust for, you probably won’t have an easy time doing it.
You don’t know what the settlor owned and think it will be hard to find out. If you don’t have the time for massive detective work, perhaps this just isn’t the right job for you at this time.
Lawsuits are threatened or already in progress. As trustee, you’ll have a duty to defend the trust against a lawsuit that could reduce its value; you will also have to collect money owed to the trust. Trust money can be used to pay for the legal expenses, but this may take up a lot of your time and energy.
You’re named along with a cotrustee. This complicates everything, because generally all cotrustees must sign off on everything. And chances are that one of you will end up doing all the work.
Getting the Big Picture
Before you decide whether or not to serve as a successor trustee, you really need to understand what a trust is and why someone would create one in the first place.
On the legal side, a trust is an agreement in which one person, the settlor, agrees to transfer property to another, the trustee, who will manage that property for the benefit of someone else, the beneficiary. For the whole plan to work, the settlor must legally transfer ownership of the assets to the trustee of the trust. A deed transfers a house; other documents are used to transfer brokerage and bank accounts. These documents notify the county, the bank, or the brokerage firm that the settlor used to own the asset and is now transferring it to the care of the trustee. The trust, in the person of the trustee, becomes the new legal owner, and the trustee becomes the new manager.
With a living trust, usually the settlor is also the first trustee and beneficiary. So the person who puts the property into the trust continues to use and manage that property during his or her lifetime. There’s a flurry of paperwork, but nothing actually changes in real life with respect to how the settlor can use or invest the assets. When the settlor dies (or becomes unable to manage the trust assets), the next trustee steps up to manage and distribute the assets. That’s you, if you accept the job.
When you are the trustee, you are responsible for the trust’s assets. Your job is to manage those assets and distribute them as the trust document directs. Your actual duties will vary enormously depending on what kind of trust you are in charge of and what the trust document instructs you to do. But no matter what kind of trust you’ve got on your hands, you’ll have certain common challenges and issues.
In general, your job is to:
identify and protect the trust’s assets
figure out what the trust instrument (the document that created the trust) requires you to do
be scrupulously honest
communicate regularly with the trust beneficiaries
manage the assets long-term or distribute them to the beneficiaries right away, and
end the trust when it’s time (as determined by the trust instrument).
The chief benefit of this arrangement is that the assets can be distributed to the people who inherit them without the need for a probate court proceeding. That saves the beneficiaries time and money. If the trust is designed to stay in existence for a while, it can also provide a way to manage assets for young beneficiaries or provide tax savings.
Environmental Problems: A Really BIG Red Flag
If the trust includes real estate that has possible environmental liability, such as a gas station, an urban lot bordered by old factories, or even farmland that was treated with pesticides, get an environmental risk assessment from a qualified expert right away. If the problems are big, think very carefully about accepting the job.
You may have to accept the trusteeship in a limited scope just to hire and supervise a general inspector. But you are well within your rights to demand that the trust foot the bill for an inspection before you agree to take on the job of trustee. If the inspection turns up problems and you decline to serve as trustee, you must tell any prospective successor trustees what you know, and let them determine for themselves whether to accept the position.
Do not transfer title to the property to your name until you have an idea of whether clean-up will be required; once you’re in the public record as owner, you can be personally on the hook.
If you do accept the trusteeship, you can authorize an in-depth inspection that will show the scope of the damage and the work needed to prepare the property for sale or transfer. The trust may be required, under local, state, or federal law, to clean up any environmental problems before the beneficiaries receive their share of trust assets. That kind of clean-up can be time-consuming, complicated, and costly—and beneficiaries may disagree with you on the proper way to proceed. But if you don’t prevent environmental damage that you should have, you could become personally liable for the cost of clean-up.
Trustees and Executors: What’s the Difference?
Even when you’re dealing with a trust, there’s almost always a will, too. That’s a good thing, because wills do two things that trusts can’t: they nominate guardians to raise minor children in case there are no surviving parents, and they distribute property that was owned by the settlor but was not placed in the trust.
As trustee, you are legally responsible only for assets that are held in the trust. Most often these are the assets that the settlor transferred to the trust by recording a new deed or by filling out forms at a bank or brokerage house. But life is messy, and it often happens that people leave some things out of their trusts. These can range from small everyday checking accounts to large brokerage accounts, stock, or even real estate. The job of collecting, protecting, and distributing nontrust assets falls instead to the executor (also called personal representative) of the person who has died.
It’s common for the same person to be named as trustee and executor. If the deceased person’s will names you as the executor, then you are the person in charge of assets governed by the will. An executor steps into the shoes of the settlor and finishes up all the odds and ends that get left behind after a death. Among other things, the executor goes through the settlor’s mail, cancels credit cards and utility bills as necessary, notifies creditors, and files the settlor’s last tax returns.
If the will gives someone else the executor’s job, then you’ll need to work together and communicate closely to get debts paid, tax returns filed, and assets distributed. You’ll probably always be in the loop anyway. It is common practice for most attorneys to draft living trusts along with a special kind of will, called a “pour-over” will. This will directs the executor to transfer any property owned by the settlor at death into the living trust. The goal is to prevent having two separate sets of instructions about who should get what. If all the property is poured into the trust, then only one set of instructions (those in the trust instrument) need to be followed. This is a sensible way to arrange things, and it means that you, as trustee, will ultimately be in charge of everything the settlor owned.
Before assets outside of the trust are transferred into the trust, there might have to be a probate proceeding. It depends upon what assets are outside of the trust and what the laws of your state say. In many states, small assets, such as checking accounts, can be transferred into the trust without a formal probate proceeding. (Chapter 5 helps you figure this out.) Whether it’s the executor or the trustee who transfers the assets to the trust will depend on the value of the asset and state law. Until the process is complete, the trust assets cannot be completely distributed.
Example 1: Ethan was the successor trustee of his father’s living trust. After his father died, Ethan discovered that his father had left a brokerage account worth $20,000 outside of his trust. Because it wasn’t held in the trust, Ethan had no authority over it as the successor trustee. But under the terms of his father’s pour-over will, the trust inherited the brokerage account. As a result, Ethan could claim it on behalf of the trust. (He didn’t have to go to probate court, because the account’s value was low enough to qualify for a simple, out-of-court transfer process under state law.) Once the account was in the trust, Ethan divided it into equal thirds and distributed it to his siblings, as the trust document directed.
Example 2: Felix was the successor trustee of his mother’s living trust and nominated as her executor in her pour-over will. After his mother died, Felix discovered that her recently purchased vacation home, worth $200,000, was not held in her trust. So Felix had to initiate a probate court proceeding to request that the judge appoint him as executor, follow his state’s probate procedures, and wait for the court’s approval to distribute the property.
After about a year, the judge ordered the property to be distributed to Felix, in his position as successor trustee of his mother’s trust. Only then Felix could distribute the vacation home to the trust beneficiaries, as the trust document directed.
What Kind of Trust Do You Have?
You don’t know what you’re getting yourself into until you figure out what kind of trust you’ve got on your hands. Some trusts are relatively simple to administer, and your job would be wrapped up quickly. Others might take time and effort for years to come.
How can you tell whether you’ve got an easy trust or a hard one? Look at the trust instrument—specifically, the section that states what is to happen when the person who created the trust (called the settlor, grantor, or trustor) dies. If the trust was made by a couple, find where it says what will happen when the first settlor dies. Usually you’ll see a section heading that says something like “Trust Distribution Upon the Death of Settlor.”
If the trust says that the trust assets are to be handed over (distributed) to certain people outright, you’ve got a simple trust to administer. If, however, the trust says that certain assets are to be held in trust for beneficiaries, you’ve got a more complicated trust, one that could last a while.
If you’ve been named trustee of an ongoing trust, it may make sense to ask an attorney or a CPA to review the trust instrument. An expert might be able to identify potential issues that would make your job as trustee especially difficult—for example, commercial real estate that would require a lot of your time to manage, or complicated distribution requirements that would require you to balance the needs of several beneficiaries over a long period of time.
Simple Living Trusts
A simple living trust is designed to end soon after the settlor’s death, so there will be no ongoing trust for you to manage. You will collect all the trust assets, pay the debts, expenses, and taxes of the trust, and distribute what’s left to the beneficiaries. Because trust assets don’t need to go through probate, you can wrap everything up and give property to the beneficiaries without the time and delay of a court proceeding. In six months or so, you should be done.
Example: Joshua established a living trust to hold his assets and named his close friend, Adam, to serve as the successor trustee. The trust instrument directed Adam, at Joshua’s death, to distribute half of the trust assets to Joshua’s sister, Mary, and half to his cousin, Leopold.
When Joshua died, Adam collected the trust’s assets and paid the debts, expenses, and taxes due. Then he distributed half of the trust’s remaining assets to Mary and half to Leopold. When he’d done that, the trust administration was finished.
This kind of basic, probate-avoidance living trust is a substitute for a will. Traditionally, people used wills to direct what should happen to their property after death. Most of us know from movies, books, and plays that a person’s last will and testament is the document that gets read in front of the family, by the lawyer, after a death. (That’s the part where Junior finds out that he’s been disinherited and his sister discovers that she’s the new owner of the manor house.) That’s still a perfectly legal way to get the job done, though sadly nobody does a big dramatic will reading anymore.
Wills are legal and effective, but they have a big drawback: Property left through a will generally has to go through probate court after a person dies. Probate is a court process that was designed to make sure that a person’s wishes were followed. There’s nothing inherently evil or wrong about probate. In some situations it’s useful to have a judge make sure that a will is valid, identify the property owned by the deceased person, ensure valid bills are paid, and make sure that the property is distributed as directed by the will. The problem with probate is simply that for many families, court supervision of this process isn’t necessary—and in many states, the process can take more than a year and can cost thousands of dollars.
That’s why living trusts are very popular, especially in states where probate is time-consuming and expensive. They allow a person to transfer assets to loved ones without the time and expense of a probate court proceeding.
Example: Rebecca establishes a living trust during her lifetime. That makes her the settlor, and the trust instrument also names her as trustee. It names her grown daughter Erin as the successor trustee.
She transfers the title to her house, her brokerage account, and her savings account to herself as the trustee of her living trust. Now, the name on her deed and accounts is “Rebecca Durham, Trustee of the Rebecca Durham Revocable Living Trust.” During her lifetime, she manages and uses trust assets however she wants.
When Rebecca dies, her daughter takes over as the successor trustee. The trust instrument directs her to distribute the trust assets in three equal shares to herself and her two siblings. After notifying certain people as required by state law and paying all of Rebecca’s last expenses, debts, and taxes, Erin distributes the trust assets in equal thirds. No probate court proceeding is required.
Although probate avoidance (as discussed above) is the main benefit of a simple living trust, settlors can get additional benefits if they set up a more complicated trust, designed to last for years or even decades. For example, couples in second marriages can control assets left to the surviving spouse or ensure that children from prior marriages will inherit. The very wealthy can do sophisticated tax planning.
There are many kinds of ongoing trusts. For example, if the trust was created by a couple and one of them has died, the trust instrument might state that assets are to be placed in trust for the benefit of the surviving spouse. Or it might direct that certain assets are to be held in trust for young children until they grow up, or in trust for other family members indefinitely.
If you are trustee of an ongoing trust of this kind, you’ll be in charge of filing tax returns, investing trust assets, and choosing how to spend trust funds for beneficiaries. You will likely work with an accountant and an attorney. You could wear your trustee’s hat for a lengthy period of time.
Example: Martina and Steven established a living trust. Upon the death of the first spouse, the trustee was directed to hold trust assets in two trusts, both for the benefit of the surviving spouse. One trust was to hold the amount of money that the first spouse to die could pass estate tax-free; the other was to hold the assets owned by the surviving spouse.
Martina and Steven named Steven’s younger brother, Todd, to serve as successor trustee after both of them had either died or resigned as trustees. After Martina died, Steven was in ill health and overwhelmed by grief; he asked Todd to take over management of the trust and resigned. Todd reviewed the trust and realized that he would be managing Steven’s two trusts for the rest of Steven’s life. After consulting an attorney and a CPA, he decided that he could do the job and accepted the position of successor trustee.
Is There a Cotrustee?
Remember having to do a group project in high school? Every group seemed to include one slacker who made big promises but never followed through, one member who brought the pizza, and one responsible person who pulled an all-nighter to actually finish the project. If you serve with someone else as a cotrustee, you may find yourself recalling those school projects.
The settlor probably named you and another person as cotrustees in hopes that your skills would complement each other’s and that together you would make a perfect trustee. Or maybe the settlor just didn’t want to hurt anyone’s feelings and named you and all of your siblings. The truth is that when you work with another person, you have many more obstacles than when acting alone.
Most trusts require cotrustees to act unanimously. In an ideal world, you will get together and delegate tasks. One of you will meet with the real estate agent to discuss listing the house, while the other talks with the financial adviser about investments. Once you’ve each done your legwork, you will get together, discuss the pros and cons of a particular action, and then both sign the papers to move the trust administration process along.
But most of the time, one person does most of the work. There can be lots of reasons—maybe a cotrustee is overwhelmed by other aspects of life or can’t stand the idea of selling the settlor’s house. In any case, if you’re the responsible cotrustee you’ll end up with more work than if you were sole trustee. Not only will you have to research the options and figure out what needs to be done, you will have to corral the cotrustee to meet and sign documents. If the cotrustee decides to be stubborn and object to your preferred action, you’re back to square one.
You might also be legally liable for actions that the cotrustee takes on behalf of the trust. If the cotrustee promises to file the trust tax return but doesn’t, for example, both of you will be on the hook.
Finally, most of the trusts we’ve seen say that cotrustees must share the trustee’s fee. As a result, the responsible cotrustee could end up doing 125% of the work for 50% of the fee. Perhaps the other cotrustee will recognize that you’re doing the bulk of the work and agree to take less, but it isn’t guaranteed.
You can guess what our advice is here: If you’re named as a cotrustee, don’t do it! Talk with the other named cotrustee and see whether that person will resign. If not, you should consider resigning before the two of you miss important deadlines. If you must continue to act as cotrustee, make sure your cotrustee reads this book and understands the work involved. Then create a task sheet with deadlines and inform the cotrustee that you expect that both of you will share information and cooperate.
Is the Settlor Incapacitated?
If a trust document names you as a successor trustee, it’s most likely that you’ll take over management of the trust when the settlor dies. But most trusts are written so that you could step in sooner, if the settlor became unable to manage the trust assets. In that situation, you would manage the trust assets until the settlor died, and then, depending on the kind of trust you’re dealing with, either wrap up the trust quickly or manage it over the long term.
You’ll step in to manage a trust for a living settlor in one of two circumstances:
the settlor asks you to, or
the settlor is incapacitated and unable to manage trust assets.
If you’ve been asked to step in, the trustee should formally resign in writing, and you should formally accept in writing. That way, no one will be confused about who is managing the trust. Examples of resignation and acceptance statements are shown below.
Resignation of Trustee of the Susan L. Woods Living Trust
I, Susan L. Woods, settlor and trustee of the Susan L. Woods Living Trust, executed on May 12, 20xx, resign as trustee, pursuant to Section 1.8, which provides that I may resign at any time during my lifetime by a signed writing delivered to the successor trustee.
This resignation shall be effective as of the date on which I sign it.
Agreement to Act as Trustee
I, Manuela Woods, agree to serve as trustee of the Susan L. Woods Living Trust, dated May 12, 20xx, and to abide by the terms of the trust instrument as of the date that this document is signed.
If you are replacing a settlor who is gradually losing the ability to manage the trust, it can be a more difficult process. It’s best, if you can, to work with the settlor during this process, which is a time of major suffering and loss. Be patient. Listen to the settlor’s concerns. It may be helpful to emphasize that as the successor trustee, you are simply managing the assets. The trust assets still belong to the settlor, and your job is only to follow instructions. Try to understand the settlor’s fear of losing control and make it clear that you’re trying to help.
If the settlor has already lost the capacity to manage financial matters, you’ve got to read the trust document to see how it defines incapacity. You can’t step in as the new trustee until the settlor resigns or is declared incapacitated. So carefully document that the settlor is in fact incapacitated before you take over as trustee.
Whatever the trust instrument says about proving incapacity, follow its instructions. Some trusts require a statement from one, two, or even three doctors. Others require a statement from a specialist, such as a neurologist or psychiatrist. Some trust instruments specifically define the tasks a settlor must be unable to do, while others state generally that a settlor who is unable to manage the affairs of daily living is incapacitated. Almost no trust will require that you get a court order of incapacity.
Example: Johnny’s trust defined incapacity this way:
Definition of Incapacity. As used in this instrument, “incapacity” or “incapacitated” means operating under a legal disability such as a duly established conservatorship, or a person who is unable to do either of the following:
(a) Provide properly for that person’s own needs for physical health, food, clothing, or shelter; or
(b) Manage substantially that person’s own financial resources, or resist fraud or undue influence.
The determination of incapacity shall be made by the physician of the person whose capacity is at issue.
Johnny’s grandson Rob is the successor trustee. In order to take over as trustee, he must get a written statement from Johnny’s physician that states that Johnny is unable to provide for his needs or manage his finances. Because Johnny has been unable to properly feed and clothe himself and has been hospitalized as a result, Rob has no trouble getting the doctor to write the statement.
Getting a Doctor’s Statement
If you think the settlor isn’t capable of managing the trust, start by approaching the settlor’s primary, general care physician. Doctors with a lot of elderly patients are familiar with this request and can quickly have a written statement ready for you, stating that the settlor is incapacitated. Medical doctors have a duty to act in the best interest of their patients, which should include cooperating in your efforts to take care of a patient who needs help.
If the doctor won’t cooperate, you can approach another doctor who sees the settlor regularly. If that doctor won’t help either, you may need to have the settlor’s mental capacity determined by a neurologist or other specialist. You may have to pay for this evaluation and then, if the settlor is determined to be incapacitated, reimburse yourself with trust money.
A doctor may be reluctant to provide a statement because of medical privacy laws such as the federal Health Insurance Portability and Accountability Act (HIPAA) and its state equivalents. These laws require a patient’s consent before a doctor can release personal health care information.
If you run into this, see whether the settlor signed a consent form authorizing the doctor to release information to the person named as the settlor’s “health care agent” under a valid durable power of attorney for health care or health care directive. Many attorneys routinely draft these documents, which give the health care agent authority to make medical decisions on behalf of the settlor if it’s necessary, as part of an estate plan. (The power of attorney is called “durable” because it stays in effect even if the person who made it becomes incapacitated. Conventional powers of attorney end if the person becomes incapacitated.)
Even if the settlor didn’t sign a consent form, doctors may still communicate with you if you are the settlor’s attorney-in-fact or agent, named in the settlor’s durable power of attorney (DPOA) for health care or finance. These documents almost always state that the agent may communicate with doctors on the settlor’s behalf. Of course, there is a chicken-and-egg problem here: they can’t talk to you until you’re appointed; and you’re not appointed until the settlor is determined to be incapacitated. Still, in practice, many doctors will cooperate with you if it’s clearly in the interest of their patients.
Example: When Barbara created her will and living trust, she also signed a durable power of attorney for health care. She named her nephew Benjamin as executor of her will, successor trustee of her living trust, and attorney-in-fact under the durable power of attorney.
When Barbara becomes ill with Alzheimer’s disease and can no longer manage daily tasks without help, Benjamin shows her doctor the DPOA, which gives him authority to make health care decisions for Barbara should she be unable to make them herself. Seeing this evidence of Barbara’s wishes, the doctor feels comfortable sharing her medical information with Benjamin.
If a doctor doesn’t think the settlor is incapacitated, you’ll have to get help to meet the settlor’s urgent needs. If the settlor is in physical danger, being abused by a caretaker, or living in squalor, call in the adult protective services in your area to get the settlor moved to a safer place. You may need to initiate protective proceedings in court, such as a temporary restraining order (to remove an abusing caregiver, for example) or an adult guardianship (also called a conservatorship), which makes a court-appointed conservator or guardian legally responsible for the settlor.
Managing the Settlor’s Trust Assets
If the settlor resigns or you get the required statements of incapacity, then you can take over management of the trust assets. Notify all of the trust’s account holders that you’re now the trustee and start keeping careful records (even if the settlor did not) so that you can prepare an accounting of the trust’s assets for the trust beneficiaries. (See Chapter 11.) If the trust owns real estate, record an affidavit (sworn statement) with the county land records office, stating that you are now the successor trustee. (See Chapter 4.)
You won’t have authority over assets that aren’t in the trust, such as retirement accounts, life insurance policies, or everyday checking accounts, unless the settlor named you as attorney-in-fact in a document called a durable power of attorney (DPOA) for finances. (This is a different document from the DPOA for health care discussed above.) A DPOA for finances should be part of the settlor’s estate plan; commonly, it is drawn up at the same time as a living trust. An attorney-in-fact has the legal authority to manage an incapacitated person’s financial affairs.
It can get confusing to keep track of which document gives you authority and over which assets. As successor trustee you have authority over the assets that the trust owns, but not over anything else. You can’t turn off the settlor’s cell phone or write a check on the settlor’s personal checking account. The bank, the phone company, the retirement account holder, and any other financial institution want proof that you are the properly appointed attorney-in-fact before they will deal with you about nontrust assets. After all, how do the people at the bank know the settlor is really incapacitated, not just away on vacation? Why should they let you, a stranger to them, have access to the settlor’s accounts?
Example: Scott’s sister, Penelope, has terminal brain cancer. Scott is both the successor trustee of her living trust and her attorney-in-fact for finances. Taking over as trustee, he moves $20,000 from her brokerage account, which is held in the trust’s name, into her everyday checking account, which is not in her trust. As her attorney-in-fact, he uses this money to pay her telephone and utility bills, to pay her caregivers, and to hire housecleaners. He signs these checks, “Penelope Thompson, by Scott Smythe, attorney-in-fact.” When Penelope wants to make a change to the beneficiaries of her life insurance policy, Scott can do that for her, acting as her attorney-in-fact.
Are the Records a Mess?
Before you sign on for the job, take a moment and consider whether you’ll be working with the legacy of an organized person or a whirlwind. It will make your job considerably harder if you’re trolling through the wreckage of someone’s financial life or if the settlor never even got around to transferring assets to the trust. (You may be able to get assets into the trust, even now; but it will take months and a lot of effort. See Chapter 5 for details.)
One of your threshold jobs as trustee will be to identify and collect trust assets. It can be easy, if the settlor left good records and was an organized person. Or it can be a nightmare, if the settlor didn’t keep good records or simply left you with a house full of seemingly random scraps of paper. (If you serve as trustee, you’ll need to keep excellent records of every dollar of trust assets that you spend or give to a beneficiary, so you can report to the beneficiaries how and where the assets were invested. We cover this in detail in Chapters 4 and 11.)
Most likely, you’ll have some detective work to do. A good starting place is the trust document itself, which should have a list of trust assets (called a schedule) attached to it.
At a minimum, you’ll be searching through account statements, looking at the settlor’s mail, and going over old tax returns. Assets that are owned by a trust are usually identified pretty clearly. For example, the deed for a house or the statement for a brokerage account will say that the asset is owned by the “Smith Family Trust.” (Chapter 5 goes into more detail on how to figure out what the trust does and doesn’t own.)
Can You Get Along With Beneficiaries?
You may be dealing with the beneficiaries for just five or six months or for decades, depending on the kind of trust. A long-term relationship is fraught with more potential problems. But even if your job is to distribute the trust property quickly, your job will probably be stressful if the beneficiaries don’t like what you’re doing. In fact, if you know up front that your relations with beneficiaries will be difficult, it’s one very good reason not to accept the job in the first place.
To avoid conflict, we advise you to communicate frequently and clearly to the beneficiaries from the get-go. You can do a lot to reassure people by being open about what’s happening and how you’re making decisions. (See Chapter 3 for more on how to do that gracefully.)
If beneficiaries become truly unhappy, they have a few legal options. They can:
Demand frequent accountings. Beneficiaries may ask for reports showing how trust assets are being managed and distributed. (See Chapter 11.) State law may limit how often beneficiaries can demand formal accountings, but they always have the right to be kept reasonably informed about the assets being managed for their benefit.
Ask a court to remove you as trustee. Whether or not the court will grant this request depends on the terms of the trust and state law. Some trusts allow beneficiaries to choose a new trustee if the current one isn’t doing a good job of managing trust assets. If the trust doesn’t say anything about this issue, a court can act, but rules vary from state to state. In some places, beneficiaries must prove that you acted in bad faith; in others, judges will remove a trustee just because the beneficiaries request it.
Sue you for violation of your legal duties to them. If you don’t send beneficiaries the accountings required by the trust document, or if you mismanage assets, you can get sued. For example, say you kept all the trust money invested in one mutual fund for years, despite its dismal performance. The beneficiaries could sue you for the losses they’ve suffered, and you could end up reimbursing the trust out of your own pocket.
We are not trying to scare you, but you need to know that if beneficiaries aren’t happy with their share of the trust (they hardly ever think that they got too much), you’ll be the one that they complain to and about. If a beneficiary complains to you about the terms of the trust, you can be sympathetic, but there isn’t much you can do to help. You have no power to equalize benefits or reward a beneficiary who had, for example, been especially attentive to an elderly settlor. You’ll just have to explain to beneficiaries that you must follow the terms of the instrument and can’t do anything except what it authorizes you to do.
Other Issues You May Be Concerned About
If you’ve gotten past the red flags discussed above and are seriously considering accepting the job of trustee, you probably have lots of questions about the responsibility you might be taking on. Here are some of the big ones.
Your Responsibility for Paying Trust Debts
You are not personally responsible for the debts on trust property, such as mortgages on property that the trust owns or loans that were taken out in the trust’s name during the settlor’s lifetime. In other words, you don’t have to use your own money to pay them. You must use trust assets to make payments on these debts, though, until you distribute the assets to the beneficiaries. For example, you must continue to pay the mortgage on a house until it’s transferred to the beneficiaries or sold. (Or, in unusual circumstances, until you decide to stop making payments and let the lender foreclose.)
If there is cash in the trust, you can use it to make payments. If there isn’t enough cash, you’ll need to figure out how those payments will be made. Commonly, a trustee or beneficiary will pay these costs and then get reimbursed after the asset is sold and the trust has enough cash to pay them back.
Example: Lee’s trust had just one asset: her house, which was fully paid for. The trust instrument stated that at Lee’s death, her adult daughters Sarah and Caitlin would receive all the trust’s assets equally. Sarah was the successor trustee. Both daughters wanted to sell the house because they lived far away, but the place needed some maintenance work before it would bring a good price. Sarah, with Caitlin’s consent, spent $12,000 of her own money to have it painted and landscaped and to pay the property tax that was due. She kept excellent records to document her expenditures.
When the house sold for $112,000, Sarah reimbursed herself the $12,000 that she’d spent on the house. Sarah and Caitlin then split the remaining $100,000 equally and amicably.
What Happens If You Mess Up
If you’re thinking about taking on the responsibility of serving as a trustee, you probably wonder about the consequences of a mistake on your part. Don’t worry. As long as you act reasonably and in good faith, you shouldn’t run into any liability problems. For example, you wouldn’t be liable for investing trust money in a stock that simply doesn’t do well, if the initial purchase was reasonable and you regularly reviewed the holding as part of an overall investment strategy. Similarly, you wouldn’t be liable for selling a property for less than its asking price in a down market, as long as you did your best under the circumstances and made reasonable choices.
You’ll be all right if you follow one simple rule: Always put the interests of the trust beneficiaries before your own. When a new client comes into our offices to discuss becoming a trustee, we put it this way: The trustee serves the trust.
Trustees are held to a high standard of honesty and faithfulness. If beneficiaries can prove that you acted in bad faith and breached your duties under the trust, a court could remove you as trustee and order you to compensate the beneficiaries for their losses. For example, you might have to pay the beneficiaries (out of your own pocket) the lost income, capital gains, or appreciation that resulted from your improper actions.
The liability we’re talking about here is for trustees who do really bad things, like stealing trust money and spending it on themselves. Or investing trust assets in extremely risky stocks. Or hiring their friends to do jobs that they’re clearly not qualified to do and damaging trust property. Honestly, if your kids were the beneficiaries of a trust, you’d want your trustees not to do these things—and to be held accountable if they did.
Communication is key. You’ll head off most troubles with beneficiaries by keeping them very well informed about what you’re doing. See Chapter 3.
Getting Paid for Your Work as Trustee
Most trustees are entitled, under the terms of the trust or state law, to “reasonable” compensation for their work. If the trust instrument states what you are to be paid, that’s what you get, though if it were clearly unreasonable (say, $1 a year), you could ask a court to authorize something more reasonable.
Should You Take a Fee?
If you are both the trustee and a beneficiary, you might decide not to pay yourself compensation at all. One reason is that any fee you collect is earned income, subject to income tax. If you instead just inherit your distribution from the trust, it won’t be taxed.
Example: Hendrick is the trustee of his father’s trust and its only beneficiary. Although he could pay himself reasonable compensation for administering his father’s trust, which he determines is $5,000, there’s no need to, because he’ll inherit everything anyway (after debts, taxes, and gifts are paid). If he received $5,000 from the trust for his work as trustee, he would have to report it as income. His inheritance, however, is not reported as income and so is free of income tax.
Family dynamics might also prompt you to forgo compensation, even if it means you’ll end up with a little less money. Let’s say you agree to be the trustee—you’re the oldest, after all, and your siblings know that Mom always trusted you with financial matters. You do some work, but it’s nothing very onerous. Will your siblings think it’s fair for you to be compensated for your time, or will they consider your work just a family obligation that you shouldn’t expect to be paid for? The tax hit you’ll incur by taking compensation might be the factor that leads you to skip the fee altogether.
In our experience, trustees named in the trust instrument who are also beneficiaries typically do not take compensation. Maybe it’s because they don’t think it’s fair that they were already singled out as the “most responsible kid” and now get more money, too. Or maybe the amount of money, seen in the larger context of a decent inheritance, isn’t worth the family aggravation.
What’s a Reasonable Fee?
If you decide to take a fee, you are in charge of paying yourself for your work. (You’re in control of trust assets.) What’s a reasonable amount? Well, for starters, you should always be able to justify what you’ve paid yourself if you were challenged.
We advise clients to keep track of the time that they spend administering the trust and pay themselves a reasonable hourly rate for their services. If you’re not a professional, charge a rate that you can justify by comparing it to the going rate for bookkeeping or similar services. If you are an accountant or a lawyer, you are expected to use your special skills and training as you administer the trust. So it would be reasonable for you to charge the trust what you would charge a client.
To compare, it’s helpful to know that professional trustees usually charge fees based on a percentage of the trust assets, plus an additional yearly fee. Small trusts might be charged 1.5% of the assets for administrative costs, while larger ones might be charged 0.75% or less. Most nonprofessional trustees, who don’t offer comparable expertise or services, charge less than this.
Getting Expert Help
You won’t be on your own. As trustee, you can hire financial advisers, attorneys, accountants, and other professionals to assist you in administering the trust—and you can use trust assets to pay their bills. But you’ll still be responsible for the decisions that they advise you to make. (Chapter 7 will help you figure out whom you need and how to find them.)
If You Decide to Say No
If the trust names you as the successor trustee and you don’t want to serve, you need to formally decline, in writing. Notify each of the trust beneficiaries that you have done so. Notifying the beneficiaries in writing is the best way to protect yourself against any future charges that they had “no idea” that you weren’t taking care of business.
You should also notify the person identified in the trust as the next successor trustee, who must then decide whether or not to take the job. With luck, the next trustee in line will accept. For example, a first choice trustee who lives far away from where the settlor lived might resign so that a sibling who lives closer can take over.
If there’s no named successor trustee, or the named one doesn’t want the job either, you’ll need help from an attorney to fill the vacancy. The trust may say who gets to choose the next trustee—sometimes it falls to the adult trust beneficiaries to take a vote. Or the trust may simply be silent as to what happens next. If so, your state’s law may permit a trust company to act as trustee if the beneficiaries agree; otherwise, any person interested in the trust (like a beneficiary or someone acting on their behalf) or any person named as trustee in the trust, may ask the probate court to appoint a trustee.
Declination to Act as Trustee
I, Genevieve Harmon, decline to act as trustee of the Jones Revocable Trust, dated January 1, 20xx.
Pursuant to Section 7 of the Jones Revocable Trust, Arthur Harmon shall act as sole trustee of the trust.
This declination to serve shall be effective as of the date on which all adult beneficiaries receive a copy of this instrument.
If the next trustee is ready to step in and take over, this is what he or she would sign.
Agreement to Act as Trustee
I, Arthur Harmon, agree to act as the trustee of the Jones Revocable Trust, dated January 1, 20xx, and to abide by the terms of the trust instrument as of the date that this document is signed.
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