Estate planning is only the first part of protecting our trust and estate clients. Like any plan, an estate plan is only as good as its implementation. Our attorneys are experts at “administering” the plan. Administration of an estate plan typically involves the administration of a trust, since the pivotal document in virtually every estate plan is a trust. The period of administration of a trust begins with the execution of the trust document and ends when the last assets are distributed from the trust to their intended beneficiaries and the final tax returns are filed and accepted by the government.
The general period of trust administration can be broken down several distinct phases. The initial phase is the period of time in which the creator of the trust, known as the settlor, is competent and acting as his or her own trustee. During this somewhat dormant period, the settlor/trustee can use trust assets without restriction. The settlor/trustee owes no fiduciary duties to anyone and may change the trust at any time. For income tax purposes, because the trust remains revocable by the settlor, the trust is not considered a separate entity and reports all income under the settlor’s social security number on the settlor’s personal income tax returns. The settlor can effectively treat the trust assets as though they are owned outright by the settlor without restriction.
The next phase of trust administration is when the settlor is living, but no longer acting as his or her own trustee, generally because of some incapacity, often times dementia or another medically recognized disability. During this second phase, the individual or corporate trustee previously named in the estate plan to succeed the settlor as trustee, steps into the position of successor trustee. Because the settlor is living and continues to retain the power to revoke the trust (although not necessarily the legal capacity), the settlor is considered as the only beneficiary of the trust. In turn, the successor trustee owes all of the general fiduciary duties to the settlor and no one else. The successor trustee’s specific duties are those set forth in the trust agreement and in the California Probate Code. Those duties generally include, but are not limited to:
- the duty to administer the trust solely in the interests of the beneficiaries,
- the duty to avoid conflicts of interest,
- the duty to avoid entering into transactions with the beneficiary whereby the trustee profits,
- the duty to keep trust assets separate from personal assets and the assets of any other trusts,
- the duty to pay only those expenses that are reasonable and necessary,
- the duty to invest the trust assets prudently,
- the duty to report information to the settlor and provide an accounting on request of the settlor,
- the duty to file tax returns and pay taxes;
- the duty to use any specialized skill for the benefit of the trust and its beneficiaries;
- the general duty to act as a prudent person would with respect to his or her own property;
- the duty to monitor the actions of any other individual acting simultaneously as successor co-trustee.
As trust and estate attorneys, we understand that many well-meaning family members are surprised to learn that they have a number of fiduciary duties. Often, there is an attitude among family member successor trustees that is a “family matter,” and as long as they act with the best intentions, they have no personal liability. This is not actually the case. There is no “good faith” exception to trustee liability. The law generally holds family member trustees to the same level of care and prudence as professional fiduciaries and banks. Some family members mistakenly believe that, so long as they don’t take any trustee’s fees for their work, they cannot be held liable for a mistake. Again, the opposite is the truth – family member trustees are generally held to the same standard of professionalism as professional fiduciaries and banks, even if the family member trustee receives no compensation. Click: CPA as Trustee: Is the Compensation Worth the Liability.
It is important for anyone, serving as successor trustee, to immediately retain experienced trust counsel. We can help. Our trust and estate attorneys will guide and direct the successor trustee, helping him or her to avoid the traps for the weary. Again, experience is the key. Whether a trustee’s actions are prudent or negligent depends in part on the customary standard of prudent practice by professional trustees in the same geographic area. With decades of experience representing trustees and other fiduciaries in Southern California, we have insight into the level of performance that the local probate courts will consider as prudent and what acts or omissions they will consider as negligent. Because we are experts in the field of trust administration, we can provide the successor trustee with steps and guidelines needed to comply with the requirements imposed by the law and enforced by the courts.
The next phase of trust administration begins with the death of the settlor. If the revocable trust was created by a single individual (i.e., settlor), the death of the settlor causes the trust to become immediately irrevocable. This means generally that the beneficiaries and distribution provisions of the trust can no longer be changed, except for good cause (under certain limited circumstances) by the probate court. If the revocable trust was created by a couple, then the death of the first spouse or domestic partner generally makes part of the trust irrevocable, while the remaining part remains revocable by the surviving spouse. With respect to irrevocable portion, the successor trustee owes fiduciary duties to the beneficiaries. In the case of the death of the first spouse, the surviving spouse often becomes the sole trustee. The surviving spouse may mistakenly believe that, as long as he or she is living, the trust is entirely hers and she owes no fiduciary duties to anyone else, such as children or stepchildren. Again, this view is incorrect. If all or a portion of the trust becomes irrevocable, then the beneficiaries who will succeed to the assets after the death of the surviving spouse are now vested beneficiaries – known as remainder beneficiaries. While these remainder beneficiaries may have no right to any distributions while the surviving spouse is alive, the surviving spouse nonetheless owes the remainder beneficiaries the same fiduciary duties discussed above, and an additional fiduciary duty, namely the duty to treat trust beneficiaries impartiality. This duty of impartiality means that the surviving spouse may not generally take actions with trust assets that unfairly favor the surviving spouse to the detriment of the remainder beneficiaries. As an example, the irrevocable portion of the trust will likely provide that, so long as the surviving spouse is living, the surviving spouse is entitled to all of the net income from the trust. This may create an incentive for the surviving spouse to invest the trust funds in assets that produce a lot of income, such as high-yield corporate bonds, but have little or no chance for capital appreciation. This action would result in a breach of fiduciary duty by the surviving spouse, since she has taken action which has favored herself to the detriment of the remainder beneficiaries. Instead, the surviving spouse is generally required by law to invest in a manner that provides both reasonable income and capital appreciation.
During this third phase of trust administration, there are a number of legal steps that the successor trustee must take to wrap up the affairs of the deceased settlor and put the trust in order. For a complete check list covering most steps, click Checklist for Administering a Trust after Death.
The final stage of trust administration generally occurs when all of the settlors are deceased and the assets are ready to be distributed to the ultimate trust beneficiaries, known as the remainder beneficiaries. During this stage, the successor trustee continues to owe all of the same fiduciary duties to the remainder beneficiaries. It is not uncommon for children filling the role of successor trustee to believe that they should have first choice concerning which assets to take as part of his or her share or that the values they place on the assets for distribution purposes should be accepted by the other beneficiaries. Again, this perspective invites liability, since for a trustee to favor himself or herself over another beneficiary is to breach the duty of impartiality.
It is our job, as your trust and estate attorneys, to educate you as successor trustee so you understand what you should and should not do and where you might get into trouble. Based on our experience, we know that whenever the decision to act is questionable and the successor trustee still intends to move forward, the best protection for the successor trustee will be to serve a Notice of Proposed Action on each of the trust beneficiaries outlining the proposed course of action. If the beneficiaries fail to object within 30 days of receiving the Notice, then the successor trustee may generally act without fear of future liability. In some cases, a Notice of Proposed Action will not provide full protection. If so, we will recommend the filing of a Petition for Instructions with the probate court, requesting the court’s advance approval.
Because our attorneys are experts in both estate planning and administration, we understand at the time of drafting the estate plan what pitfalls may appear when it comes time to administer the plan. Because we have the knowledge that comes from experience, we can anticipate most problems during the preparation phase of the estate plan. Where protection of a family member successor trustee is important to the settlor, we will draft certain protections into the trust document that alter the successor trustee’s general liability under the law and limit the ability of the beneficiaries to sue the successor trustee. The protection may come in the form of an Exculpatory Clause, which is enforceable and limits the trustee’s liability to acts of gross negligence as opposed to ordinary negligence. The protection may be a clause negating the trustee’s general fiduciary duty to diversify assets, thereby allowing the trustee to concentrate a large part of the portfolio in relatively few assets. Where the beneficiaries are known to be litigious, we may suggest inclusion of a provision in the trust agreement that permits the family member successor trustee to use trust assets to purchase fiduciary liability insurance – malpractice insurance for the successor trustee. If the successor trustee is sued by a beneficiary, then the insurance company may be forced to pay the cost of the defense and any judgment obtained against the successor trustee. To further dissuade possible challenges by beneficiaries, we may suggest the inclusion of a No Contest Clause, which effectively disinherits someone who challenges the distributions provisions of the trust.