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California Trust Administration Guidance for Trustees

Revocable living trusts are immensely valuable tools in estate planning.  During life, the trust’s grantor (a/k/a “settlor” or “trustor”) can continue benefiting from trust assets as a named beneficiary—and even continue controlling trust assets as trustee.  Upon death, assets held in the trust are excluded from the grantor’s probate estate, saving time and money and protecting family privacy.  Of course, if the grantor doubled as trustee while living, the trust will need a new trustee once the grantor’s not around to fill the role anymore.  In most cases, the trust instrument (a document governing the trust, often titled “declaration of trust” or something similar) names a successor trustee to take over the job when the original trustee dies.  When someone new takes over, California trust administration guidance for trustees becomes critical because this is a first time for many in this role.

California Trust Administration Guidance for Successor Trustees

A California trustee is responsible for managing assets held in within a California trust.  And, when a California revocable living trust is used as a will substitute, the successor trustee also serves in a capacity similar to an executor named in a will.  With that in mind, a successor trustee needs to be someone who is honest, reliable, and competent to serve in the role.  A successor trustee could be a professional trustee or a financial institution.  But, more commonly with smaller, less complex estates, a successor trustee is a close friend or family member the grantor believes is ready and willing to undertake the position.

Serving as a successor trustee in California doesn’t have to be difficult or intimidating, but the job does come with some important responsibilities and obligations.  If you’re ever appointed as a trustee in California, you’ll need plenty of California trust administration guidance for trustees in order to get a firm understanding of the role and requirements for administering a California trust.

Understanding California Trustee Duties

Under California law (and the laws of pretty much any other state, for that matter), a trustee has a fiduciary duty to administer a trust in accordance with the trust’s terms and always for the beneficiaries’ benefit.  This is a heightened duty that can lead to legal liability for a careless trustee.  So, it’s critical for a newly appointed successor trustee to take the role seriously and become thoroughly familiar with the trust’s terms, the grantor’s objectives, and the trustee’s responsibilities.

When it comes to California trust administration guidance for trustees, first and foremost, a successor trustee needs to carefully review the trust instrument. The trustee has a legal duty to attempt to achieve the purposes stated in the trust instrument and to meticulously abide by any instructions it gives for administration.  If the trust says that assets are to be managed or invested in a particular way, the successor trustee needs to be aware of and conform to the instruction (except to the extent that following the instruction would require unlawful conduct).

If the trust’s terms are uncertain or contradictory, a trustee may need to hire an attorney to help resolve the ambiguities or explain how the trust’s terms interrelate with California law.  In a few cases, it may be necessary to ask for a court’s help in interpreting the trustee’s duties.  An unclear trust instrument can cause a lot of headaches, so experienced attorneys try to draft trusts that are precise and comprehensible.

Providing Notice to California Beneficiaries and Heirs

Also critical concerning California trust administration guidance for trustees, is understanding that when the grantor of a revocable trust dies, the trust automatically becomes irrevocable, and a successor trustee (hopefully named in the trust instrument) takes over the trust’s administration.  One of a successor trustee’s initial obligations is to provide notice of the trust to the beneficiaries named within the trust and to any heirs of the decedent grantor’s estate.  The notice needs to be provided within 60 days of when the successor trusteeship becomes effective.

Along with disclosing that the trust has become irrevocable and that the successor has taken over, the notice identifies the grantor and date of the trust, provides the successor trustee’s contact information, and informs recipients of their right to review documentation of the trust and to formally object to its terms within 120 days.

An additional notice to creditors may also be necessary—depending on the status of any probate estate—but that comes a little later in the process.

Marshalling California Trust Assets

California trust administration guidance for trustees includes some important instruction on what is called “marshalling California trust assets”.  Upon the death of an original trustee, a successor trustee needs to promptly identify and secure all assets belonging to the trust. This step may require some investigation, and, for personal property, may entail taking physical custody of some assets.  For instance, if trust assets include valuable jewelry or collectibles, the trustee needs to make sure the items are stored somewhere that mitigates the risk of theft or damage.

The successor trustee may need to retitle certain assets into the name of the successor trustee in his or her capacity as trustee.  The successor will also need to open a bank account for the trust and transfer cash assets owned by the trust into the account.  The account can then be used to pay expenses of the trust—including taxes, costs for maintenance of trust property, and the fees owed to any professionals hired to work for the trust.

It’s absolutely vital for a trustee to keep detailed, accurate records of all transactions involving the trust.  Any expenses paid out or income received needs to be tracked and documented.  If any third parties owe any debts to the trust (for example, renters leasing a property titled to the trust), it’s the trustee’s job to seek payment and deposit the funds received into the trust’s account.

Along with preserving and maintaining property, California trustees also have a duty to prudently invest trust assets.  Appropriate investments vary depending on the situation and the nature of the trust.  Sometimes, a trust instrument includes specific investment instructions for the trustee.

Appraising California Trust Assets

Appraising California trust assets is the next step in thorough California trust administration guidance for trustees.  Once a successor trustee has identified and secured assets in the trust, he or she needs to determine the value of property in the trust.  For cash and assets that have regularly published prices (like equities), this is fairly simple.  For more unique assets like jewelry, collectables, or land, the successor trustee may need to hire a professional appraiser.

Obtaining reliable appraisals can be important for estate taxes, but it can also be part of the trustee’s legal duty to treat beneficiaries impartially.  If the eventual distributions are stated as a percentage of trust assets, for instance, the trustee needs to know the value of all assets in the trust so that they can be distributed in the correct proportions.

Lodging the California Last Will

Lodging the California last will is another factor in California trust administration guidance for trustees.  Even when all or nearly all of a decedent’s assets are held within a living trust, most estate plans still include a “pour-over will” that ensures any property not yet in the trust ultimately ends up there.  Because assets subject to a pour-over are not titled to the trust at the time of death, those assets must go through probate.  When estate assets subject to California probate are distributed, assets included in a pour-over will are formally transferred to the trust and can then be managed by the successor trustee under the trust’s terms.   A pour-over will can also include non-asset-related provisions, such as appointments of an executor for the probate estate and a guardian if the decedent had minor children.

If a successor trustee is also named executor in the decedent’s will, the trustee / executor is charged with locating the original will and submitting it to the probate court of the decedent’s county of residence.  Once the court issues a letter of administration, the executor is legally authorized to act on the estate’s behalf.  An executor’s functions include identifying and preserving assets of the probate estate, ensuring taxes are paid, providing necessary notices (including notice to creditors), reviewing and paying claims against the estate, and distributing assets to heirs.

Determining and Paying California Trust Taxes

Let’s not forget about paying taxes on behalf of the trust, as a critical aspect of California trust administration guidance for trustees.  Depending on the situation and the status of any probate estate, this could include paying property taxes owed for assets held in the trust, paying the decedent’s final year income taxes, and/or filing an estate tax return.  In each case, taxes owed by the trust can be paid using funds from the trust’s bank account.

When necessary, a successor trustee should hire a professional accountant or tax attorney to help determine the type and amounts of any taxes owed and that all filings are complete and accurate.

Settling California Trust Creditor Claims

During the probate process, creditors of a decedent have the opportunity to submit claims against the estate.  The executor reviews the claims and, if they are legitimate and sufficient assets are available in the probate estate, pays off the debts.  If probate estate assets are insufficient to satisfy estate claims, the decedent’s creditors have the right to seek payment from assets held in a decedent’s revocable trust.

When no probate estate is opened (and therefore creditors don’t receive notice in probate), a successor trustee has to make a reasonable effort to ascertain estate debts and provide potential creditors with notice of their right to file claims. In this situation, the successor trustee acts in place of an executor in probate—reviewing and paying legitimate claims from trust assets.

Creditor claims could include anything from medical bills and final expenses to credit card debt or vehicle loans.  Claims are paid in order of statutory priority, and, under California law, support allowances for surviving spouses and minor children take precedence over many estate claims when not everyone can be paid.

Distributions to California Trust Beneficiaries

Perhaps the most visible part of California trust administration guidance for trustees, is making distributions to beneficiaries.  However, only when creditor claims and taxes have been dealt with, should a successor trustee start thinking about distributions to beneficiaries.  Living trusts used in estate planning can vary immensely in how distributions are structured.  Indeed, flexibility and versatility are two of the chief advantages of trusts as an estate-planning tool.

With a small, simple trust, the trust instrument might tell the successor trustee to just equally divide and distribute all trust assets among beneficiaries and then wrap up the trust—mission accomplished.

For larger, more complex trusts, a successor trustee’s duties could continue for years after the grantor’s death.  For example, the grantor might direct the successor to manage and invest trust assets, making periodic distributions measured as a percentage of trust principal and growth.  The trust only terminates, and the trustee’s duties only cease, once trust assets fall below a certain threshold and are fully distributed to beneficiaries.

Or, if a trust’s beneficiaries are minor children, a grantor might instruct the trustee to manage and invest trust assets until the beneficiaries reach adulthood—making occasional distributions for the beneficiaries’ health and education—and only disburse remaining assets to beneficiaries and terminate the trust when they reach a certain age.

The California Successor Trustee’s Fee

In California, a trustee is entitled to reasonable compensation for work performed administering a trust.  In some cases, the trust instrument sets a fee for the trustee’s efforts.  When that is the case, the trust instrument takes precedence.  Otherwise, the fee depends on the trust and individual trustee—bearing in mind that a “reasonable” fee will typically be higher for a trustee who performs more work and has more specialized skills.

Friends and family members serving as successor trustee usually receive a relatively modest hourly rate for work performed for the trust.  Professional trustees often receive a percentage of trust assets or a higher hourly rate.  In some cases, particularly with simple trusts administered by family members, the trustee chooses to waive the fee.  That can sometimes make sense when the trustee is also a beneficiary.  On occasion, trust wealth received by the trustee as compensation qualifies as taxable income, but the same money received as a distribution from the trust would be non-taxable.  When in doubt, an experienced estate-planning attorney can provide advice on calculating a reasonable trustee fee.

Steve Gibbs, Esq,