Probate and Trust Administration

Outline of Trust Administration for a Successor Trustee
of a Revocable (Living) Trust

Living Trust Administration

Living trusts have become popular estate planning tools. As long as the original trust owner (sometimes referred to as “grantor” or “settlor”) serves as trustee of the trust, there are few special duties or legal issues. When a successor takes over the trustee job everything changes. Often there are huge responsibilities and significant potential liability if the successor trustee fails to perform the duties outlined below.

I believe that our trust administration and other fiduciary services can help the successor trustee carry out his or her responsibilities with minimal liability risk.

A successor trustee is a fiduciary

A successor trustee takes over the management of a living trust when the original grantor/trustee of the trust is no longer able to serve as trustee or when the original grantor/trustee dies.

A trustee is classified by law as a "fiduciary" - defined as a person or entity "who by reason of a written agreement, Will, court order or other instrument has the responsibility for the acquisition, investment, reinvestment, exchange, retention, sale, or management of money or property of another." Other fiduciaries include persons acting under power of attorney and estate  personal representatives

Trustee duties

• To administer the trust according to law and in accordance with the trust instrument.

• If the trustee is given "discretion" with respect to a matter, to exercise that "discretion" in a reasonable manner.

• To impartially administer the trust for the benefit of the trust beneficiaries, which include the current beneficiaries as well as the potential remainder beneficiaries.

• To protect and preserve the assets of the trust estate.

• To ascertain that the assets are invested in a prudent and cautious manner.

• To avoid conflict of interest such as entering into transactions with trust property that will result in a profit to the trustee personally.

• To understand that if the trustee duties are not properly or competently performed, the trustee may have to answer to anyone harmed as a result.

• fiduciary tax returns.

Trustee responsibilities

• Review the trust document, including all amendments to the original trust agreement

• Understand trustee duties as required by Florida law.

• Review Prudent Investor Rule

• Review Principal and Income Act

• Notify all beneficiaries of acceptance of trustee duties

• Obtain Tax Identification Number for the trust and notify the Internal Revenue Service

• Locate all trust assets and determine their values

• Provide documentation to all relevant financial institutions, banks, brokers, etc., indicating that the successor trustee now has the authority over the trust’s assets. Also provide these institutions with the successor trustee’s address and the trust’s new Tax Identification Number

• Keep trust property separate from property that is not subject to the trust

• Prepare an initial inventory of the trust assets

  • If the grantor is still alive, then the trust assets retain their original tax cost bases. In this case, the inventory should include the trust assets’ fair market value on the date that the successor trustee took over administration of the trust and the grantor’s original tax cost bases.

  • If the grantor is dead, then the fair market value of the trusts assets as of the grantor’s date of death becomes the new tax cost bases. In this case, the tax costs bases and the fair market value are the same, so the inventory would only to reflect these values.

• Collect all trust receipts and determine whether the receipt is principal or income or should be allocated between both

• Pay all expenses, creditors, and fees and determine whether the expense is principal or income or should be allocated between both

• For an income beneficiary, the trustee must calculate the amount of income due and distribute these funds according to the terms of the trust.

• Florida law requires that the income beneficiary receive at least a net three percent annual distribution from the trust. If the total amount of net income for the year does not equal or exceed three percent of the market value of the trust's assets as of the beginning of the year, then the trustee must distribute principal to the income beneficiary to compensate for this. This amount must be calculated and, as necessary, distributed annually to the income beneficiary.

• Make discretionary principal distributions based on the terms of the trust with consideration for both the current and the potential remainder beneficiaries.

• Prepare annual accountings of the trust’s assets with the following information:

  • A list of the assets on hand at the end of the previous accounting or a list of the assets as shown on the initial inventory.

  • A list of all receipts received during the accounting period with each item designated as principal or income or an allocation between both.

  • A list of all disbursements made out during the accounting period with each item designated as principal or income or an allocation between both.

  • A list of all distributions made during the accounting period with each item designated as principal or income or an allocation between both.

  • A list of all capital changes and transactions during the accounting period, which would all sales or purchases and would indicate any gains or losses incurred.

  • A list of all trust assets on hand at the end of the accounting period with the tax cost bases and the current fair market value shown for all items.

• Provide copies of the annual accountings to all beneficiaries, including both current and potential remainder beneficiaries

• Florida law provides that the beneficiaries have six months from the receipt of an annual accounting to assert a claim. If no annual accountings are made, there is no statute of limitation for the beneficiaries to bring proceedings against the trustee.

• Preparation and filing of all necessary tax returns, even if no tax is due. However if the trustee fails to pay taxes that are due from the trust, tax law permits the Internal Revenue Service to collect the taxes from the trustee's own assets. This includes the right to freeze the trustee's personal bank account(s), or to place liens on real estate or other property that belongs to the trustee personally.

• The trustee should retain a certified public accountant that is familiar with all of the requirements of fiduciary tax returns.

Prudent Investor Rule

As a fiduciary, the trustee is bound to comply with each state’s Prudent Investor Rule. The following is a brief summary of this law:

·         Developing the Trust Portfolio: Within a reasonable time after becoming the fiduciary, the trustee has the duty to review the investment portfolio and to make decisions concerning the retention or disposition of the original preexisting investments. The trustee must be certain that the portfolio is well diversified. The trustee also should seek a proper trade-off between risk and return. The idea is not to be ultra-conservative or ultra-risky, but to be in the middle.

·         How The Trustee's Performance is Evaluated: Investment decisions are evaluated based on the whole portfolio, not each individual investment. Investments will be judged on the circumstances surrounding the investment at the time the trustee made the investment. Circumstances include the inflation rate, the tax consequences, the economy, the expected total return, the role of each investment in the total portfolio, and the financial situation for the beneficiaries.

·         The Trustee's Responsibility to the Beneficiaries: The trustee must consider the impact upon the beneficiaries of the assets selected and held. When income is disbursed from the trust, the beneficiaries are usually taxed, not the trust itself.

·         Delegation: It is not easy to meet all of the financial requirements listed above. However under the Prudent Investor Rule, the trustee can delegate these duties in order to meet the requirements of diversification. The law gives the trustee the authority and duty to engage an investment agent, if he is not skilled or knowledgeable in the financial investments field.

·         Seeking an Investment Advisor: The trustee may delegate his investment functions to an investment agent. The trustee has the duty to exercise reasonable care, skill and caution: (1) in the selection of agents, (2) in the establishment and scope of specific terms of delegation, and (3) in the periodic review of the agent's actions.

·         Procedure: If the trustee delegates the investment function, he is required to give written notice to the current beneficiaries within 30 days. If the trustee has followed this procedure, he is not responsible for the investment decisions or actions made by that person or company. However, the trustee must give the investment agent guidelines and define the trust's investment objectives when he delegates responsibility.

Principal and Income Act

As a fiduciary, the trustee is bound to comply with each state’s Principal and Income Act. The following are definitions and a brief summary of this law:  Failure to follow the technical requirements of Principal and Income accounting can leave the fiduciary open not only to liability, but in at least one state, liability with no statute of limitations.

Income: The return in money or property derived from the use principal.

Principal: The property that has been set aside by the owner so that it is held in trust eventually to be delivered to a remainderman.

Income beneficiary: The person who is entitled to income currently payable or accumulated for distribution as income.

Remainderman: The person who is entitled to principal, including income that has been accumulated and added to principal.

Receipts that are posted to Income, unless Trust provides otherwise:

·         Corporate cash dividends

·         Interest on money lent

·         Rent on real or personal property

·         Accruals on bonds usually issued at a discount, such as Treasury bills and Series EE savings bonds

·         Profits from business or farming operations

Receipts that are posted to Principal, unless Trust provides otherwise:

·         Stock splits

·         Stock dividends

·         Subscription rights

·         Bond redemption except accruals on bonds usually issued at a discount

·         Losses from business or farming operations

·         Sale, transfer, change, refund, or replacement of principal asset

·         Insurance proceeds on principal assets

·         Proceeds of condemnation

·         Capital gains

·         Royalties

Expenses that are posted to Income, unless the Trust provides otherwise:

·         Ordinary expenses incurred in connection with the administration of the trust, such as:

·         real estate taxes

·         utilities

·         insurance premiums

·         interest paid by trustee

·         ordinary repairs

·         One-half of:

·         court costs

·         attorney's fees

·         accounting fees

·         trustee's compensation

·         Taxes levied on income

·         Fees and taxes related to income

Expenses that are posted to Principal, unless Trust directs otherwise:

·         Capital gains tax

·         Capital improvements

·         Extraordinary repairs

·         Principal portion of debts, such as mortgages

·         Investment expenses, such as commissions or transfer taxes

·         Expenses to prepare property for rent or sale

·         Fees and taxes related to principal

·         Other half of:

·         court costs

·         attorney’s fees

·         accounting fees

·         trustee’s compensation

·         Any other charges not specifically provided for in Income charges