9 PAINFUL MISTAKES YOU DON'T WANT TO MAKE AS TRUSTEE
Congratulations! You've been named trustee in someone's trust. This is an important position of honor and trust. It shows that the trust's creator thinks highly of you and your character. But what happens when you become responsible for administering a trust? You might assume that because the revocable living trust avoids the costs and hassles of probate, there is not much after-death administration. Compared to probate, there isn't. However, tax and fiduciary laws still apply. Pitfalls still abound, and they can cost you a fortune.
If you are the successor trustee to a revocable living trust, make sure you avoid every one of the following painful mistakes. Your trust is unique, so please do not rely on this brief list to identify every crucial step you must take. Allow me to get you started and help you avoid some of the most common and dangerous errors..
Painful Mistake #1: Not Identifying Tax Issues Right Away
Make every effort to identify all the tax issues immediately. Will the trust be subject to estate tax (the current exemption amount is $2,000,000 less any taxable gifts made during life)? Obtain gift tax returns from the IRS. Are there any gifts that skip a generation from the grantor's (the "grantor" is the person who created the trust) generation?
Is there a Qualified Family Owned Business Interest, an S-Corporation, a partnership, an LLC, an LLP or a farming asset in the trust? Make appropriate elections.
Make sure you obtain a new tax ID number for the administrative trust that lasts until all property is finally distributed out of the trust.
Painful Mistake #2: Failing to Send Notifications
You must serve the statutory "Notification by Trustee" under Probate Code ยง16061.7.
You must also send notification to various government agencies. Be sure to consider whether notice is required by the Department of Social Security, the Department of Veteran's Affairs, the Department of Health Services, or any other payors of benefits to the decedent.
If you fail to record the will and any codicils with the court, you may forfeit your appointment as executor. If there are any disputes between you and the person who becomes executor, you and the beneficiaries stand to lose a ton.
Painful Mistake #3: Missing a Hot Issue
You must review the entire trust and assets and liabilities to identify hot issues, those issues that require immediate action. These can range from the rare (a toxic waste problem on real property) to the common (ownership of stock options). Be sure to consider whether a disclaimer is necessary to avoid losing as much as 55% of the estate. Make sure you identify any errors in the document or in transferring the assets into the trust quickly. Hot issues require immediate attention, and must be identified early.
Painful Mistake #4: Failing to Understand the Big Picture
You have been named the successor trustee of at least one trust. But the decedent's financial life may have included many other aspects that make or break your job. Who was named as executor? If it's you, you must understand the whole picture quickly. If it's not you, you must work with the executor to make sure nothing falls between the cracks of your two areas of responsibility. Start with the following questions: Did the decedent have powers in other trusts? Is there property outside of the trust? Will a probate be required? What does the trust own? Should creditor notices be sent in order to reduce the risk of later claims?
Painful Mistake #5: Assuming Real Property Transfers are No Big Deal
It's only a few pieces of paper, so why worry much about it? Because mistakes here can cost a bundle. Be sure to file appropriate forms for real property including notice to the County Assessor and the State Controller.
Painful Mistake #6: Procrastinating on the Inventory & Accounting
You know that you must maintain the trust property in good condition, including payment of any property taxes as they are due. But if you procrastinate on your accounting, you may find out that you missed something too late. That could take a huge sum right out of the trust, or your own pocket. Prepare an accounting of what was in the trust at the date of death and what has happened since. Do it right away. Find out if appraisals are required for any property owned by the trust. Fiduciary rules in California are strict and important. Be sure you understand your responsibilities under law: as the trustee, you will pay for your mistakes out of your own pocket.
Painful Mistake #7: Missing Tax Filings
Pay property taxes. File the decedent's final income tax return. File an estate tax return if necessary. File trust tax return(s). Quarterly payments may be necessary. Don't delay or the estate (and YOU if it's your fault) could be in for big penalties.
Painful Mistake #8: Just Writing Checks
After you've successfully navigated the minefield of mistakes that awaits the casual trustee, you look forward to writing those final distribution checks and wrapping up the estate. However, distributions are not always as simple as writing a check. Where subtrusts, minors or special needs beneficiaries are involved, be sure to obtain the appropriate tax ID numbers, and allocate property among trusts according to the provided formulas, no matter how complex.
Painful Mistake #9: Reinventing the Wheel
Some trustees believe that to do a good job, they must handle everything themselves. But you were named as trustee because the grantor trusts you and wants you at the helm, not because the grantor thinks you are an experienced trust administration attorney. When I help a family create an estate plan that avoids probate, they are always delighted with the savings they achieve over the costs of probate. But everyone at the table expects there to be some costs. I advise clients to choose as trustee someone who cares about the beneficiaries and who is honest and trustworthy, regardless of how little knowledge or experience that person may have in administering a trust. My clients know that the wise trustee relies on professional guidance to steer the minefield of trust administration. Quickly determine whether your trust requires professional assistance, and, if it does, hire a trusted counselor to protect the you AND the beneficiaries from costly and painful mistakes.
When to Call Me
Contact me for further information about Trust Administration if you face a sticky situation:
- You fear that some beneficiaries of the trust may be unhappy with the distribution. In this case, you must be extra-cautious and take advantage of statutes of limitations to protect yourself from emotional claims.
- The family is grieving from a very painful loss, and reliance on a calm and experienced advisor will ease the stress of an already difficult time for you and for them.
- You may need to file an estate tax return.
- The trust creates subtrusts.
- Any beneficiary is a minor, has special needs, or is incapacitated.
- You and the beneficiaries want the confidence and security of knowing that the administration is being handled promptly and according to law.
- You have a busy life and know the value of an experienced and caring guide in saving you and the beneficiaries time and money.
I invite your call any time, whether or not you find yourself in one of the sticky situations above. Please call or email for your free initial consultation sooner rather than later. Deadlines, for which you will have to pay out of your own pocket, start expiring 30 days after the grantor's death.