Ensure that your or a loved one's trust is handled correctly.
What does it mean to
"administer" a trust?
Administering a trust is following the directions put in the trust by the person or people who established it (the settlors). That may be relatively simple, if the directions are to inventory the property and divide it evenly among a few people. Administering a trust may be quite complicated, if the trust is to continue for years, making distributions according to a complex formula.
Who administers a trust?
The trustee named in the trust has the authority and duty to administer the trust. Often, the first trustees are the settlors of the trust. If settlors create a revocable living trust, they usually name themselves the first trustees. While they are alive and competent, they can completely control all the assets of the trust, change the beneficiaries, and even revoke the trust. If they die, or if they become unable to administer their own affairs, the successor trustee named in the trust becomes responsible to administer the trust. The settlors can also choose to voluntarily relinquish control to the successor trustee.
Can I be paid for being trustee?
Serving as trustee can be very time-consuming. A trustee deserves to be paid a reasonable fee. Ask your attorney whether your trust allows the trustee to be paid. Some forbid payment to trustees who are family members. If that is not acceptable to you, you can decline to serve, or you can petition for a modification of the trust. In any case, you should be reimbursed for any expenses you incur, including being reimbursed for mileage you put on your car. Keep careful records of your time and expenses, particularly because beneficiaries of the trust may question payments you make to yourself.
When does a trust become irrevocable?
Most revocable living trusts created for couples become irrevocable upon the death of the second-to-die spouse. However, older trusts created when the estate tax threshold was quite small may call for division of the assets at the first death, with a portion going into an irrevocable trust.
Some trusts are created as irrevocable trusts, such as special needs trusts, or spendthrift trusts.
Can an irrevocable trust ever be changed?
That depends. If the reason for creating the irrevocable trust no longer applies, many courts will grant a petition to terminate or modify the irrevocable trust. One example is an irrevocable trust that was created to limit estate taxes when the estate tax exemption was one million dollars. The current estate tax exemption is $5.34 million per person (indexed each year for inflation). We also now have “portability” (the ability to elect to fully use each spouse’s exemption). With less than .2% of couples now liable for estate taxes, there is no need for an irrevocable trust to avoid estate taxes.
On the other hand, an irrevocable trust may have been created for other reasons, such as a spendthrift trust to protect an inheritance from creditors or over-spending. Special needs trusts are also often irrevocable trusts. (See Special Needs Trusts). If the reason for a trust being irrevocable still exists, it cannot be terminated. Even making changes usually requires a court order.
Administering a trust upon first settlor's death
Even when a trust remains revocable upon the death of one spouse, there are still actions to be taken. In most cases, the remaining trustee is also the personal representative under the will. As personal representative, he or she must probate the will if necessary. If real estate is held in trust, the county must be notified of the death of one trustee. If the trust calls for the creation of an irrevocable trust for a portion of the property, that trust must be created, or a court must be petitioned to modify that requirement. The surviving spouse is not allowed to just ignore that requirement in the trust. If an irrevocable trust is created, the beneficiaries of that trust must be notified.
What are my duties as Trustee?
You must follow the instructions in the trust document.
You cannot use trust assets for your own benefit (unless the trust authorizes it).
You must be impartial. You cannot favor one beneficiary over another, but you can make unequal distributions if the trust permits them. You also cannot favor income beneficiaries over the beneficiaries who will eventually receive the principal, or vice versa.
You must keep accurate records, file tax returns and report to the beneficiaries as the trust requires. In general, you must give the beneficiaries an accounting at least once a year for a continuing trust, or when the distributions are complete for a decedent’s trust.
You must invest the assets in a prudent manner. You must diversify, so that not all resources are in one investment. You must make all resources productive. For example, you should not allow one beneficiary to live rent-free in a residence the trust owns unless the trust calls for you to do that. Under the Uniform Prudent Investor Act, you are allowed to take some risk with some investments to gain more income, but the risk must be reasonable. It is advisable to either have a financial advisor handle the assets, or at least have investment recommendations from a financial advisor.
You cannot mix trust assets with your own. You must keep separate checking accounts and investments.
What are my duties as trustee when the settlor is incapcitated?
If you are serving as trustee because the settlor is incapacitated, you have some of the same duties as above, but some different ones. First you need to obtain written documentation that the settlor is incapacitated. The trust document will state who decides that. Some require only a statement from the attending physician. Some require statements from two physicians. Some require a disability committee to state the settlor is incapacitated. Once you have that documentation, you will present it to the bank, insurance companies, and any other financial institution.
You will need to investigate whether the settlor is eligible for any disability benefits, and apply for those. You will need to monitor health insurance payments, and be sure that the insurer is making all payments their contract requires them to make. You will need to make sure the settlor’s bills continue to be paid. If the settlor has dependents, you will need to be sure they are provided for according to the terms of the trust. If you are also the agent under a healthcare power of attorney, you will need to be sure the settlor is receiving proper medical care, in the most appropriate setting. If the disability continues for a long period, or appears permanent, you may need to make more long-term decisions. Before making irreversible decisions, such as selling the residence, you should consult with an attorney and the settlor’s financial advisors.
What if the settlor regains capacity?
If the settlor regains capacity, your duties as successor trustee are over for now. You should turn over the financial records for the period of incapacity. You or the settlor will need to inform the banks and other financial institutions of the settlor’s return to control. This may be difficult, because those institutions may be leery of returning control unless they have strong assurance the settlor does now have capacity.
One alternative is for the settlor to name a reliable co-trustee right from the beginning, and give the co-trustee the authority to act alone if the settlor becomes incapacitated.
Special needs trusts are essentially a very special type of spendthrift trust. The beneficiary has no control over the trust and no right to demand distributions. But a special needs trust is different, because the beneficiary most likely either currently receives or may in the future receive various government benefits because of his disability.
The trustee of a special needs trust is responsible to know what benefits the beneficiary receives or may be eligible for in the future. The trustee must know what resource and income limitations are placed on those benefits, and never unknowingly jeopardize them. For example, the trustee must not distribute cash or cash equivalents to the beneficiary. (A cash equivalent is something easily converted to cash, such as a gift card).
If the trust has enough resources, the trustee may knowingly cause a reduction in government benefits, if that will increase the beneficiary’s comfort. For example, paying for a beneficiary’s housing will cause a reduction in SSI (Supplemental Security Income). But that may be a reasonable trade-off if it enables the beneficiary to live in an apartment in a safe neighborhood.
The trustee should prepare a budget of expenditures and expected investment income, and review that budget with the beneficiary or the beneficiary’s guardians. Many expenses may be paid from the trust, but no trust can afford to pay all possible expenses. Decisions must be made as to which expenses will best help the beneficiary’s quality of life. Reviewing the budget may help a family understand that, for example, the trust can afford to purchase a home, but only within a certain price range, or that it would be wiser to search for a used disability-equipped van than purchase a new one.
How do I administer a Special Needs Trust?
Some Allowable Expenditures from a Special Needs Trust
Household furnishings and decorations
Appliances, including their repair
Medical services or equipment not provided by the beneficiary’s medical provider
A vehicle, and its insurance, maintenance, and fuel
Education, whether for credit or for enjoyment, including books and supplies
Computer equipment and supplies
Television, including cable subscription
As noted above, a special needs trust may potentially also pay for housing and for groceries or meals. But the trustee must carefully evaluate whether those payments will cause a loss of or reduction in government benefits, and whether that loss is justified by a better life for the beneficiary.
Put your Trust is in safe hands.
Call Sonin Law today at (530) 662-2226 for an appointment to discuss your Trust Administration needs.
© 2015 Barbara Sonin
DISCLAIMER: In publishing these materials, the author is not engaged in rendering legal, accounting or other professional service. If legal advice is required, the service of a competent professional should be sought. No attorney-client relationship is created by the provision of this information.