California Trust Administration
What happens to a living trust after the settlor (the person who created the trust) dies? The person(s) or entity named in the trust as the successor trustee has certain fiduciary duties or obligations to fulfill. If these actions are not undertaken, or are handled incorrectly, the successor trustee may be liable for any additional taxes due or may be liable to the trust beneficiaries for mistakes made, even if the successor trustee's actions were done in good faith. Some of the successor trustee's actions are mandated by the terms set forth in the trust document; other actions are required under California law or federal tax law.
The process which unfolds after the death of the settlor of the trust is often referred to as "trust administration". The purpose of this article is to provide a brief overview of some of the steps required in the administration of a trust. The steps outlined in this article may apply in any situation where a trust has become irrevocable due to the death of a settlor. Depending on the situation and the complexity of the estate, additional trust administration steps may be required.
Filing of the Original Will
Under California law, the original will of the decedent, along with any codicils to the will, must be filed within 30 days of the date of death with the county clerk in the county where the decedent resided at the time or his or her death. If probate is not required, there is no filing fee. A copy of the will must be mailed to the executor named in the will, even if probate proceedings are not required.
Notification to Trust Beneficiaries and Heirs
Within 60 days of the date of death, a written notice must be sent to all trust beneficiaries and the deceased's heirs at law giving them notice of the irrevocability of the trust and providing them with notice that they are entitled to receive a copy of the trust and all amendments to it if they request it. The notice also advises the recipient of their right to contest the trust and states that any action to contest the trust must be brought within 120 days from the date of mailing. The probate code has specific requirements as to the wording, font size, etc. for this notice. If the notice is not mailed, the beneficiary may have up to four years to contest the trust. There are potential damages, including attorney's fees and costs, if the trustee does not mail the notice or comply with all the requirements under the notice. Any party receiving the notice may legally request a copy of the trust and all amendments to the trust.
Valuation of Assets
The trustee will inventory all of the assets of the trust, as well as all assets that the decedent owned at the time of his or her death which were not in the trust. The value which is used is the fair market value as of the date of death. Stocks and bonds are valued by taking the average between the low and high value as of the date of death. If the decedent died on a weekend or holiday, the average between the low and high values on the preceding Friday and following Monday are taken, and are averaged again to determine the value. Mutual funds are valued as of the closing price on the date of death. Other assets, such as an interest in a business, need a written appraisal by a competent appraiser. Real estate is valued using a written appraisal by a real estate agent or broker, or a qualified real estate appraiser. Cars are usually valued using the Kelly Blue Book value.
Once the trust becomes irrevocable, the trustee must invest the funds in accordance with the terms of the trust document and the California Uniform Prudent Investors Act. The trustee must also keep records for the trusts and file annual trust income tax returns.
For trusts created after July 1, 1987, the trustee must also file annual accountings with the trust beneficiaries who receive payments from the trust and provide an accounting upon a change of trustees and upon the termination of the trust. The accounting may be waived in writing if the sole beneficiary of the trust is also the trustee. However, other beneficiaries who may have a future interest in the trust, even though such interest may be remote in time, may demand and receive a trust accounting each year.
Trust beneficiaries have the right to request information regarding the trust from the trustee, including information on sales or purchases of assets and assets on hand.
Tax Identification Number
Once the trust becomes irrevocable, a separate tax identification number must be obtained from the IRS. This is accomplished by completing IRS form SS-4 and submitting it to the IRS for approval and assignment of the tax identification number. This number will be used in lieu of the decedent's social security number for the trust assets and for tax reporting purposes.
A certification of a trust is a statement which lists the current acting trustees of the trust, the tax identification number, powers of the trustee, and other pertinent information regarding the trust. This certification, along with a certified copy of the death certificate, will be required to transfer the trust assets into the name of the successor trustee of the trust.
Changing Title to Real Property
An Affidavit-Death of Trustee should be completed and recorded for each interest in real property held in the trust. The Affidavit must be submitted for recording along with a certified copy of the death certificate. This will effectively change the title to the property into the name of the new trustee.
A Preliminary Change of Ownership Report may be filed with the Affidavit-Death of Trustee. This document notifies the county assessor that a change of ownership has occurred which may subject the property to reassessment for property tax purposes. Real property passing to a surviving spouse or a trust for the surviving spouse's benefit, or to the children of the decedent, or to the children of a deceased child are all exempt from reassessment. Transfers to other relatives or someone not related to the decedent may trigger a reassessment.
Federal Estate Tax Returns
A federal estate tax return is required if the decedent's assets exceed a certain amount. The value is based upon the total gross value of the decedent's estate, whether the assets are in the living trust or not. If the decedent was married, the value is based upon one-half of the decedent's community property assets and all of the decedent's separate property, if any.
An estate tax return is required if the decedent's gross assets (before deducting any expenses or costs) exceed the exempt amount shown in the table below:
Here's how the estate tax has broken down over the years:
The federal estate tax return must be filed within nine months of the date of death. An extension may be granted for up to six months to file the return.
Probate of Assets Outside the Trust
Assets held in a living trust typically avoid probate. However, occasionally someone will pass away holding an interest in an asset which is held outside of the living trust. The asset which is not in the trust may require probate.
Pursuant to California law, assets outside of the living trust which do not exceed $150,000 do not require probate, and may be transferred by affidavit procedure. This $150,000 figure does not include any assets held in joint tenancy, any assets where a beneficiary is named as a life insurance or IRA account, or any vehicles. Property meeting these requirements can be transferred into the living trust, or to whoever is legally entitled to the asset, using a special certification form. The trustee must wait for 40 days to elapse from the decedent's date of death.
If the value of the asset held outside of the trust exceeds $150,000 as of the date of death, or if the asset is an interest in real property which exceeds $50,000 in value, probate will be required before the asset may be transferred into the living trust.
Trust Administration Requires Experienced Legal Counsel
There are many legal requirements for the trustee when a trust becomes irrevocable. Failing to follow these requirements may result in possible litigation and potential liability for the trustee for failing to fulfill their duties as trustee. Improper administration may also result in higher estate taxes or the loss of a property tax exemption. It is important to seek the advice of an attorney who is experienced in the administration of trusts in California and understands the tax implications which are inherent in California trust administration.