Trust Administration Resulting From the Cognitive Incapacity of the Trustmaker(s)
When a Trustmaker is deemed incapacitated as defined in the Trust document, then the Trustmaker passes the reins to a successor Trustee (or a married couple may leave the role with the non-incapacitated Trustmaker). As the Trustmaker remains the current beneficiary, the successor Trustee manages finances on behalf of the Trustmaker(s). This makes detailed instructions within the Trust instrument regarding the Trustmaker’s wishes important to avoiding “the Disability Dilemma” (commonly defined as “Now what do we do?”).
Essentially, the successor Trustee is now running a “small business” for the disabled Trustmaker. The successor Trustee is obligated to be “prudent” in the care of these assets. This means he or she must practice diligence and care. The successor Trustee needs to keep assets properly insured, file and pay appropriate state and federal taxes, pay the Trustmaker’s obligations and, in general, look out for the well being of the trust estate. As to the legal documentation required, often a law firm is retained to help the successor Trustee.
Since the Trustmaker has been deemed to lack the capacity to handle his/her own financial affairs, the trust has essentially become irrevocable. An irrevocable trust differs from a revocable trust in three major respects: (1) it cannot be amended or revoked by the Trustmaker; (2) it may need its own tax identification number; and (3) the successor Trustee now owes both the Trustmaker and his/her beneficiaries a duty of care. As a result of these changes, one of the first things the successor Trustee will do is start corresponding with the beneficiaries.
The principal source of trustee powers is the trust itself. The successor Trustee must read the trust carefully. He or she owes a duty to beneficiaries of the trust to furnish information to them as to what is happening during trust administration.
Gathering the estate planning documents
The successor Trustee and the retained law firm, review the Trustmaker’s trust and ancillary documents together on more than one occasion. During a period of incapacity, the successor Trustee draws his or her authority and instructions from the trust itself (particularly the Incapacity Instructions) and the Durable Power of Attorney (for finances). The Trustmaker also executed an Advance Health Care Directive. This gives the Trustmaker’s agent(s) the authority to make medical decisions upon his/her behalf. One of the successor Trustee’s responsibilities is coordinating a plan with the Trustmaker’s health care agent.
The Duties of a Successor Trustee
The successor Trustee’s basic duties involve the collection, management, and investment of trust assets during administration. This involves record keeping. It is critical that he or she does not commingle any of his or her personal assets with the Trustmaker’s assets.
Another important duty that cannot be overlooked is filing tax returns on a timely basis. Whether or not the successor Trustee file a Form 56 with the IRS to notify them of the new Trustee status and secure a separate tax identification number for the trust is a joint decision for you, your attorney and your accountant.
Good communication is key to a successful trust administration. The trust administration attorney will initially advise the beneficiaries of the change in circumstances. From time to time, the successor Trustee will want to send status reports. We have found that providing the Trustmaker and all contingent beneficiaries a quarterly or semi-annual accounting is critical is one of the most important tasks before the successor Trustee. Everyone stays informed and if questions arise, all the events are fresh in the Trustee’s mind.
Establishing A Care Plan
It is important to establish a care plan for the disabled Trustmaker. The purpose of reducing a plan to writing is to document how the successor Trustee anticipates how trust funds will be spent on the care of the Trustmaker. It may also allocate responsibilities to the individuals who have volunteered their assistance. Needless to say, this plan must be flexible and amended from time to time, as the Trustmaker’s needs change. It is, once again, a good device for keeping everyone informed.
Transferring trust property to the successor Trustee
One of the successor Trustee’s first tasks is transferring the Trustmaker’s assets from his/her name to the successor Truste. Each asset is transferred in a specific way. For example, an Affidavit of Successor Trustee may be required to open a new bank or investment account. Whether or not it is critical to immediately move the Trustmaker’s real property into the successor Trustee’s name is a discussion for the successor Trustee and an attorney. Only recently has the State of California authorized the recording of an Affidavit of Successor Trustee.
Our ability to help you in this area has been seriously curtailed due to recent privacy laws. For example, we will ask you to correspond directly with financial institutions.
Always remember if you are choosing a successor Trustee for your own plan or if you have been named someone else’s successor Trusteer…
- The successor Trustee has a duty to administer the trust according to its terms.
- The successor Trustee is to administer the trust for the benefit of the Trustmaker and his/her contingent beneficiaries.
- The successor Trustee must avoid conflicts of interest.
- The successor Trustee has a duty to control and preserve trust assets.
Although the successor Trustee is ultimately held responsible for his or her acts or omissions, the attorney’s job is to assist the successor Trustee in carrying out its duties. Wright & Wright often works closely with your accounting and financial advisors. Making your advisors part of the process is usually both time and cost effective.
We welcome your questions and comments. Our goal is to make any administration go as smoothly as possible while ensuring the Trustmaker’s directives are carried out effectively. With most disabilities, it is impossible to forecast how long the successor Trustee will be acting as the designated disability trustee. If this job ever becomes overwhelming, call your attorney immediately to discuss alternatives.
ADMINISTRATION OF THE FAMILY TRUST WHEN THE TRUSTMAKER PASSES AWAY
After the Trustmaker’s death, the Trust continues as a management and distribution vehicle that will exist only as long as is necessary to identify and collect trust assets, pay debts and taxes, and distribute the trust assets to the beneficiaries (or in further trust, depending on the terms of the Trust). You might visualize this trust as a funnel through which all of the trust assets will pass to the beneficiaries (with the exceptions of tangible personal property, life insurance proceeds, and other nontrust assets that may pass directly to the beneficiaries outside the Trust).
The successor Trustee appointed in the Trust instrument, collects and manages the trust’s assets, appraises trust property, pays all taxes and expenses relating to the administration of the Trust, and distributes the trust property according to the Trustmaker’s instructions.
A Trustee has a fiduciary duty to the Trustmaker and the beneficiaries. As such, the Trustee owes certain legal duties to the beneficiaries. It is a fundamental principle of trust law that you must be faithful to the interests of the Trust and its beneficiaries. The Trustee occupies a position of trust and confidence and owes a duty of care to the beneficiaries. The Trustee has a duty to administer the Trust solely in the interest of the beneficiaries and to deal impartially with them. The Trustee cannot use trust property for his or her own profit or for any nontrust purpose. (Remember, successor Trustees have a different role than you might as Trustmaker/Trustee.) The Trustee must not engage in any transaction that will result in a conflict of interest between the Trustee and the Trust or a beneficiary.
In managing the trust property, a Trustee must use at least ordinary business ability. However, if he or she has special skills, under California law the Trustee will be held to a higher standard of care. Successor Trustees often employ the service of a Trustee Administration attorney to facilitate the process and ensure they meet their fiduciary obligations. However, if he or she has special skills, under California law the Trustee will be held to a higher standard of care. In any event, Trustee management will be judged in light of the circumstances existing at the time transactions occur, rather than with the benefit of hindsight. If the Trustee exceeds the trustee powers, the Trustee may be held liable for loss or damage to the trust estate.
B. Source of Trustee Powers
The rules that govern Trustee Powers are derived from three sources: (1) the Trust itself, (2) statutory law (the “Trust Law” found in the California Probate Code), and (3) decisional law created by the courts.
The principal source of Trustee powers is the Trust itself. A Trustee should therefore read the Trust carefully. Most Trusts contain two types of provisions: (1) “dispositive provisions” that govern the distribution of property and (2) “administrative provisions” that govern the powers of the Trustee, payment of taxes and expenses, rules for interpreting the trust instrument, and other procedural issues. The bulk of the Trust is made up of these administrative provisions.
C. General Duties of Trustee
You’re the Trustee’s basic duties involve the collection, management, and investment of trust assets and the accumulation and distribution of income and principal under the Trust. Another important set of duties relates to tax matters, which are explained in Estate and Gift Taxes.