Guidelines for Successor Trustees

These Guidelines are designed as an aid to those of you who have been entrusted to serve as successor trustee(s).  It is not possible to answer all of your potential questions.  However, we hope to answer those which will come up with some regularity.

You may have assumed the duties as successor trustee either because of the incapacity or death of the primary trustee(s).  Therefore, these Guidelines are divided into two groups.  The following discusses what to do upon the death of the Settlor(s) of a Trust.

Succession Because of Death

If you have assumed the duties of successor trustee because of the death of one or more of the original trustees, your task is as follows:

1.  Locate all of the assets of the Trust.  If the Settlors have been maintaining the Asset Inventory section of their Family Trust Portfolio, this should be a simple matter.

2.  Determine whether a Credit Shelter Trust is to be created and, if so, obtain from the IRS (Form SS-4) a tax ID number for the Credit Shelter Trust upon the death of the first spouse, and retitle the appropriate assets into the Credit Shelter Trust under that trust’s tax ID number.   Assistance from an attorney and/or accountant is recommended to make sure this aspect of settlement is done properly.

3.  File the annual form 1041  (trust tax return) with the Internal Revenue Service.  This form requires you to show the income of the trust, its expenses, and the manner in which the income was distributed.  If the income has all been distributed, the trust will pay no tax, and this return is merely an information return. This form has a number of lines, but you will not be using most of the lines. With some guidance from your CPA or attorney, you should be able to complete the form.

4.  Verify the date of death value of all assets.  This value will become the new tax basis for the assets, and therefore, it is very important.

5.  Determine whether or not all of the real estate owned by the Settlor(s) has been transferred to the Trust.  Check for copies of recorded Deeds in the Family Trust Portfolio or check with the County Recorder’ office.

6.  Determine the expenses of last illness, taxes due and owing, funeral expenses and debts of the Settlor(s).  The funds of the Trust must first be used to pay these items.

7.  Once you are sure that all of the expenses have been paid, distribute the trust assets.  Make sure you have allowed for any income tax due and payable on the last year’s income of the Settlor(s).  You may be responsible for any shortage of these funds.  It is not uncommon to make a partial distribution of funds initially, with a final distribution once all expenses have been paid.

8.  Depending on the size of the estate, a Federal Estate Tax Return must be filed.  Because of the complexity of this return, we suggest you employ an attorney or accountant to assist you.

Tags: Trust Management & Settlement by Greg Reese
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These Guidelines are designed as an aid to those of you who have been entrusted to serve as successor trustee(s).  It is not possible to answer all of your potential questions.  However, we hope to answer those which will come up with some regularity.

You may have assumed the duties as successor trustee either because of the incapacity or death of the primary trustee(s).  Therefore, these Guidelines are divided into two groups.  Following is a discussion of the steps you should take if assuming responsibilities as a result of incapacity of the Trust’s Settlor or Original Trustee.

Succession Due to Incapacity

If you have taken on the primary trustee responsibilities because of the incapacity of the primary trustee(s), you should take care of the following items:

1.  Locate all of the trust assets and make certain that title to the assets have been transferred into the name of the trust.  If there are assets which have yet to be transferred into the trust, the person or persons holding a Durable Power of Attorney can complete the transfers.  Since a Power of Attorney is no longer effective after the death of the Principal, it is important not to delay this step.

2.  Determine the needs of the Settlor or Settlors.  It will be your responsibility to manage their funds, and to take care of their financial needs to the extent the funds of the trust permit.

3.  If long term nursing home placement is a possibility, consider whether or not it may be advisable to “gift” trust assets to someone other than the Settlor.

4.  Provide an annual account to the beneficiaries of the Trust which tells them what funds were in the trust, how much income the trust had, and how that income was spent.

5.  File the annual form 1040 of the Settlor(s) with the Internal Revenue Service.

Tags: Trust Management & Settlement by Greg Reese
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It is not uncommon for supporters of living trusts as a means for distributing one’s estate to compare the often high cost of probate to the cost of creating a Revocable Living Trust.  Depending on the state you live in and the complexities of your estate, Probate can consume anywhere from 4% to 10% or more of your gross estate, (before debts are paid), based on a comprehensive study by AARP.  A decent Revocable Living Trust  might run from $1,200 to $2,500 more or less.  It seems clear that the cost of setting up a living trust is much less than the cost of allowing your estate to go through probate.   But, is that the only measure of cost you should compare?

Some would argue that a Living Trust should be managed by a professional, or corporate trustee and they charge fees commensurate with executors fees for a Will going through Probate.  There can be many reasons why the services of a corporate trustee would be preferable to using a family member,  however, in most cases, trusted family members can and do successfully settle trust estates without undue complication.

Unless the Settlor pre-determines the fees that may be charged by an individual or professional for managing and settling a Trust,  a typical trust will usually allow for “Reasonable Compensation by a Trustee”.   Reasonable compensation is often a standard approach since the courts have essentially defined that term to be the fees usually and customarily charged by professional corporate trustees in the geographic area where the Settlor died, or where the Trust administration is to take place.  It varies a little from here to there but is generally around .75% to 1.75% of assets under management on an annual basis (if the trust is managed for beneficiaries over time as opposed to being all distributed outright).

There can be additional fees associated with real estate commissions, brokerage fees to liquidate real estate or stocks, tax preparation fees from an accountant… all of which can generally apply anyway whether you are dealing with a Probate or a Trust.   The key expense items that usually are not part of a Living Trust’s settlement are court costs and attorneys fees.

Here is something important to note… most successor trustees who are beneficiaries DO NOT charge any Trustee Fee (maybe just reimbursement for out of pocket expenses)… The reason being that trustee fees are taxable to them… inheritance is not.  Sometimes taking a fee is warranted by a beneficiary who is acting as a Successor Trustee,  but it usually the exception more than the rule.

The bottom line is that a properly prepared and funded living trust, even if administered by a Successor Trustee who is a paid Corporate Trustee, should still be significantly more economical than the cost of Probate Administration in most cases.  In the wider analysis, the comparison of costs should not be the only factor looked at.  You should also look at the length of time each method will take, the likelyhood of any heirs who might seek to contest your wishes, and the short and long term needs of the beneficiaries.

Tags: Uncategorized by Greg Reese
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