I’ve Been Named the Successor Trustee HELP!
Author: Rebecca L. Van Loon
You have just learned that you have been named as successor trustee of a parent’s, a family member’s, or a friend’s trust. Your first question may be where do I start? What does a trust administration involve? What are my obligations to the trust beneficiaries? How do I pay taxes? How do I deal with creditors?
First, just as every estate plan is unique, every trust administration is unique and depends on a number of factors, including the terms of the trust, the nature of the assets held in the trust, the value of the assets in the trust, and family dynamics, just to name a few. Understanding what’s involved and what’s ahead is an important first step.
The next consideration is understanding the responsibilities, duties and risks associated with serving as successor trustee. Suffice it to say, being designated successor trustee is not always an honor.
This article discusses trust administration generally and below is an overview of the initial trust administration steps following the death of the settlor/trustor/creator/grantor of a revocable trust. (The below information is not an exclusive list/summary of all of a trustee’s duties and responsibilities and is only intended to highlight various trustee obligations and issues a trustee may encounter during a trust administration).
Engage Counsel. Although the terms of the trust may seem straight forward and relatively simple if all of the beneficiaries are getting along, the trustee bears the risk, responsibility, and potentially the liability to beneficiaries if the trust is not administered properly. If there are known complications, such as difficult assets, litigation, and/or family disputes, it is even more important to seek legal counsel to advise you, as the trustee, on how to handle such issues and properly fulfill your legal duties and obligations. Engaging legal counsel is an expense that can be paid from the trust assets and is worthwhile to ensure that you read and interpret the trust documents correctly, send all required notices (including those that are required to be filed within a certain period of time), guide you through the process, answer questions, and deal with issues (such as disputes among beneficiaries, tax issues, litigation, difficult assets, creditors, etc.) along the way.
Review and Understand the Trust Terms. Read the trust (and all amendments) as well as all the other estate planning documents. If the trust terms are ambiguous, conflicting, or unclear, you may need to seek instruction from the Probate Court.
Deposit the Will. The person (usually the trustee) who is in possession of the deceased trustor’s Will is required to deposit the original Will with the Probate Court in the County in which the deceased trustor was domiciled.
Notice to the Beneficiaries. Trustees are required to send written notice of the trust administration to all trust beneficiaries and heirs of the decedent. Be careful – there is statutory language and information required to be included in the notice. A trustee’s failure to send the notification could cause the statute of limitations on contesting the trust to not run and may result in liability to the trustee.
Creditors. Trustees are also required to deal with the debts and creditors of the deceased trustor. The trustee needs to understand the nature of the claims, timing, and explore if any statute of limitations or notice period will apply to limit such claims. The trustee also needs to make sure creditors, taxes, and trust administration expenses are paid (or retain a sufficient reserve to pay such liabilities) before making distributions. Failure to deal with creditors, taxes and other expenses properly may result in trustee liability.
Marshal Assets. Trustees also need to marshal the trust assets. This typically includes locating and collecting all assets belonging to the trust (cash accounts, investment accounts, real property entity interests, vehicles, other tangible personal property, etc.), retitling assets in the name of the successor trustee, and/or consolidating accounts/investments. Be careful and consider all tax implications before closing accounts and liquidating investments. In addition, a trustee generally has a duty to make trust property productive by investing prudently during the trust administration.
Income Taxes. The trustee is responsible for confirming the deceased trustor’s personal income taxes were filed and paid (as well as any other required tax fillings, such as gift tax returns). The trustee may also need to file federal and state income tax returns for the trust. The residency of the trustor, trustee, and/or the beneficiaries may be crucial in determining where the trustee must file state trust income tax returns.
Property Taxes. The trustee is responsible for notifying the assessor’s office of the trustor’s passing in each county where the deceased trustor held real property. The trustee must use the required forms and submit the forms within the required timeframe. Failure to properly notify the assessor’s office may result in penalties or reassessment of the property. Generally, the death of a real property owner triggers a “change of ownership” requiring the reassessment of the property for property tax purposes. However, there are a number of exceptions, including, but not limited to, spousal transfers, parent-child transfers, grandparent-grandchild transfers, and co-owner/co-occupant transfers. Qualifying for most of the exclusions from reassessment (including the transfer of real property from a parent to a child) requires the trustee to claim the exclusion by filing the proper forms with the assessor’s office. Failure to do so within the required timeframe may result in the loss of the exclusion from reassessment.
In addition, the reassessment exclusions may be limited. For example, a parent-child exclusion only extends to the transfer of a principal residence and up to $1million of assessed value for all other properties. In addition, the parent-child exclusion does not apply to transfers of LLC or other entity interests holding real property. A trustee should use caution to confirm all exclusion forms are filed before selling real property and/or making distributions from the trust.
Estate Tax. If the gross value of the deceased trustor’s estate exceeds the federal estate tax exemption ($11.58 million in 2020, adjusted for inflation), the trustee will need to file a federal estate tax return within nine months (plus six month extension) of the deceased trustor’s date-of-death. Note that the estimated estate tax payment is due within nine months of the deceased trustor’s date-of-death.
Accountings. A trustee is required to account to the beneficiaries and provide information to the beneficiaries upon reasonable request. A trust accounting is generally required to be in a specific statutory format. An accounting may provide protection to the trustee by disclosing to the beneficiaries actions taken by the trustee. Failure to provide the accounting may result in liability or removal as trustee. Depending on the trust terms, the delivery of the trust accounting may start either a 180-day or 3-year time period in which a beneficiary may object to the accounting. The trustee may also seek court approval of an accounting. Beneficiaries also have the option to waive the requirement of an accounting.
Notice of Proposed Action/Court Instruction. If the trustee intends to take certain actions, for example sell real property or renegotiate a lease, the trustee may consider sending a notice of proposed action to the beneficiaries or seek court instruction as to whether to take the action. By sending the notice or seeking court instruction, the trustee may protect himself or herself from liability if a beneficiary later tries to object to the action taken by the trustee.
Compensation. A trustee is generally entitled to “reasonable compensation” for his or her services as trustee. Be sure to read the trust to determine if the trust instrument specifically discusses trustee compensation. Trustee compensation is also considered income to the trustee.
Distributions. After the trustee determines there are sufficient assets to cover debts, taxes, and expenses and the trust administration is generally complete, the trustee may seek to make preliminary and/or final distributions to the beneficiaries. The distributions may be in cash or in-kind and/or pro rata or non-prorata (again – review the trust instrument for any specific instructions or limitations). A trustee may also request the beneficiaries execute a receipt for any distributions received.
**This is just a general summary. Your unique circumstances and needs should also be addressed. Please feel free to give us a call if you have further questions/concerns.
***The information provided in this article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.***
 The federal estate tax exemption is set to return to $5 million adjusted for inflation on January 1, 2026.