When a person who has created a living account passes away, the persons or entity named in the trust as the successor trustee has statutory fiduciary obligations that they must fulfill. If their duties are not undertaken correctly, the successor trustee is potentially liable for additional taxes due to the estate or may face potential lawsuits from the trust beneficiaries for any mistakes they are alleged to have made even though the trustee's actions were carried out in good faith. The actions carried out by the successor trustee are mandated by the terms set forth in the trust document and other prescribed actions are required under California law or federal tax law.

When the creator or the settlor of a trust dies, the process undertaken by the successor trustee is called trust administration. The steps that a successor trustee must undertake following the passing of the settlor are described briefly below:

Filing the Original Will of the Decedent

The original will of the decedent accompanied by any codicils must be filed within 30 days of the date of death with the county clerk in the county the decedent was a resident of at the time of death. In the case of a trust, probate is generally not required therefore there is no filing fee. The executor named in the will must receive a copy of the will filed even if probate proceedings are not needed.

Notifying The Trust Beneficiaries & Heirs Of The Deceased

A written notice must be sent to all trust beneficiaries and heirs at law within 60 days providing notice of the irrevocability of the trust and providing notice that they are entitled to receive a copy of the trust and all amendments to it upon request. The notice advises the recipient of their right to contest the trust and states the time limit for contesting the trust which is typically 120 days from the date of mailing. Upon failure to notify beneficiaries or heirs they may have up to 4 years to contest the trust. Potential damages including attorney's fees and costs may be awarded if the trustee does not mail the notice or comply with all the requirements under the notice.

Inventory & Valuation Of Assets

It is mandatory for the trustee to inventory all of the assets of the trust, as well as all assets owned by the decedent at the time of death that were not in the trust. The assets are then valued in accordance with fair market value as of the date of death. Assets such as business interests need a written appraisal by a competent appraiser and similarly, real estate is valued using a written appraisal by a real estate agent or broker or a qualified real estate appraiser.

The Duties Of A Trustee Once A Trust Becomes Irrevocable

When a trust becomes irrevocable, the trustee has to invest funds in accordance with the terms of the trust document and the California Uniform Prudent Investors Act. It is also mandatory for the trustee to keep records for the trusts and file annual trust income tax returns as well as filing annual accountings with the trust beneficiaries who receive payments from the trust. The trustee is further asked to provide an accounting when there is a change of trustees or the trust is terminated. Beneficiaries of a trust can request any information regarding the trust from the trustee including information on sales or purchases of assets and assets on hand.

A separate tax identification number must be obtained from the IRS when a trust becomes irrevocable. The trustee has to complete IRS form SS-4 and submit it to the IRS for approval and assignment of the tax identification number. This number is used in lieu of the decedent's social security number for trust assets and for purposes of tax reporting. 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 along with other information pertinent to the trust. The certification of a trust and a certified copy of the death certificate are required to transfer the trust assets into the name of the successor trustee.

Federal estate tax returns are required if the gross value of the decedent's assets exceed a certain amount, whether the assets are in the living trust or not.  Federal estate tax returns must be filed within 9 months of the date of death. Extensions may be granted for up to 6 months to file the return. Probate is not needed for assets that are held in a living trust. Occasionally someone passes away holding an interest in an asset held outside of the trust and that asset may require probate. Under California law, assets held outside of the living trust which do not exceed $100,000 may avoid probate, and be transferred by affidavit procedure. Any assets held in joint tenancy or where a beneficiary is named as a life insurance or IRA account, or any vehicles are excluded from this $100,000 amount. These are the requirements for transferring assets such as property into the living trust or to someone who is legally entitled to the asset by using a special certification form.

However, if the value of the asset outside of the trust is in excess of $100,000 or if the asset is an interest in real property that has value in excess of $20,000 then probate will be required prior to transferring the assets into the living trust.

The Pitfalls Associated With Trust Administration in California

Failing to carry out the aforementioned duties when a trust becomes irrevocable can often lead to dire consequences for a successor trustee. Trustees that are alleged not to have fulfilled their duties often face litigation and potential liability from the beneficiaries of the trust. Improper administration can additionally lead to higher estate taxes and the loss of a property tax exemption. Therefore, it is imperative to seek the counsel of an estate planning attorney experienced in the administration of trusts in California who understands tax implications inherent in California trust administration.