When the Estate Planning Attorneys at Clarity Legal Group work with clients to create an estate plan, we always begin with listening to the client’s particular goals and concerns so we can tailor the plan to the unique needs of the client. We do a lot of planning built around Living Trusts. I am sometimes asked “do I need a Living Trust?” I think better questions are “how can I accomplish my goals through a Living Trust” and “how does planning around a Trust accomplish those goals better or differently than planning without a trust”.
Two important distinctions of planning through a Living Trust are simplification of administration for a Trustee versus an Executor, who works through the Courts under a Will, and the greater flexibility which can be given to a Trustee. When a trust is created, a Trustee must be appointed. The Trustee of a trust is responsible for administering the trust as well as managing and investing trust assets. If you recently learned that you were appointed to be the Trustee of a trust, you probably have questions and concerns if this is your first time serving as a Trustee. To help alleviate some of those questions and concerns, I have put together some basic information about trust administration for the first-time Trustee.
How a Trust Works
A trust is a legal relationship built around a contract — a Trust Agreement. The concept of the relationship is built around the idea that the Trustee holds property (financial accounts, real estate, or even household property) for the benefit of one or more other people. A trust is created by a Trustor (also referred to as a Settlor or Grantor), who transfers property to a Trustee, also named by the Trustor. The Trustee holds that property for the benefit of the beneficiaries named in the trust agreement.
Trusts can be testamentary or inter vivos – can arise upon someone’s death or be created during the Trustor’s life. A Revocable inter vivos trust in which the Trustor is also the beneficiary is commonly referred to as a living trust. This kind of trust can be used by the person who creates it over the course of his or her life and can be modified by the Trustor so long as he or she is alive (and mentally competent). A testamentary trust is a trust that arises upon the death of the Settlor and might be activated by a provision in the Trustor’s Will or Living Trust. These testamentary trusts are irrevocable and set out rules for the management of property for a beneficiary or beneficiaries which ordinarily cannot be modified by anyone.
What Is Involved in Administering a Trust?
Administering a trust entails managing and investing the trust assets pursuant to guidelines in the Trust Agreement and statutes and following the trust terms, created by the Trustor, to achieve the stated trust purpose. The trust terms, which are found in the Trust Agreement, will dictate when trust assets are to be distributed, in what amounts, and might also specify the purposes for which the assets can be distributed. The Trust Agreement will identify the beneficiary or beneficiaries who are to to receive the distribution. The trust may also provide details that direct how the trust assets are to be invested. The Trustee must abide by all trust terms unless a term is illegal, impossible, or unconscionable. No two Trust Agreements are identical, meaning the administration of no two trusts will be exactly the same. Nevertheless, there are enough some common steps a Trustee should take when administering a trust to create a checklist.
- Gather and review all estate planning documents. If the Trustor is recently deceased, get copies of legal document such as the Trust Agreement and Last Will and Testament, life insurance policies and their beneficiary designations and all account statements and deeds relating to property owned by the Trustor or the Trust.
- Review the Trust Agreement with Clarity Legal Group or another experienced law firm. Most Trustees retain an experienced trust attorney to help them administer the trust to prevent making costly errors. At a bare minimum, go over the trust agreement with an attorney to make sure you understand all the terms. Review the terms of the Trust Agreement with the Attorney so you understand the routine and unique obligations of your responsibilities. Don’t expect to be able to work your way through all of the legal jargon without some guidance. Also, do not make the mistake or relying on representatives of banks, investment firms or accountants for interpreting your duties under the Trust. Each of these people have their area of expertise and advising you as to your obligations in administering a Trust is not one of them.
- Review the Account statements and Deeds. Understand that it is these items — and not the Will or Trust Agreement themselves — which will determine whether an asset of the decedent in controlled by the Will or Trust.
- Consult with the financial advisor of the decedent. Meet with a financial advisor who can help guide you with regard to investing the trust assets. A good and experienced adviser will be able to assist you with responsibilities you may have to meet particular standards in investing and managing the assets under a Trust.
- Create an inventory. Create an inventory of all of the assets owned by the decedent, how they were owned (in Trust or not), whether they had beneficiary designations attached to them (and to whom). Keep this inventory updated as you administer the Trust so you always know what the trust owns, where the assets are located, and what they are worth.
- Ask you lawyer to secure a tax identification number for the Trust and apply it to all accounts. The accounts and other assets in a Revocable Living Trust are attached to the Trustor’s Social Security Number during his or her life. After the Trustor dies, the trust becomes a separate legal entity for tax purposes and will need a separate tax identification number which should be communicated to each financial institution holding an account for the Trust. If you were not already the Trustee but rather because Trustee as a result of the Trustor’s death, you will need to add your name to the accounts as the Successor Trustee. You Clarity Legal Group attorneys will prepare a new Certification of Trust which will facilitate these changes.
- Arrange to transfer assets into the trust as required. As I mentioned above, it is not the legal document but the way an asset is owned and organized which will dictate what legal arrangement controls the asset. At Clarity Legal Group part of our estate planning services includes assisting the client to move asset which should be held under the Trust in Trust ownership during the Trustor’s life. These assets are controlled by the Trust without further actions. Other assets — a life insurance policy, for example — might be owned outside of the Trust but be directed by beneficiary designation to be paid into the Trust at death. In this case, the Trustee would contact the Life Insurance company as beneficiary of the policy to arrange for the proceeds to be transferred to the Trust. It might also by that some assets are controlled by the Will and thus, unfortunately be part of the Court supervised Probate Estate. When someone has a Living Trust, it is typical for the Will to provide that most or even all of the assets which are controlled by the Will are to be moved into Trust as part of the probate. There are specific processes which must be followed before the transfers are made, but the Trustee should work with the Executor to make sure these transfers are properly made. It is often the case that the Trustee and Executor are the same person.
- Communicate with beneficiaries. Let the beneficiaries of the trust know that you are the Trustee and that you will be handling the administration of the trust. You have an ongoing duty to communicate with the beneficiaries and keep them updated on trust business.
- Keep detailed records. Everything you do as the Trustee should be well documented. This protects you in the event that questions arise regarding your role as Trustee and it allows you to be compensated for acting as the Trustee.
Contact a Chapel Hill Trust Administration Attorney
If you have additional questions or concerns about trust administration, please contact the Chapel Hill, Raleigh, Durham estate planning attorneys at Clarity Legal Group by calling us at 919-484-0012 or contact us online.