“You’re the Successor Trustee and the Trustee Dies. Now What?”
The Administration of the Trust by the Successor Trustee
Watch the VIDEO Here
Do you plan on creating a Trust for your family or your business? Have you been asked to be the Successor Trustee of someone else’s Trust? Or, have you been suddenly and unexpectedly thrust into the role of being new Trustee due to the passing of the Trustor? This information will discuss the things that you need to know about “The Administration of the Trust by the Successor Trustee”.
What is a “Successor Trustee”?
If you aren’t familiar with Trusts and how they operate, you wouldn’t understand the answer to that question because the Successor Trustee is probably the trickiest position to understand in the world of trusts. If you are familiar with Trusts, please skip ahead to “How Does a Living Trust Work After Death?”
What is Trust?
A Trust is a legal entity that, like a Corporation, LLC, or Partnership, must have certain elements. We can compare a Trust to a legal entity that you are probably more familiar with, the Corporation.
- Trustee of the Trust is like the CEO of the corporation, the person who runs the show and who everyone answers to. The buck stops with the Trustee.
- Grantor of the Trust is like a founder of the corporation, one who contributes their assets to create the Trust.
- Trustor of the Trust is another word for the Grantor once the trust has been formed, and indicates in a “Living Trust” that this person(s) is also a beneficiary while they are living.
- Beneficiaries of the Trust are like the stockholders of the corporation; they benefit when the Trust has positive cashflow and/or is liquidated.
So, a Trust is a fiduciary arrangement where the Trustee holds title to the trust assets for the benefit of the beneficiaries. These assets are held and managed by the Trustee until they can be distributed at the end of the trust administration process. As I mentioned, a person who creates the trust in the first place is called the Grantor, and when the Trust is created, they will designate a Successor Trustee.
- Successor Trustee is the one who will manage the trust after the Grantor(s) pass away or become legally incapacitated. If they’re smart, they will also designate a backup Successor Trustees in case the First Successor Trustee is unable to act.
What is the role of the Executor?
Many people ask about the role of the “Executor.” The answer is simple, there is no “executor” in a Trust. An executor is the person who is nominated in a Will to handle the “Estate” of the deceased. The Executor is like the Successor Trustee (or “CEO”), and the “estate” is like the assets of the corporation of Trust.
Discussing Wills is a whole other story, but to make sure that everybody knows that if an Estate’s assets include Real Property, or total over $184,500 in California (as of 2024), then the Executor will be required to hire a Probate Attorney and open a Probate case. That’s the main reason that Simone Legal PC is drafting living Trusts on a daily basis! Probate is a miserable process for the family and especially the Executor that takes place for 8-24 months in a public courtroom before a judge, with many hearings, valuations, accountings, reports, etc. In the end the judge decides who gets what, and yes, this is all on the public record. The happiest person at the end of the case is the Probate Attorney, who walks away with a sizeable chunk of the decedent’s estate.
Categories of Trusts
There are many types of trusts, but the two main categories are Revocable Trusts and Irrevocable Trusts, each governed by a different set of rules. Most trusts are Revocable “Living” Trusts. The legal terms:
- “Revocable” means that the Trust can be modified or even terminated (revoked) by the Trustee or Trustees at any time. “Living” is not a legal term but a marketing term that was created to show that the terms of the Trust are “living”, as they can be updated at any time, and also to highlight the fact that a complete Estate Plan has many features – such as a Springing Durable Power of Attorney and Advance Healthcare Directive – that benefit the Grantors/Trustees while they are still living.
- “Irrevocable”- the successor trustee must follow its terms exactly as set forth by the Grantor(s). The Irrevocable Trust cannot be modified or terminated except in certain rare instances.
How Does a “Living Trust” Work After Someone Dies?
What happens to a trust after the Trustee dies? The answer is quite simple in theory but difficult in real life: the moment that the Trustee passes away, the first Successor Trustee instantly becomes the new Trustee by operation of law. If you’ve been named the successor trustee of a “Living Trust”, you’ll definitely need to understand your legal responsibilities. If you’re the successor trustee of an irrevocable trust, you’ll need to grasp how settling it differs from handling a revocable trust. And if you’re a trust beneficiary, it’s advisable to learn about the process of administering a living trust after death.
Since there a legal consequences for the negligent or fraudulent administration of the trust, this is critical information to know if you are a Successor Trustee or someone about to designate your Successor Trustee. Beneficiaries also need to monitor the trust administration process to hold trustees accountable. The California Probate Code requires Trustees who are managing a Trust after the death of the Grantor(s) to perform certain tasks. Managing a trust after death can be challenging, and chances are you will not have much if any warning. So, prepare yourself now. Fortunately for you, this article serves as a helpful guide to close a revocable or irrevocable trust after the death of the last living Grantor/Trustor/Trustee.
How Does a Living Trust Work After Death?
A revocable living trust is a type of trust that the Trustor can modify or revoke during their lifetime. However, in California, after the last living Trustor’s death or incapacitation, the trust usually becomes fully irrevocable, meaning that the successor trustee must follow its terms exactly as set forth by the Grantor(s).
Many people choose revocable living trusts for their estate plans because of the flexibility they offer. For instance, a single, childless person would prefer a revocable living trust so they can amend it if they get married or have children at a later time.
If you want to learn more a Revocable Living Trusts, make sure to watch the video or read the blog article titled “The Ten Benefits of Living Trusts.” You will be amazed at how many huge benefits a solid Estate Plan has for you and your family. Do not confuse estate planning and personal medical benefits with Asset Protection. It is important to note that revocable trusts generally do not provide significant tax savings or protect assets from creditors. Simone Legal PC has solved that problem with the “Peace of Mind Package” a California LLC and Living Trust arrangement that provides Asset Protection and Estate Planning together for one low price. Check out the video or article titled, “The Best of Both Worlds: Using LLCs and Trusts Together.”
What happens to a “Family Trust” after death?
“Family Trusts” can be either revocable or irrevocable, just like any other trust. When we refer to a “family trust,” we’re usually talking about a Revocable Living Trust, which we discussed above. These trusts are designed for the benefit of beneficiaries who are typically family members of the grantor(s), usually the children of the Grantor(s). A family trust can include a wide range of assets, such as a family home and/or a family business.
After the grantor’s death, the management of a family trust can vary. For instance, if the trust was set up jointly by a husband and wife, the surviving spouse may inherit full control of the trust assets or a portion of them. In some cases, the death of one spouse may trigger the creation of sub-trusts to protect assets for the children while providing financial support for the surviving spouse. When the surviving spouse dies or becomes incapacitated, the trust usually becomes irrevocable, and the process of trust administration for the first Successor Trustee begins.
How Does an Irrevocable Trust Work After Death?
An Irrevocable Trust is a type of trust that, once created, essentially cannot be altered or revoked by the Grantor. Once the grantor executes an irrevocable trust, they lose control over its assets, and the trustee must strictly follow the trust’s terms as originally set. To over-simplify it, we’ll start out with the definition of “ownership.” For example, I “own” my home because I can sell it, take out loans on it, rent it out, paint it hot pink if I like, etc. In short, I have control over it. If I place that property into an Irrevocable Trust, aside from the terms that I set forth in the beginning, I no longer have control over it, the Trustee (who must be a 3rd party) does.
Since grantors have no control over the assets in an irrevocable trust, these trusts are treated as separate tax entities. This means the assets within the trust are not included in the grantor’s taxable estate, potentially resulting in tax savings. Additionally, creditors find it difficult to access the assets in an irrevocable trust to satisfy the grantor’s debts, as these assets are no longer legally “owned” by the Grantor. One Irrevocable Trust that I like is called the Charitable Remainder Trust, which is most often used by wealthy Grantors. It provides substantial tax advantages to The Grantors and Beneficiaries with a specific format that pays the Grantor a regular income during their lifetimes and then contributes the remainder to a designated Charity or Charities. It’s a brilliant win-win scheme which benefits the Grantors, Beneficiaries and of course the Charities.
Assets Must Be Transferred into a Trust = “Funding The Trust”
Getting back to Estate Planning basics, with a Will, assets are generally considered to be part of the Estate if they are not held by a trust or transferred through other non-probate methods, such as joint tenancy or beneficiary designations.
On the other hand, for an asset to be part of a trust – and thus avoid probate – the title of real property must be transferred into the trust’s name by grant or quitclaim Deed, and there must be language that Personal Property is to be distributed under the direction of the Trustee. This “funding of the Trust” is critically important, and Simone Legal PC constantly reminds clients to get that Deed to Trust not only Notarized but Recorded! If that is not done, then there will need to be a probate case opened even though there is a Trust. And that would be a shame.
Trusts Are Not Subject to Probate
Probate is a court-supervised proceeding that involves appointing an executor or administrator and validating the decedent’s will, if there is one. Estates typically go through probate, while trusts should not. One of the main advantages of trusts is that they avoid probate, which can be complex, expensive, exhausting and time-consuming. Additionally, probate often requires the executor or administrator to get court approval before making distributions to beneficiaries, and sometimes the judge decides who gets what.
How to Close a Trust After the Passing of the Trustor = SETTLING THE TRUST
As the Successor Trustee of a trust, your role is to “settle” the trust, which means you must eventually wind it up by distributing its assets according to the trust’s terms. While many trusts are fully distributed shortly after the grantor’s death, some are designed to remain open for extended periods.
For example, if a Grantor sets up a trust for their minor children, California law requires that the children cannot access their inheritances until they reach adulthood. As a result, the trustee may need to keep the trust active for several years to ensure the grantor’s wishes are fulfilled. Similarly, if a grantor is concerned that their adult children might misuse their inheritance, they might set up the trust to make gradual distributions over time rather than a lump sum. Some trusts might even include conditions for beneficiaries, like completing college, before they can claim their inheritance.
“Settling” a trust can vary greatly depending on its terms. It’s vital for new trustees to follow the trust’s provisions precisely to avoid potential breach of trust claims by beneficiaries. If you find interpreting the terms challenging, it’s wise to consult a Probate attorney before proceeding further. (Something to remember, “Estate Planning Attorneys” primarily deal with events while the Grantors are still alive, while most post-death issues are handled by Probate Attorneys, even if there is no probate case.)
STEPS FOR MANAGING A TRUST AFTER DEATH
If you’re unsure about what to do with a trust after someone’s death, you’re not alone. The process of administering a trust can be complex but following each step carefully and in the correct order will simplify your task.
Having a trust administration attorney (“Probate Attorney”), can make a significant difference in protecting you from potential liabilities. If a beneficiary feels wronged and files a court case and the court determine that you’ve breached your duties during the administration, you could face substantial financial penalties. Therefore, having a lawyer on your side is a prudent measure for every trustee who is administering a complex trust estate. Additionally, the cost of legal services is usually covered by trust assets, so there’s generally no reason not to seek professional assistance. Here are the steps for managing the trust after the Trustor(s) have passed:
- Locate and Review Relevant Documents
Your first task after learning that a grantor has died or become incapacitated is to gather the essential documents. This typically includes certified copies of the grantor’s death certificate from the coroner’s office, the trust instrument, and any other relevant estate planning documents.
The grantor may have previously informed you of the trust’s location, but if not, you might need to search through their office or personal files. If you can’t find the trust instrument, check with the grantor’s family and friends to see if they know where it might be. If it remains missing, trust administration cannot proceed, and the assets may need to go through probate and be distributed according to intestacy laws, unless there’s a will specifying alternative distribution. (That’s why we always remind our clients to make digital PDF copies of the notarized Trust Documents to keep them in the Cloud and to email to (at least) the Successor Trustee.)
Before moving forward, you’ll need to interpret the trust instrument. This process can sometimes be straightforward, but there may be ambiguities or issues that require assistance from a lawyer or potentially the court. Ensure you fully understand the trust instrument and its terms before proceeding to the next step.
2. Provide Notice to Beneficiaries and Heirs About Trust Administration
Under California Probate Code section 16061.7, trustees must provide written notice to trust beneficiaries and the grantor’s heirs about the commencement of trust administration. This notice must be given within 60 days of the grantor’s death or 60 days from when the trustee takes over, whichever is later.
For a notification by trustee to be valid, it should contain all the following information:
- The name of the grantor and the date the trust was signed by them;
- The name, address and phone number of each trustee of the trust;
- The address where trust administration will take place;
- Any additional information required by the terms of the trust;
- A note that the recipient may request from the trustee and be provided a complete copy of the trust;
- A note that the recipient has 120 days from the date they received notice or 60 days after a copy of the trust is mailed or delivered to them (whichever is later) to bring legal action to dispute the trust.
If the trustee’s notification is invalid, delayed, or if a copy of the trust is not provided to beneficiaries or heirs promptly upon request, it can lead to delays in administration and potential accusations of duty breaches against the trustee.
3. Gather and Value Trust Assets
After completing the initial steps of trust administration, your next task is to create an inventory of the trust’s assets. Start by gathering the assets listed in the trust document. Organize these assets into a spreadsheet to track their entry and exit from the trust, their value at the time of the grantor’s death, and any changes in value over time. For liquid assets like bank accounts, list their value as of the grantor’s death. For non-liquid or fluctuating assets such as real estate, stocks, or bonds, you may need to hire a third-party appraiser or a probate referee—a neutral, state-appointed appraiser who is usually a more cost-effective option.
It’s wise to avoid valuing assets yourself, as this could be perceived as a breach of trust and lead to disputes with beneficiaries. Keep your inventory updated and maintain detailed records of all transactions. This will make trust accounting more efficient and provide a clear record if beneficiaries request justification for your actions.
4. Satisfy the Grantor’s Debts
Before distributing trust funds to beneficiaries, you must first settle the grantor’s valid creditor claims. Typically, if the grantor’s estate has enough assets, it will cover these debts. However, if the estate’s assets are insufficient, creditors might be able to claim from the trust, especially if the trust was revocable at its creation.
As the trustee, failing to address all outstanding debts before making distributions could make you personally liable for those debts. Remember, government agencies are considered creditors too, so ensure all tax obligations for both the grantor and the trust are met. Consulting a CPA cis strongly recommended for preparing tax returns and managing these obligations.
5. Prudently Manage and Invest Trust Assets
Depending on the trust’s terms, the trustee may need to make prudent investments to generate income for the trust. For instance, they might choose to invest some of the trust’s liquid assets in stable, dividend-paying stocks. Conversely, investing in a high-risk business that may not yield profits for years could be considered imprudent.
Trustees should also avoid leaving assets that could be generating income idle. For example, if the trust owns a vacant property, renting it out or selling it is probably a good idea. Trustees can be held liable for poor investment choices or selling property below market value. However, they may be able to defend against breach of trust claims if they can demonstrate that their decisions were reasonable and well-supported, even if the outcomes were less favorable for the trust.
By this time, if you’re a new Successor Trustee you may be feeling pretty unhappy. But hold on, don’t forget that most trusts allow you to pay yourself! And some Trustees can be paid at the same rate as the probate attorney, so your diligent work will be compensated.
6. Track Down Title to Trust Assets
To effectively manage trust assets, it’s essential to ensure that they are properly titled in the name of the trust. Sometimes, assets are already titled correctly, and the trustee simply needs to update the trustee’s name on these assets. This could involve recording new documents for real estate or submitting formal paperwork to financial institutions for liquid assets.
If the assets are not yet titled in the name of the trust, the trustee may need to file an 850 petition with the probate court to officially transfer the title. This process, as discussed earlier, is a necessary step to align the asset’s title with the trust’s requirements.
7. Account to Beneficiaries and Heirs
As previously noted, trustees must monitor any changes in the trust’s value and keep track of all assets entering and leaving the trust. Trustees are required to provide beneficiaries with a formal accounting each year while the trust remains open. Beneficiaries also have the right to request reasonable financial information related to their interests at any time.
To manage these responsibilities effectively, trustees should be thorough and organized. Using trust accounting software, maintaining a filing system, and employing other organizational tools can be beneficial. Since the costs of professional services can typically be covered by the trust, it’s advisable for trustees to have a CPA or probate attorney review their accountings for accuracy, or even prepare them entirely.
8. Make Distributions to Beneficiaries in Accordance with Terms of Trust
Trusts may specify that distributions to beneficiaries be made either as a lump sum or over time. It’s crucial for you, as the trustee, to understand the trust’s terms to ensure you faithfully distribute the assets according to the wishes of the Grantor(s).
Trustees should also be attentive to making distributions promptly. Once trust administration is complete, distributions should follow shortly thereafter. However, unlike executors or administrators, who are generally required to distribute assets without delay, trustees often have more discretion regarding when to make distributions.
For instance, trustees may be permitted to withhold a distribution temporarily if a beneficiary’s well-being is at risk, such as in cases of substance abuse. However, trustees cannot withhold distributions arbitrarily unless explicitly authorized by the trust’s terms or if the trust itself is discretionary.
Failure to make timely and accurate distributions can lead to beneficiaries suing for breach of trust. Therefore, it’s essential for trustees to handle this step of the process with care.
What happens when the Trustor dies and Real Estate has not been Deeded to the Trust?
A trust has not been completely “funded” when the Grantor/Trustor did not transfer property Title(s) into the trust before passing away. In other words, the “Deed to Revocable Trust” was not recorded by the County Recorder in the county where the property was located. Sometimes Trustors do remember to do this, but are later forced by Lenders to deed the property out of the Trust in order to perform a Re-Finance. In any case, if the Grantor’s intention to transfer these titles into the trust is unclear, a formal Probate Case will need to be opened so that Title to the property can be cleared; in this case, a judge will be the one deciding who owns the property, and in the majority of case, a Probate Attorney will need to be retained.
However, if the Grantor’s intent to transfer the assets into the trust is evident (e.g., mentioned in the trust instrument), you might be able to use a Heggstad Petition for a California Revocable Trust.
What is Heggstad Petition?
- Heggstad Petition is a type of “850 Petition” to complete the transfer without going through probate. Simone Legal PC always drafts a special part of the Estate Plan called the “Declaration Of Trust” that clearly announces, citing the Heggstad case, the intent for everything owned by the Grantor to be included in the Trust.
To use a Heggstad Petition effectively, it’s best to consult with an experienced Probate attorney. They can draft the petition and present your case to the court. If successful, this petition will be less expensive and significantly faster than a full-blown probate case.
Hopefully this article has given you the information you need to get started and has relieved your stress to an extent. These are difficult times, but remember that all Simone Legal clients can always schedule a free consultation with attorney Simone at StuartSimone.com. The first rule to follow is, if in doubt, hire professional help.
