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Is An Attorney Necessary For Trust Administration If Everyone Agrees?

It is common for people to feel that if they have a revocable living trust, they will not need an attorney during trust administration since the trust will tell them everything they need to do with the assets, especially when all of the beneficiaries agree how assets are to be divided.  In my experience, this is rarely true.  Here you will find some of the pitfalls of attempting trust administration without the help of a competent estate tax attorney.

Notification

Often the successor trustee (person responsible for administering a trust after the death of the trust makers) thinks the trust document will tell them everything they need to do in the trust administration.  One of the responsibilities of the trustee that is often overlooked is the duty to notify beneficiaries.  California Probate Code Sections 16060 through 16069 describe the Trustees duties to provide the beneficiaries of a trust with certain information including the terms of the trust that effect the beneficiary and annual accountings.  If these duties are not handled properly, the successor trustee can be held liable to the trust and the beneficiary for his actions.

Marital Division

If the administration is happening because the first spouse of a marriage passed away, there can be even more complications.  Where estate planners used to define how assets would be divided between the A and B (and sometimes C) trusts), currently trust planning is increasingly using the “wait and see” strategy when it comes to funding a marital trust for estate tax purposes.  Between disclaimer provisions, Clayton elections, and the new use of portability, most revocable living trusts want to wait until the first spouse passes away to make these crucial decisions.  While this is a very smart strategy, it also means that the successor trustee needs to consult with an attorney to make sure that each of the steps taken is done with all of the tax implications taken into account.

Often times there are many planning opportunities that can be easily missed, if an attorney is not consulted.  A competent estate planning attorney can help the trustee divide assets into the separate trusts to maximize the use of the step up in basis, easily saving the beneficiaries hundreds of thousands of dollars in taxes.  An attorney will also be able to help in filing an estate tax return. This may be necessary even if there is no estate tax due to lock in estate values or make proper elections to preserve tax benefits at the second spouse’s passing.

Taxes and Expenses

If the estate will owe estate taxes, an attorney should definitely be involved, but even when no estate tax is due there are other taxes that the trust is liable for.  There may be income or capital gains tax due, debts that need to be settled, expenses paid, charitable contributions to make, and as we just discussed there may be opportunities to plan for basis and other tax savings.  This needs to be done properly or the trustee could be held personally responsible for the debts of the trust.  An attorney can also help spot opportunities to save on taxes and other payments.

In Trust Distributions

If the beneficiaries will be receive their inheritance outright, it is possible that the trustee and beneficiary can work together to have the assets distributed without too many problems, but if the assets are to be held in trust for the beneficiary, an attorney should be consulted to make sure the assets are titled correctly and that the trustee understands her responsibilities and duties moving forward, since the trustee will be administering the assets for a much longer period of time.

Retirement

Revocable living trusts are often named as a beneficiary of retirement accounts.  It is very important that the trustee understand the intricacies of dealing with retirement assets that are distributed to a trust.  If the assets are not dealt with correctly, the trustee could negate the stretch out to the beneficiaries and cause immediate recognition of capital gains taxes on the entire account.  It is very important to make sure these assets are handled correctly to ensure the tax benefits of the account are maintained for the beneficiaries.

When it comes to trust administration, at first glance it may appear that the trustee is just distributing assets to the beneficiaries, but there are many pitfalls and stumbling blocks that, at the very least, can put a strain on family relationships, and at the worst, cause the trust to lose out on thousands or millions in tax savings and leave the trustee personally liable to the beneficiaries for these mistakes.

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