Trust Administration: Reality vs. Hype

Post-death Duties

Trust Administration: Reality vs. Hype

Trusts are often properly marketed as a way to avoid the hassles of probate and to minimize taxes. A main benefit of trusts is that, unlike wills, they are generally administered without probate court involvement. But trusts are over-marketed when people are told that administering a trust is hassle-free.

Post-death Duties

Trust administration is relatively simple when the persons who created the trust (the "trustor(s)" or "settlor(s)") are all alive and still administering the trust (as "trustee(s)"). But upon the death or incapacity of a settlor, the duties of a remaining or successor trustee can be very complicated. These duties — under the trust and state law — are very serious: a trustee who fails to properly perform them can be held personally liable for breach of fiduciary duty.

Successor trustee duties include the following:

• Notice to Beneficiaries.  If a trust becomes irrevocable in whole or in part at a settlor's death, the decedent's heirs and trust beneficiaries must be notified of that fact and given an opportunity to request copies of the trust.

• Accounting.  Trust beneficiaries have the right to a proper accounting of the trust, although such an accounting is generally not supervised by a probate court. 

• Inventory and Appraisal.  An inventory and appraisal is essential for protecting and preserving trust assets, and for properly accounting for and distributing those assets.

• Creating and Administering any Sub-trusts.  Many trusts must be split into certain sub-trusts upon a settlor's death.  For example, trusts for couples often provide for a "bypass" or "credit shelter" sub-trust, which doubles the couples' estate tax exemption by preserving the individual exemption of the first deceased partner.  Failure to properly create and administer such a trust can cut the couples' estate tax exemption in half, and cost the family hundreds of thousands of dollars.

• Decedent Income Taxes.  Personal returns must be filed for the decedent. 

• Fiduciary Income Taxes.  If some or all of a trust becomes irrevocable (as is usually the case with a "bypass" or "credit shelter" trust), then the successor trustee must generally file fiduciary income tax returns.

• Estate Taxes.  If a taxable estate is more than $1.5 million (for deaths in 2005) or $2 million (for deaths in 2006 or later) a federal estate tax return must be filed.

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