Estate & Trust Administration

How soon do I need to tackle trust and estate administration?

Many tasks can be addressed in the months after the passing of a family member or friend.  However, it is important to find out answers about some immediate questions such as whether a Social Security payment needs to be returned depending upon when the recipient passed away.  Among other things, family members need to keep in mind that just because money arrived in a bank account by automatic deposit does not mean that it may be kept.

My parents had a trust and nothing was done after one parent died years ago.  What needs to be done now?

These are referred to as “stale trusts,” and depending upon what the trust required, administration may still need to be done.  A trust that was created years ago oftentimes required the division of assets upon the passing of the first spouse for the purpose of minimizing the tax liability due to a significantly lower estate tax exemption than the current one.  The terms of a trust, even if written years ago, dictate what steps need to be followed.

How can I minimize the time and expense of a trust or estate administration?

Organization is key.  One idea is to create a file system soon after a loved one’s passing and diligently maintain notes and documents such as communication with each financial institution.  Write down details about phone calls and in-person visits to financial institutions and include the date, whom you speak with and the information given to you.  We recommend that you keep a separate notepad for each financial institution as it is likely that there will be several calls and or visits.  There will be an abundance of information and keeping track of it all from the beginning will help save you time and consequently money.  The more readily you have documentation organized, the less time it will take you or an attorney to locate needed information.  Our office finds that checklists help keep track of the seemingly endless responsibilities, and we recommend them for trust and estate administration.

How much does it cost to administer a trust?

Trust administration work is billed at a per hour rate.  Because of the unique circumstances pertaining to each person’s trust, assets and the number and personalities of the beneficiaries, it is difficult to estimate the total cost to administer a trust.

How much does it cost to administer an estate?

Estate administration that does not involve a probate is billed at a per hour rate.  If a situation requires that a probate be filed, then there is an applicable rate for certain probate work dictated by state law and that is a percentage of the value of the probate assets.  The court orders the amount to be paid to the executor and the attorney (in addition to filing fees and costs).  By way of example, if a probate estate has a value of $1,000,000, the executor is entitled to receive $23,000 in ordinary compensation, and the attorney is entitled to $23,000 in ordinary compensation.  Depending upon the circumstances, the court may award extraordinary compensation.

Annual Gift Exclusion:  is the amount that someone can give to another during the calendar year without having to pay gift tax.  The 2018 gift tax exclusion per beneficiary is $15,000 (see IRC section 2503 and periodic adjustment).

Applicable Exclusion Amount (AEA):  is the amount that someone can leave to heirs without paying estate tax (a transfer tax at death).  The 2018 AEA is $11,180,000.

Basis: this is the tax value of an asset, usually measured by the date on which the asset was acquired.  Capital Gains tax is paid based upon the increase in value/gain from the owner’s basis to the value when the asset is sold.

For example, if you paid $10 for an item and over time, it increases to $100, you have a basis of $10 and a “capital gain” of $90.  If you sell the asset, you pay a capital gains tax based on that $90.

Carry-Over Basis:  if you give the above-noted property away during your life, the person who receives it has the same basis you had – this is “carry-over basis.”  If the person sells the property for $100, their basis is still $10, and they pay tax on the $90 gain.  This is generally the less desirable gain because the person who sells the property has to pay the capital gains tax liability based upon the original owner’s “carried-over” basis.

Step-Up Basis:  if you pass away owning an asset that has increased in value and it is then given to someone, he/she will generally get a “step-up” in basis to the date of death value.  Example:  you purchased an asset for $10, and by the time of your passing, the value of the asset increased to $100.   Beneficiaries then receive the asset, which is valued at $100, and they sell the asset for $100.  Because the beneficiaries received the “stepped up” basis in your estate upon your passing, the beneficiaries have a capital gain of $0.

Strategies that target basis adjustment seek to eliminate carry-over basis and give step-up basis to beneficiaries.

Beneficiary:  is the person, entity, or group for whom a trust is established.  A beneficiary may be a present interest beneficiary, that is entitled to receive distributions from a trust at the present time, or a future interest beneficiary, entitled to receive distributions at some point in the future.  They may be vested, where their rights under the trust may not be taken away, or contingent, where their rights are still subject to condition that may or may not occur in the future.

Bypass/Credit Shelter Trust:  this is the portion of a deceased spouse’s property that gets charged against the decedent’s Applicable Exclusion Amount.  The bypass trust can provide benefits for the surviving spouse or other beneficiaries (or a combination), and the trust is typically designed so that the value of the assets allocated to the bypass trust do not get included in the surviving spouse’s estate later when he/she passes away.

Community Property:  this refers to property acquired by a couple during marriage, or property that is combined or commingled between spouses.  This only applies to community property states, which California is one of.  The biggest benefit of community property is that the entire value of the property gets a basis adjustment (also known as a step-up) when one spouse dies.  As an example, if a surviving spouse sells community property after the death of their spouse, the capital gain is based on the increase in value from the first spouse’s death (where the basis got adjusted on both spouses’ shares) to the value at the date of the sale.  This allows the surviving spouse to save money on capital gains tax liability.

Decedent:  is the person who died.

Disclaimer:  is a legal “no thank you.”  It is a technique that allows someone who is entitled to receive property to disclaim it and therefore allowing it to be distributed to someone or somewhere else.  A disclaimer allows a surviving spouse to disclaim property into the bypass trust, providing flexibility that may be desired.

Executor/Personal Representative: is the person who is named in a will to administer the estate of a deceased person and if applicable, the probate estate.   An administrator administers a probate estate where there was no will but there is a probate action.

Fiduciary:  a party (person or entity) that owes legal duties to another and is held legally responsible for the fiduciary’s actions. (A trustee is a fiduciary of a trust. An executor is a fiduciary of a Will).

Funding:  is the process of transferring property to the trust.  The trust must hold title to property in order for the trust to work – similar to a car needing fuel to run.  If there is any property that has not been funded to the trust when the client dies, that property must generally go through state probate proceedings before anyone can do anything with the property.

General Power of Appointment (GPOA): is a power that is reserved by a trust maker or given to someone else to direct how property in a trust gets distributed.  General powers of appointment are included in the power holder’s estate.  To be a “general” power of appointment, the person holding the power must be able to appoint the property to any one of the following: themselves, their estate, their creditors, or the creditors of their estate.

Irrevocable Life Insurance Trust (ILIT):  a form of irrevocable trust that is designed to own high-value life insurance.  A client establishes an ILIT and pays enough money into the trust to allow the trustee to purchase life insurance on the life of the client (and often, the spouse).  When the insured person dies, the death benefit of the life insurance is paid into the trust but is not included in the gross estate of the client (and therefore, keeping it away from estate tax liability).

Intestate/Intestacy:  is the status of someone who dies without a will or trust in place.  If you do not have an estate plan, your property will pass through the laws of the state where you reside.

Probate:  the court proceeding that must be undertaken to transfer the property of a deceased person to surviving beneficiaries.  They are generally a public proceeding and in California, the process can be time consuming and costly.  One of the objectives to trust-based planning is to avoid probate and to save time, minimize the likelihood of disputes among heirs and to preserve privacy.

Revocable Living Trust:  is the main document and planning solution that clients use to transfer their property so that a trustee can manage property if the client becomes incapacitated and/or when a client

Settlor/Trust Maker/Grantor:  in general, these refer to the individual who establishes a trust and are usually the same person.  The Settlor/Trust Maker establishes a trust and determines how it will operate.  The Grantor put his or her property into the trust.

Survivor’s Trust:  in a joint revocable living trust, this term refers to the surviving spouse’s share of the joint trust property, plus any separate property the surviving spouse had.  The deceased spouse’s property typically will flow into the marital and/or bypass trusts.  The survivor’s trust

Trust: a formal legal relationship wherein the trust maker appoints a trustee to manage trust property for the benefit of beneficiaries. The trustee holds title to trust assets as a fiduciary.

Trustee:  the one who manages and administers on a day-to-day basis the trust for the benefit of the beneficiary or beneficiaries.  The trustee has a number of fiduciary duties to the beneficiaries to make sure that the trust is administered properly according to the terms of the trust and governing law and that the beneficiaries’ interests are protected.  There must always be a trustee for a valid trust to exist, and all trustees are held to a fiduciary standard.

Trust Protector: is someone besides a trustee or a beneficiary who through authorized special administrative powers can oversee trust administration of an irrevocable trust so the intent of the trust maker is carried out even when the law or circumstances change in the years after the trust was executed and when the trust maker no longer can change the trust. (This role is called Trust Advisor by some).

Will: among other details, a Will is a document that states final wishes such as who should take care of one’s estate (an executor) and who should get one’s assets (a devisee is the general term).