Trust Administration and Fiduciary Services
Sullivan & Griffith • Serving Families and Individuals in Guilford, New Haven and Madison, CT
When a trust is funded during lifetime, the process of managing trust property is relatively simple, because in most cases the creator of the trust (the "Grantor") is also the Trustee. There is no loss of control and the Grantor/Trustee can manage assets in any way he or she sees fit. There are no additional tax returns required; the Grantor simply includes trust assets on his/her personal income tax return. There is also virtually no liability for making bad decisions. A Grantor/Trustee can make a poor investment or incur virtually unlimited expenses, without any second-guessing.
But all this changes after the person who created the trust dies. The trust formed by the decedent during lifetime must now be administered according to the terms and conditions of the trust agreement. This process is commonly referred to as "trust administration" and it can be overwhelming and full of traps for the unwary.
If you are appointed Trustee of a trust following the death or incapacity of a loved one, that means that you have been trusted to make sure the Grantor's wishes are carried out in accordance with the instructions provided in the trust document. You must do so while simultaneously handling all of the legal, financial and administrative responsibilities of administering a trust. That's not a responsibility to be taken lightly, and professional guidance should be a part of that process.
Every trust is different. The terms and conditions of the trust agreement, the nature of the discretion given to Trustees, the size, nature and location of trust assets, whether the trust was fully funded, and the number, temperament and specific needs of the beneficiaries are all factors that should be thoughtfully considered when selecting a Trustee. Thoughtful consideration should also be given to the nature of the responsibilities the Trustee must fulfill. Some of these responsibilities include:
- Communication with Beneficiaries. The Trustee must notify the designated beneficiaries of the change in Trustees, and keep them appropriately informed of the trust’s activities. This typically starts with making sure the beneficiaries understand their rights under the trust agreement and the nature and frequency of distributions to which they may be entitled.
- Inventory of Trust Assets. Trust assets need to be collected, inventoried and valued. Depending upon the types of assets, formal appraisals and valuations may need to be obtained. There may be ongoing tax consequences for an incorrect valuation, so accuracy is essential for protecting and preserving trust assets, and for properly accounting for and distributing those assets.
- Management of Investments. The Trustee has a duty to appropriately invest trust property for the benefit of beneficiaries, subject to whatever restrictions or limitations may have been included in the trust. Generally, the Trustee has the duty to make trust assets economically productive of income.
- Make Distribution Decisions. The terms of the trust will provide instructions regarding distributions, in many cases distinguishing between the trust’s principal and income. How income and principal is calculated and then distributed can be a sophisticated exercise, and failure to follow the appropriate distribution instructions could have significant adverse tax consequences.
- Accounting. Trust beneficiaries have the right to understand how the trust assets are being managed. This not only requires meticulous record-keeping and retention of records, it may also require reporting all of the transactions that have taken place inside the trust in the form of an “accounting.” The accounting may be required if the trust is subject to probate court supervision, or it may be requested by a beneficiary.
- Creating and Administering any Sub-trusts. Many trusts start as a single legal entity, but then must be split into multiple sub-trusts, usually upon a certain event (death). Establishing these sub trusts and appropriately dividing the assets is a responsibility of the Trustee.
- Fiduciary Income Taxes. Trusts (and estates) have to report income, track expenses and pay taxes just like individuals. They must file state and federal income tax returns (a Form 1041) annually. We recommend that these returns be prepared as early each year as possible, because they will impact the personal income tax returns of the trust beneficiaries. The trust will issue a K1 to the beneficiaries reporting the portion of the trust income that the beneficiary received and an appropriate portion of any deductions.
Every individual Trustee should seek qualified professional advice to make sure that these responsibilities are fulfilled correctly.
Professional Trustee Services
There may be circumstances when a family member may not be the right choice as Trustee. Putting one sibling in charge of the finances of other siblings may cause uncomfortable family friction. Or you may wish to have a professional serve with a family member, to carry more of the administrative responsibilities associated with managing the trust. Where requested, we can serve as a professional Trustee.
Trust and Estate Planning lawyers are well versed in the nuances of trust and estate law and the many fiduciary duties that must be adhered to. These "fiduciary obligations" include the duty of loyalty, full disclosure, fair dealing, good faith and impartiality. Having read and drafted numerous trusts and wills, a lawyer understands when discretion may be exercised, the obligation to invest money prudently, and the importance of communication with the beneficiaries. Like most things, experience in handling other trusts and similar situations allows us to continually improve and reap the benefits of past experience. We will make sure that the terms of the trust are clear and are adhered to, that the beneficiaries receive what they are due, that income tax returns and required accountings for the trust are filed on time and are accurate and, most importantly, that your intent in creating the trust is achieved.
If no professional Trustee is needed or desired, an individual Trustee can still take advantage of the experience and administrative tools our firm has to offer. Accounting software, checkbook management, and other office capabilities allow us to act as a Trustee's "back office." The Trustee retains control over all decision-making, but the day to responsibilities of collecting rents and income, paying expenses, recording transactions on a monthly basis, and keeping accurate records falls to us. This arrangement is commonly referred to as appointing an Agent for the Trustee.