This guide is intended to give you a brief overview of a trustee's common duties, tasks, and goals.  Hopefully, this article will give you some background, but it is no way meant to be exhaustive or one-size-fits-all.  As you read, you will likely come up with questions.  When you do, feel free to reach out to me to discuss. 

WHAT IS A TRUST, TRUSTEE, AND BENEFICIARY?

            Before we get into the finer points of your trusteeship, let's review some terms.  A “trust” is an entity that holds property, splitting the ownership of the property into legal ownership and beneficial ownership.  Really, this means that the creator of a trust can hold title to property in their capacity as trustee.  Then, upon the creator's incapacity, death, or other specified event, a new person can be appointed as trustee to take over management of the assets.  If done correctly, the new trustee, called a “successor trustee” can step in without court intervention, meaning no need for probate.

            The person that actually creates the trust is often called “settlor” or “trustor.”  This person usually appoints themselves as the initial trustee, but not always.  If the initial trustee becomes unwilling or unable to continue as trustee, the trust document will specify a successor trustee or set of successor co-trustees who will take over. 

            As discussed, the trustee is effectively the manager of a trust.  The law often states that a trustee holds “legal title” to property.  This means that the trustee has the power to take charge of, manage, and ultimately distribute any property that is held in the trust.  But wait, what does “held in trust” mean? This just means that property is either titled in the name of the trustee (e.g. John Doe, as Trustee of the John Doe Revocable Trust) or, has been assigned to the trust if the asset does not have title (like jewelry for example).

            Finally, there are beneficiaries of the trust.  These are the persons or entities that are meant to benefit from the assets of the trust.  Like being the initial trustee, the settlor of the trust is most often the beneficiary of their own trust for their lifetime.  The trust will usually state that upon the settlor's death, someone else is entitled to benefit from the trust, meaning they are now the beneficiaries.  This can be the right to use trust property, a distribution of a specific asset, a portion of income generated from the trust, or a combination of these or other benefits. 

            There is one additional finer point on beneficial interests: they can be “vested” or “contingent.”  A vested beneficial interest basically means one that cannot be taken away, even if it is one that only occurs in the future.  Whereas a contingent beneficial interest is one that might come into effect if something happens or does not happen.  An easy example is if a trust is fully revocable, any future beneficial interest is contingent on the trustee not revoking the trust.  When the trust becomes irrevocable (often upon the settlor's death), the beneficial interest “vests.”  Fortunately, the trust instrument will state if the trust is revocable or irrevocable, and exactly who gets what and when.

            Now that we have a basic overview, let's take a closer look at what it means to be a trustee.

DUTIES OF A TRUSTEE

            The most important rule of being a trustee is that the trustee owes fiduciary duties to the beneficiaries of a trust.  If you are the settlor and the sole beneficiary of your revocable trust, you can skim this part, mainly because you are the only one who can complain if you violate one of these duties.  However, if you are the successor trustee or if there are other beneficiaries, know that you owe legal duties to the beneficiaries of the trust to act selflessly and prudently, making all decisions based on what is best for those beneficiaries.  Below is a quick overview of some of the most important duties:

1.           Duty of Loyalty

The duty of loyalty is probably the broadest but also the most important.  As the California Probate Code states, “the trustee has a duty to administer the trust solely in the interest of the beneficiaries.”  As you might guess, this means that a trustee cannot take advantage of their position to benefit themselves to the detriment of the beneficiaries.   

2.           Duty to Not Commingle

            A trustee must keep trust assets completely separate from the trustee's own property.  This means that trust property must always be kept in the name of the trustee, and for cash or cash-equivalents, the assets must be kept in a dedicated trust account that is identified as such.

3.           Duty to Keep Trust Property Productive

While you are in charge of trust assets, you must keep them productive.  This means that all cash assets should be generating reasonable interest, investments should be diversified and safe, and real property should be producing rents (or getting prepared for sale or distribution).  The golden rule applies here: treat the beneficiaries' property how you would want your own property to be treated. 

4.           Duty to Administer the Trust

This one sounds like a no-brainer, but the trustee is obligated to carry out the terms of the trust as stated in the trust document.  This means that, just because you (and maybe even the beneficiaries) disagree with parts of the trust, you still cannot simply disregard them. 

5.           Duty to Report and Account

The duty to report and account is likely the biggest generator of trust litigation.  A trustee is obligated to provide regular updates and information to the beneficiaries of the trust.  This duty goes beyond just providing informal updates, however.  Under the terms of the trust and under California law, a trustee has a duty to account to beneficiaries.  This typically means providing a detailed overview of all trust assets, values, and transactions.  As discussed below, successor trustees should take special care to keep records of every penny that goes into or out of the trust.    

FIRST STEPS AS A SUCCESSOR TRUSTEE:

1. Read the Trust Instrument

The trust instrument will be your best source of information as you start the process of administering the trust.  You should read it slowly and carefully, taking special care to determine the successor trustee(s), beneficiaries, beneficial interests, and trustee powers.  You will almost certainly come up with questions, so feel free to reach out to me or another trust attorney to help guide you in interpreting the trust.

2.    2. Send Required Notice (Probate Code § 16061.7)

When a California trust (or a portion of it) becomes irrevocable upon the death of a settlor, the trustee must send out a specific notice to the trust's beneficiaries and the settlor's heirs.  This notice, required under California Probate Code section 16061.7, includes some basic information about the trust, the current trustee, and a notice that the beneficiaries and the heirs are entitled to a copy of the trust. 

3.     3. Identify and Safeguard Trust Assets

One of the most important and most difficult tasks is identifying and safeguarding the assets of the trust.  You should first be able to look to the schedule of trust assets attached to the back of the trust to determine assets, but this list may not be conclusive or exclusive.  You will likely need to review documents at the deceased settlor's home to find bank statements, investment account statements, or other documents evidencing property ownership. Additionally, even if an asset is listed on the schedule of trust assets, you will still need to confirm that it was actually transferred into the trust.  This could be as simple as pulling the most recent recorded document for real property or reaching out to the bank manager to confirm vesting of an account.

Once you have identified trust assets, you will next need to safeguard them.  For example, for trust real property, you will need to make sure the property is physically secure from break-ins or other damage.  Similarly, for vehicles or other personal property, you may need to move the items into either secured storage or into a trust-specific safety deposit box.  The requirements of this process are typically very different for each successor trustee, so the above is just a starting point!

4.     4. Taxes

            Depending on the time of year, you may need to quickly think about taxes.  An executor of the decedent's will and the successor trustee (if not the same person) must work together to file a decedent's final tax return or determine if there are other outstanding tax liabilities of the estate.  You should therefore talk to a Certified Public Accountant familiar with decedent's and estate tax returns to see what taxes are due.

5.    5. Creating Trust Bank Accounts

If you need to combine trust assets or if you will sell an asset, you will need a separate trust account.  If one is not set up, you will need to create one.  Often banks will require you to sign a Certification of Trust, certifying that you are the trustee of the trust and have the authority to create and manage that account.

Also, when a trust becomes irrevocable, it becomes its own entity.  This means that it can be liable for its own taxes if it generates income.  When opening a bank account, the bank will also typically require that you provide a Tax Identification Number / Employer Identification Number for the trust (because you will not want to use your own social security number!).  You can obtain one through the IRS website. 

If you have become a trustee, will become a trustee in the future, or are simply thinking about creating a trust, Finlay Law Group can help you every step of the way.  Contact us for a free consultation today. 

Disclaimer: The above information is intended for information purposes alone and is not intended as legal advice. Please consult with counsel before taking any steps in reliance on any of the information contained herein.