So you’ve been named trustee, now what?
Most of those thrust into the role of trustee, conservator, or guardian aren’t professional fiduciaries trained in the intricacies of trust and estate management. They are sons and daughters, siblings, parents, cousins, or loyal friends who are viewed as responsible, organized, and ethical. But being a trustee is a complicated occupation, and to be very clear, it is a full time occupation. Managing an estate is highly complex, with a lot of moving parts. It has strict legal requirements, which if not followed can lead to personal consequences for the trustee/administrator.
The majority trustees are first timers, having spent their lives focused on careers in other industries, and are asked to step into the role of managing the affairs of a close relative while mourning their loss. Imagine for a moment, your last remaining parent has just passed away. You are one of 3 siblings, the only one left living in California, and you were named successor trustee. You now have a legal obligation to fulfill the terms of the trust your parents set up to provide you and your siblings with an inheritance. Where do you start? How do you act in your official capacity? What are you supposed to do now that you’ve been named the successor trustee? How are you supposed to learn the duties of your new role? Well there is not official school of trustees, there are professional organizations that can provide education or assistance, but without prior knowledge of the process, where do you even begin to look?
These are questions we’ve encountered from clients over years of working with probate attorneys, professional and first time fiduciaries (Fiduciary is just an all encompassing word for someone who acts as trustee, conservator, guardian, administrator, etc.). As a professional fiduciary myself, I’ve had to learn these lessons the hard way. Hopefully, through sharing some tips and tricks, and best practices, my experience will help you avoid some of the pitfalls that come with the job.
So you’ve been named successor trustee, now what?
Step One: Obtain a copy of the trust and read it. Most of this will be boiler plate language that isn’t relevant to your role. However, the trust (or other official instrument) dictates exactly how assets are to be used or distributed. The signed copy of the trust is a legal instrument that dictates what actions a trustee can or cannot take and how assets are to be distributed. Many times, my team and I have spoken with clients who expressed that the Grantor (creator) of the trust wanted to distribute their assets in a different manner than what the trust describes. This does not matter. Without a signed amendment from the original creator of the trust, these wishes are irrelevant. The trust MUST be followed to the T.
Step Two: Hire an attorney. This is a crucial step. Unless you’re already well versed in California Probate Code, or have worked in an adjacent field this is a must. Every professional fiduciary has a legal team, maybe multiple, to provide expert counsel regarding the administration process. Not only does this provide you with knowledge, it also insulates you from potential breaches of fiduciary duty. As a trustee, you’re not expected to be an expert in every aspect of the job. You’re the supervisor, the team lead, the conductor of the orchestra. Your job is to build a team of experts to advise on with the legal requirements of the trust, and act on their advice.
Step Three: Complete official documents to be named as trustee. You will need to provide these documents to financial institutions in order to access trust funds or speak with employees regarding trust accounts. You will need to retitle all trust accounts to your name as trustee so that you are able to perform your duties effectively. You will also need to do this as quickly as possible. There are some services that will assist you in searching for records of accounts or assets that belong to a specific individual or trust.
Step Four: Obtain appraisals for all assets from your date of appointment. Every trust has different asset structures. Some are more traditional such as houses, investment accounts, and cash, but in today’s age assets are becoming more and more complicated. Nowadays many trusts hold digital assets such as crypto currencies, ownership interest in LLCs, annuities, etc. It isn’t important to understand the details of how these assets work, but it is important to identify and obtain control of all assets titled to the trust. Anything of values is considered an asset; jewelry, cars, land, mineral rights, furniture, collectibles, anything of value. As trustee, you are responsible for the performance of these assets from your date of appointment. Knowing their value and understanding any changes to their value is the duty of the trustee. Neglecting to maintain the value of an asset could be considered a breach of duty.
These 4 steps are crucial to completing as quickly as possible in order to set yourself up for success long term. Every administration is different, and you will need to be flexible so as to adapt to any new challenges or obstacles that arrive, but if you build a strong team of advisors around you, and get on top of learning your responsibilities quickly, you’ll set yourself up for success long term.
Having been a professional fiduciary for many years, I’ve also developed some do’s and don’ts that I feel are helpful for professionals and first timers alike.
Do’s and Don’ts:
Data Integrity: bank statements – try to obtain them on a monthly basis, keep them organized using a specific naming convention that never changes, use an ordered folder structure that you maintain for all accounts which never changes.
Track every transaction in supplemental document; QuickBooks, Excel document, or check register. The manner is not important, what’s important is maintaining a record of every payee/payor and description for every transaction. You will likely be required to account for the performance of the trust/estate at some point during your administration. If you do, you are required by the probate code to provide this level of detail for every single transaction. You cannot lump income or expenses together. For example, if you own a 10 unit apartment. You are required to know the individual rental breakdown of each unit, what tenant paid you what rent, and the date of that transaction. On the flip side, you need to know every expense incurred by unit as well. Bank statements are not sufficient in this regard.
Buy a good scanner, digitize everything! Scan your receipts, rental agreements, leases, checks, seller's FINAL statement. We live in a digital age. Financial institutions, escrow companies, even the courts now starting to have digital filing. Hard copies will take up space and are easy to lose or become damaged. Digital copies are much easier to work with, to send, and to store.
Set up online accounts with all financial institutions and download PDF statements directly. Banks are required to keep records for 7 years. Some smaller banks may keep them for longer. Some banks may be able to dig up older records if they are subpoenaed, but there’s no guarantee. Downloading statements directly from the institution will ensure that you have authentic copies that can’t be wrinkled or damaged.
NEVER commingle trust or estate assets with your own. May I repeat, NEVER EVER UNDER ANY CIRCUMSTANCES should you commingle trust or estate assets with your own. First and foremost, this is a breach of fiduciary duty. Mixing assets you are responsible for as part of your administrative duties with your own personal funds puts you at risk. It is prohibited by the probate code and could be grounds for removal. If you are found to have breached your fiduciary duties, you could be held liable personally liable.
Make sure you read the trust instrument. There may be sub trusts that have specifically designated certain assets to one trust or another, as a result, any income or expenses associated with those assets are required to be allocated to the specific trust that owns those assets. Commingling trust assets between trusts is also a big no no. You are less likely to be held personally liable, but you will very likely have to hire a team of accountants to help you untangle the commingled funds. As a team of accountants who have untangled millions of dollars in commingled funds, we can tell you first hand this is not cheap.
Double check all I&A values from probate referees to ensure accuracy. We’ve seen it before, they’re only human. Sometimes probate referees make mistakes when assessing assets or valuing property. These can be amended. If something doesn’t look right to you, speak up.
Keep detailed records of any expenses that need to be reimbursed. You’ll want to avoid paying out of pocket as much as possible. As administrator of a trust/estate you are supposed to use the trust assets to cover any expenses of the trust. However, sometimes this isn’t always feasible. Maybe you’ve set up a new account with a bank and it’s been put on a temporary hold because the bank thinks there’s “suspicious activity” but you need to pay your attorney now. Make sure you detail every cent you’ve spent for the administration as you are entitled to reimbursement.
If you’ve made it this far, thanks for reading. As fiduciary accountants we interact regularly with attorneys, cpas, professional fiduciaries, and first time trustees. Fiduciary accounting is a crucial part of the administration process. While not always required, when you need it you won’t want to be unprepared. It’s a complex process that can be similar to tax accounting but follows completely separate rules and is governed by the probate code. After years of practice, and hundreds of cases, we can confidently say that we’ve seen it all. My team has worked on estates ranging from the tens of thousands to the tens of millions, performed accountings that ranged from 3 months to 12 years, provided reconciliation plans that untangled millions in commingled funds, and helped reduce the anxiety of hundreds of professional and novice fiduciaries by taking the accounting duties off their plate.
If that’s something that sounds of interest to you, please reach out, we’re always accepting new clients, and if you just have questions, we’re happy to help however we can.
– Susan