Trust administration usually occurs when the grantor irrevocably transfers property to the trustee for administration and management in accordance with the provisions of the trust agreement. Usually, this irrevocable transfer of property to the trustee happens when the grantor dies. However, there are instances when the grantor irrevocably transfers property to the trustee, even without dying, such as (but not limited to) cases of Medicaid trusts and GRATs (grantor retained annuity trusts).
What happens in trust administration?
Transfer of property to trustee (gathering assets)
When the grantor transfers property to the trustee, the trustee becomes the legal owner of the trust asset. It is only when property is actually transferred to the trustee will the trust agreement become effective. When property is transferred to the trustee, trust administration begins.
For example, A executes a trust agreement, appointing B as trustee of ABC Trust. If A does not transfer property to B, then the trust agreement is ineffective. On the other hand, if a house is transferred from the grantor, A, to the trustee, B, the deed will show A as the grantor and B, Trustee of ABC Trust, as grantee. Trust administration begins. B, as the new legal owner of the house, can manage the property, such as rent it out or even sell it, for as long as these powers have not been restricted under the trust agreement. The proceeds of any sale or rent of the house would then be placed in the trust bank account.
Getting a tax identification number
When property has been irrevocably transferred to the trustee (which usually happens when the grantor dies), the trustee needs to get a tax identification number (EIN) from the IRS for the trust because any income arising from the trust property cannot be reported using the grantor’s social security number anymore. Even if the grantor has not died, trustees get EINs for irrevocable trusts because income from an irrevocable trust is reported separately from the grantor’s SSN, the grantor having irrevocably given up control over the property transferred to the trust.
Establishing a bank account
Trust administration requires the establishment of a trust bank account to ensure that the funds in the trust are not commingled with the money of the trustee. Establishing a bank account for a trust requires an EIN. A trust having its own bank account would make it easier to monitor income and expenses.
Recording all assets received, income, and expenses
One good trust administration skill is ensuring that all assets received, income, and expenses are recorded with a corresponding description. Why? At one point, the trustee will need to submit an accounting to the trust beneficiaries in order to be discharged from its responsibilities and future liabilities, and having all income and expenses recorded with supporting documents will make the submission of an accounting easier for the trustee. Recording income and expenses can easily be done through Microsoft Excel.
Filing tax returns and paying taxes
Part of trust administration requires the trustee to timely file returns and pay taxes on behalf of the trust. The trustee should file a final tax return for the decedent-grantor and an annual income tax return for as long as the trust is open and under administration. The trustee should remember that both federal and state taxes must be paid and up-to-date. The trustee must consult with a trust attorney and an accountant to ensure where and when to pay the taxes of the trust.
Distribution of trust assets
Part of trust administration is the trustee’s distribution of trust assets to its beneficiaries. When trust assets and income are distributed to the beneficiaries depends on the language of the trust agreement. It can be a one-time lump sum, staggered, or discretionary. When all the trust assets are distributed, the trustee closes the trust by submitting an accounting and asking the beneficiaries to sign receipts and releases. When there are no more assets in the trust and the trust is closed, the trustee does not need to pay any taxes anymore.
Other trust administration responsibilities
Depending on the language of the trust agreement, a trustee has the following responsibilities:
- Notifying trust beneficiaries about the status of trust administration
- Submitting periodic accounting reports to beneficiaries
- Filing tax returns
- Gathering trust assets and transferring assets from the name of the deceased grantor to the name of the trustee
- Obtaining valuations of property as of date of death of grantor
- Ensuring that all grantor’s debts have been paid before making distributions to the beneficiaries
- Paying ongoing expenses of trust administration
- Investing trust assets in a safe and prudent manner
- Distributing trust assets to beneficiaries
Although the above is not an exhaustive list, they are the most common responsibilities of the trustee in trust administration.
Fiduciary duty in trust administration
A trustee is a fiduciary who has a duty to always act in the best interests of its current and future beneficiaries. In case there is any conflict between the interests of the trustee and the interests of the beneficiaries, the trustee should always act in the best interest of the beneficiaries, even if it is to the trustee’s personal detriment. If the trustee acts with personal interest or in conflict of interest during trust administration, the beneficiaries can hold the trustee liable for compensatory and punitive damages.
Trust administration trustee powers
A trustee, especially in a New York trust, may also have some unique powers that have been granted in the trust agreement such as decanting and power of appointment.
Most trust agreements in New York now include a decanting provision. A decanting provision in an irrevocable trust allows the trustee to transfer the trust assets to another trust with terms that are more favorable or aligned to the grantor’s objectives. A decanting provision allows the modification or amendment of an irrevocable trust and is an important mechanism that gives the trustee flexibility to adapt to changing circumstances.
Power of appointment
Trust agreements in New York also usually include a power of appointment provision that allows the trustee or another person to remove beneficiaries of a trust and to appoint new beneficiaries to be taken from a class of beneficiaries described in the trust agreement (usually the grantor’s issue). This gives the grantor and trustee flexibility to change the beneficiaries in an irrevocable trust.
Trust administration can be complex. When there are doubts, it is advisable to consult a trust attorney to ensure that you will not be held personally liable for your management of the trust. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.