If you are a California Trustee, here are eight must know facts for your to properly administer your Trust and keep yourself safe from any personal liability:
1. Know Your Duties
Being a Trustee is a thankless job. You owe many duties and obligations to the beneficiaries, but they owe you no duties at all. That means, if you are going to succeed as a Trustee, you have to know what your duties are in the first place.
2. Know the Uniform Prudent Investor Act
If you do not follow any other duty as Trustee, at least know and follow the Uniform Prudent Investor Act. When the Trust creator was alive, he or she was able to invest however they pleased. Not so with you. As a successor Trustee you have a duty to invest prudently. That means you have to follow the investment rules. And you really should have an investor’s policy statement (or IPS). An IPS is an investment plan that your financial professional creates for you. You can then invest according to that plan and check in with the financial professional once per quarter to be sure the investments are performing as expected. The law does not mandate an IPS, but when we attack Trustee’s is looks very bad in court to invest without one. And for good reason, how do you know your are investing prudently if you have no written plan?
3. Know Your beneficiaries
As a Trustee, you have a duty to know your beneficiaries, especially if the Trust gives you the power to make distributions based on a standard, such as health, education, maintenance and support (the standard “ascertainable standard”). When you have that power, it is up to you (the Trustee) to determine what the beneficiaries needs are and whether a distribution must be made to meet those needs. You are not allowed to ignore the beneficiary or even force them to ask for a distribution. Rather, the Trustee must be proactive and inquire as to the beneficiaries needs.
4. Know your assets
Trustees must take control of Trust assets (referred to as “marshaling” assets). But you cannot take control of assets you don’t know about, so your first job is to get to know the Trust assets. How are they held, how are they invested, and what is the future plan for each asset? If an asset is in danger of losing value, then the Trustee must take action to protect the assets and prevent a loss, if possible.
5. Keep all receipts and statements so you can account
Every Trustee must account for their actions (read more about Trust accountings here). That means you have to demonstrate what assets you started with, what you received in income, what you spent on expenses, the distributions you made to beneficiaries, and what is left at the end of the accounting period. And each of these categories must be supported by detailed schedules showing each transactions by date, description and amount. The only way to report that level of detail is to keep all receipts, account statements, and similar financial documents so a thorough accounting can be prepared.
6. Understand Trust accounting
Trust accounts are VERY DIFFERENT from corporate or business accountings. If you ask your CPA for a Trust accounting, and they give you a balance sheet and profit and loss statement as you would have for a business accounting, run to another CPA immediately. Trust accounts do not have balance sheets and profit and loss statements. In fact, Probate Code section 1061 lists exactly what a Trust accounting mut have, which is a list of charges and credits. The charges must begin with the assets on hand at the start of the accounting period, the income received and any gain on sale (in other words, every asset coming into the “charge” of the Trustee). The credits represent the cost side of things, such as the expenses paid, the distributions to beneficiaries, any losses on sale, and ends with the assets on hand at the end of the accounting period. The charges must equal the credits for the accounting to balance. And each category must have a supporting schedule showing all the details (for example, all the detail for every expense paid).
7. Know the Statute of Limitations
How long does a beneficiary have to file a lawsuit against you as Trustee? It depends. If you serve Trustee’s notice under Probate Code section 16061.7, then the beneficiary has 120 days in which to file to contest the Trust terms. As for your actions as Trustee, that statute remains open indefinitely unless you provide an accounting to the beneficiaries. Once an accounting is provided (assuming is fully discloses all actions you took as Trustee), then the beneficiary has three years to sue the Trustee. If you file your accounting in court and see court approval, then the beneficiary must either object prior to court approval or be forever barred from suing you as trustee for everything reported in the accounting.
8. Communication/Information is Key
Being a Trustee is a thankless job, especially if you are dealing with difficult or demanding beneficiaries. But you have too many duties to ignore beneficiaries. The key is to communicate as often as possible with beneficiaries. Send out copies of bank statements, send letters updating beneficiaries on the Trust administration if you have to, whatever it takes. The more you communicate, the better.