You may have been named as successor trustee of Mom or Dad’s trust. Do you really know what that entails? Do you know what your obligations are?
As a successor trustee, your primary duty is to preserve and protect the trust assets for the benefit of the named trust beneficiaries. You have to follow the instructions left by Mom or Dad in the trust, and there are a lot of instructions in the trust. In addition, you have to comply with the Michigan Trust Code, the Michigan Tax Code and the Internal Revenue Code.
This is probably the first trust for which you have been named trustee. To make sure that you fulfill all of your trustee obligations, you will need some guidance from someone who deals with these matters every day. Assembling a team to assist you with your duties as trustee can make you job immensely easier, especially if you have never acted as trustee before. Two key team members are your estate planning attorney and accountant.
The first team member with whom you should consult is your estate planning attorney. Not just any attorney will do. There are attorneys who do estate planning and there are estate planning attorneys. You should work with an estate planning attorney whose core practice area includes trust administration. The attorney you choose should have experience in these matters and deal with them on a daily basis.
Your attorney can review the trust, outline your duties and responsibilities and prepare the necessary documents to allow you to take over as trustee. Those documents typically would include an acceptance of trust, a certificate of trust and, if taking over as a disability trustee, the disability certificates.
An acceptance of trust is the document in which you agree to act as trustee and abide by all the terms and conditions of the trust. A certificate of trust names you as trustee and states your authority over the trust. If properly drafted, the certificate of trust is the only document you need to have for banks, investment advisors and others to show your authority to act as trustee of the trust.
If you are taking over as a disability trustee, your attorney can review the trust to make sure all of the instructions are followed to remove the disabled trustmaker as trustee and to allow you to act as trustee. Oftentimes there will be disability panel members who need to sign a disability certificate prepared by your estate planning attorney. The disability certificate would indicate that the trustmaker is no longer capable of effectively managing his or her property and financial affairs. Most trustmakers we see name family members to the disability panel, but the panel may include others.
If you are taking over as death trustee, your attorney will also assist you by preparing the creditors notice for publication. Since Mom or Dad had a revocable trust, you must publish in the local paper, a notice to all of Mom or Dad’s creditors that they have four months in which to file a claim against Mom or Dad’s trust. You also need to give certain notices to the trust beneficiaries.
Your estate planning attorney or tax preparer accountant can also help with applying for the tax identification number for the trust. Mom or Dad’s social security number would typically be used by the trust during Mom or Dad’s lifetime. Social security numbers expire with their owners. The trust becomes a separate tax entity upon the death of a trustmaker, after which the trust must apply for its own tax identification number.
You will need to make annual accountings to the trust beneficiaries, usually with the assistance of your tax preparer accountant. Without the proper records, this can be difficult and costly. The three most important things to remember when you are acting as trustee is organization, organization, organization.
By keeping track of trust records, it makes your job immensely easier. Whenever you make a deposit, make a copy of the check and any documentation of that deposit. When you pay any bills, pay by check or online, not cash. And keep copies of all those bills you pay.
In addition to annual accountings, your tax preparer accountant can prepare the annual tax returns. There will be individual income tax returns for Mom or Dad during their lifetimes and final returns after death. The trust will have its own income tax return as a separate entity after Mom or Dad’s death.
The tax preparer accountant can also prepare the Federal estate tax return when needed. A return is needed if the assets in Mom or Dad’s estate and trust at the time of death total more than the Federal estate tax exemption amount of $5.43 million in 2015. This exemption amount is inflation adjusted every year.
Some attorneys will offer to do the accountings and tax returns for the trust. If that is the case, at least get a fee estimate from the accountant. Even though I am a CPA, with the exception of some family returns, I stopped doing tax returns for my clients years ago. What I found in my own practice is that I could not be as efficient as an accountant when I am only preparing dozens of tax returns per year compared to the hundreds of tax returns per year prepared by an accountant.
I would rather have someone who does accountings and tax returns on a full-time basis for my clients, rather than do them myself on a part-time basis. In addition, accountants’ hourly rates are generally less than attorneys. For the accountings and tax returns, it often makes more sense to use an accountant who takes less time, costs less money and has more experience than most attorneys.
When I am dealing with successor trustees, I try not to disturb existing professional advisor relationships. If Mom or Dad had a tax preparer accountant who has experience preparing trust and estate tax returns, then why not use him or her who is familiar with Mom or Dad’s finances?
You are not a professional investor. You may also want to hire a financial advisor to assist you with the investments of the trust. Mom or Dad may have had confidence in their financial advisor. Use that advisor, unless the advisor took advantage of Mom or Dad. For example, I have seen advisors who name themselves as beneficiaries of their clients’ accounts or advisors who sell annuities with 10 or 20 year surrender charge penalty periods to 70 or 80 year olds. Unfortunately, there is no shortage of annuity and insurance peddlers out there masquerading as financial advisors.
When you are trustee, you can hire professional advisors and others to assist you with your duties. Feel uncomfortable paying the bills? Hire an accountant to pay the bills. Then you don’t have to keep track of all of the documentation. The key in being a good trustee is to know what you are good at and what you are not. Do what you are good at and hire others to do the rest.
But regardless of whatever you do or have others to do, you still have ultimate responsibility and authority over the trust and for preserving and protecting those assets for the benefit of the named trust beneficiaries.
By: Matthew M. Wallace, CPA, JD
Published edited February 15, 2015 in The Times Herald newspaper, Port Huron, Michigan as: I’m a trustee; what do I do now?