by Jonathan A. Nelson
Some successor Trustees have years to prepare for taking on the role. I am working on a litigation case where we agreed to a compromise trustee who is now unexpectedly having to start from scratch on only a few weeks' notice. Regardless of how much forewarning you have, if you find yourself becoming a Trustee, what are your first steps? Here are six to get you started:
Know the document. The trust document, whether a 150-page tome, a handwritten scrap of paper, or a court order memorializing an oral trust, are the Trustee’s marching orders. You need to understand the type of trust you are managing and its purpose so that you can make correct decisions and, if necessary, obtain appropriate guidance. You also need to know who the beneficiaries of the trust are, how beneficiary succession occurs (e.g., death before final distribution), and what outside documents may bind you. You must discern the amounts and timing of distributions, whether they are mandatory, as well as factors for making discretionary distributions and level of investigation required to exercise that discretion. There are also communications and filings required of the Trustee, and deadlines for both (see item #5). Finally, it is usually a good idea to understand how your own compensation will be calculated, and whether there are limits set by the trust or by statute, before you accept the position.
Need to qualify? The trust document itself may not convey when and whether additional steps are required under the laws of the state where the trust came into being. In Virginia, this may be as simple as signing a Certification of Trust, or it may require a court appearance. Even if you have an attorney in your own state, you may need to retain counsel local to the trust’s state to make sure you are properly credentialed.
Get an EIN. Unless you are a grantor reporting the transactions of the Trust on your own Form 1040, the Trust needs an EIN from the IRS. There are a number of pitfalls, but two I see frequently:
a. Do not fill out a form on a website other than www.irs.gov. At best, spoofing websites (many show up as Sponsored Results on Google!) charge you $125 for something the IRS gives out free; at worst, they steal your SSN and try to get into your online accounts.
b. Once you are at the right place, the IRS asks for the date of the Trust; they don’t tell you they mean that in a sense limited to the tax code. You need the date that liability for taxable transactions starts, not the date the document was signed. Incorrectly listing “1986” because “that’s the year dad signed his trust” can cause the IRS to send tax bills since that time.
Secure the assets. Regardless of whether you are the initial trustee or a successor, your liability for waste starts as soon as you become Trustee. Whether real estate, investment accounts, or a baseball card collection, you need to know what you have oversight over, control access to it, and ensure that it is being cared for properly. This process can take time, especially with financial institutions, so get started as soon as you can.
Calendar deadlines. The statutes of the Trust’s state may require written notices to beneficiaries within a certain time, the trust document may require periodic reports, and the court you qualified before may have set other deadlines. You will have tax filing requirements as well and you may be required to make distributions on a particular schedule. It is very easy to miss deadlines if you don’t have intentional organization for them – and plenty of calendar reminders.
Investment strategy. In most states, Trustees are held to a prudent investment standard, subject to any specific instructions in the Trust, but the purpose of the Trust will determine your investment strategy – if you expect earnings to be retained in the Trust, your taxes may be better with a growth strategy involving untaxed income or unrealized gains, while if you need liquidity to keep up real estate or provide regular distributions, you may do better with an income strategy.
Next in the Fiduciary Boot Camp series: 7 Trustee Missteps to Avoid
Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.
The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.