How to administer a trust in California (step-by-step guide)

Stepping into the role of a successor trustee in California can be overwhelming, especially if you’re new to the responsibilities that come with it. It's not just about handling paperwork or managing assets; it's about honoring a legacy.

Every trust comes with a unique set of wishes and provisions, intricately planned by the trustor, and your key role is to bring these wishes to life in a fair and just manner. And as you navigate this path, remember, you're not just a trustee - you are the legal guardian of assets that hold deep significance.

A successor trustee is a person or entity who has a duty to administer the trust according to the trust instrument in the interest of beneficiaries after the trustor’s death or incapacitation. Individual successor trustees are usually friends or family members of the trustor, while corporate trustees are usually banks or trust companies.

If you find yourself designated as a successor trustee in California, navigating through the intricacies of trust administration can feel daunting. To help guide you on this journey, this blog post carefully guides you through the 10-step process of administering a trust in California. Let's get started!

It’s important to understand, that as a successor trustee you are held to a fiduciary duty towards the trust and its beneficiaries - requiring you to uphold a great deal of financial and legal accountability.

Before you decide to administer a trust independently, consider the complexity and potential implications involved. The trust administration process, as outlined by the California Probate Code 16040, requires a trustee to execute tasks with reasonable care, skill, and caution.

Gaining a solid grasp of the various phases of trust administration can better equip you to fulfill your obligations.

With the help of our California trust team, outlined in this blog post - we have crafted a step by step guide to help you understand and guide you through the process of "winding" up a trust.

While small trusts might be manageable with limited support, in most other instances, we strongly encourage enlisting professional help.

Step 1 - Obtain The Necessary Documents

Gathering the essential documents is the first step trustee must take in case of the trustor's death. This includes:

• obtaining the original trust document
• death certificate,
• asset list,
• property deeds.

The initial trust document will serve as your guidebook when carrying out the duties of a trustee.

You can find an original trust document in many places, including the attorney's office or safety deposit box. Read this article if you need more instructions on where to find the original trust document.

Make sure you have it at hand and understand its contents fully. Amendments can alter terms within the main trust agreement - thus, you should look for any trust amendment forms. As for the death certificate, it is usually available within 72 hours of death. Make sure you order several official copies.

Step 2 - Get Familiar with the Deadlines

There are several important deadlines you must keep in mind as a successor trustee during the trust administration process. Missing these deadlines can result in significant delays, or even consequences opposed by the law.

• Most urgently, probate must begin within 30 days following the grantor's passing – this applies only if an executor or family member is tasked with post-mortem duties. Typically any funds transferred into trust will not enter probate proceedings.
• Within 60 days of the death, trustees should issue notices to all beneficiaries and heirs entitled by law. These notifications give 120 days in which they can contest the trust.
• Within 90 days of the date of death, it is essential for either a trustee or grantor's executor to file a Medi-Cal Notice of Death with the Director at the Department of Health Care Services.
• Within 150 days of the decedent's passing, the trustee must file a Notice of Death of Real Property Owner to complete their Change in Ownership for each real property.

Step 3: Seek Professional Assistance When Necessary

Trustees in California shouldn't hesitate to reach out for professional help when they need it while administering a trust. Consulting with estate professionals, accountants, financial advisors, and the like can provide invaluable advice on specific aspects of trust administration.

Step 4: Review Trust Provisions

A trust provision is essentially a rule, clause, or condition specified in the trust document. Created by the trustor, the provisions outline how the trust should be managed, and it dictates the terms under which assets within the trust are to be distributed to the beneficiaries.

Trust provisions serve as roadmaps, guiding the trustee in managing the trust according to the wishes of the person who established the trust, also known as the trustor or settlor. They lend structure to the trust and ensure that the trustor's intentions are honored after their death or incapacity.

A common example of a trust provision is the "spendthrift clause". A spendthrift clause is a provision in a trust that protects the trust's assets from being claimed by a beneficiary's creditors. It's designed to prevent a position where a beneficiary might be pressured into using trust assets to pay off their personal debts.

This provision ensures that the trust assets are used for their intended purpose - to provide for the beneficiary's needs.

Step 5: Notify Beneficiaries and Heirs

To comply with California law, (California Probate Code 16061.7) mandates that the trustee must notify beneficiaries and heirs within 60 days following the settlor's death.

We have a full guide to beneficiary notices in California, which you can read: here

Those who receive notice may contest a trust within 120 days. After that, it is not allowed to do so. You can also notify creditors so they will have a timeframe for filing claims against the trust.

If you don't send a notice, it may result in numerous negative consequences. Firstly, it may leave your trust vulnerable to claims from heirs or beneficiaries who come out of nowhere years later. Secondly, should assets be distributed among current claimants while neglecting this step, you may hold personal liability for any damages caused by the improper distribution.

Step 6: Inventory Trust Assets, Pay Taxes, and File Necessary Forms

As the successor trustee, one of your key responsibilities involves inventorying a compiling a comprehensive list of all assets within the trust.

This inventory should include items such as:

• Property holdings
• Investments
• Bank accounts
• Artwork

Each item should be paired with an estimated value to determine the total worth of the trust.

It's crucial to obtain the trust's tax identification number, an EIN, for accurate income reporting to the IRS. Consider the trust's total value and income to discern if a federal income return needs to be filed in the trust's name.

Part of your role as a successor trustee is to ensure property taxes are paid promptly and the deceased's final tax returns are filed if necessary. This might involve personal income tax (Form 1040) from the first day of the year of death until the date of passing, and any income earned after the death until assets are distributed (Form 1041).

If the deceased was married and their spouse is alive, filing Form 706 in a timely manner is thruster to access the unused exemption of their partner. This can be crucial for estate tax planning for the surviving spouse.

Furthermore, for trusts in California, you will also need to fill out an annual California Trust Tax Return. The main form used for this is the Sealed Form 541, or the California Fiduciary Income Tax Return.

This form accounts for the trust's income, deductions, and credits. Then, it calculates how much tax the trust owes. If a trust expects to owe more than $500 a year in tax, it needs to make a tax estimate and make payments ahead of time using form 541-ES.

As a successor trustee, you are responsible for completing this form and remitting payments to the Franchise Tax Board.

In addition to Form 541, there are other schedules that need to be completed as part of the tax return. The most familiar of these might be Schedule K-1, which is used to record how much money the trust has distributed to each beneficiary. The trustee needs to fill out a Schedule K-1 for each beneficiary as part of the tax return.

They also need to give a copy to each beneficiary. This even includes beneficiaries who don't live in California, because if they receive money from the trust that was earned in California, they might have to pay California tax on it.

Step 7: Manage Trust Assets

A significant role of a successor trustee involves managing and investing trust assets, following closely the specifications stated in the trust provisions.

This task involves a wide range of responsibilities, which might mean opening a bank account on behalf of the trust, consolidating financial accounts when necessary, or ensuring that insurance coverage for trust assets is up-to-date.

For example: if the trust consists of a rental property, it's your duty to ensure that the property is well maintained, rent is collected, and that the property is adequately insured.

Another essential aspect of managing the trust's assets is acting in the best interest of the beneficiaries, which is a fiduciary duty imposed by law (California Probate Code 16002).

When there are multiple beneficiaries, you, as a trustee, must act impartially, considering their respective interests (California Probate Code 16003). This of your role might involve distributing income or capital gains from the trust's assets to the beneficiaries according to the terms set out in the trust.

Moreover, when making the trust's assets are also to consider several other factors (as per California Probate Code 16047). These include general economic conditions, potential impacts of inflation and deflation, projected tax outcomes, liquidity needs, income regularity, among others. For instance, when managing a trust that contains stock investments, you might need to consider the overall state of the economy, stock market trends, the potential tax implications of selling stocks, and the cash needs of the trust and beneficiaries.

Lastly, it's important to remember that as a trustee, personal gain from the trust's assets is strictly prohibited. Every action taken should aim solely at serving the beneficiaries' best interests, and any form of self-dealing could result in legal consequences.

Step 8: Address Estate Debts and Pay Creditors

As a trustee, you need to handle estate debts in a specific order, following California Probate Code Section 11420. The debt priority includes:

• Estate administration expenses.
• Obligations secured by a mortgage, deed of trust, or another lien.
• Funeral expenses.
• Medical expenses related to the last illness.
• Family allowance for dependents.
• Wage claims for unpaid employee wages.
• All other debts, including unsecured debts.

To address estate debts, follow these 3 steps:

Notify Creditors: Inform known or potential creditors about the decedent's passing. For estates with businesses or high liability potential, file a proposed notice to creditors with the court (California Probate Code 19003).

Creditors Make Claims: Creditors need to follow California Probate Code Sections 9000-9399 procedures for claims. They must submit their claims within one year of the settlor's death, even if they were unaware of it.

Review and Address Claims: As the trustee, assess each claim for legitimacy and accuracy. California Probate Code section 19005 grants trustees the power to pay, reject, or contest claims. Repay accurate claims with estate funds, and reject or contest fraudulent or incorrect claims. Creditors have 90 days to file a lawsuit if they want to pursue a rejected claim further.

Step 9: Distribute Trust Assets

Once all debts, expenses, and taxes have been settled, it's time to ensure that the trust assets are distributed in accordance with the provisions set out in the trust.

If the trust agreement stipulates periodic payments (e.g., monthly or yearly), an appropriate system should be established for timely delivery. Trustees can develop a distribution plan to ensure everything is properly distributed to beneficiaries on time.

Furthermore, one of the main tasks of a trustee is to minimize any potential expenses associated with the distribution process. Additionally, each beneficiary is entitled to receive a portion of an income generated by undistributed assets equal to the beneficiary’s fractional interest (California Probate Code 16341).

So the successor trustee must ensure that all income, if any, generated by trust assets before the distribution is provided to each beneficiary.

Step 10: Close the Trust

After fulfilling the tasks specified in the trust provisions, you can proceed with terminating the trust. This process involves a series of steps to safeguard yourself and the trust from potential liabilities. Initially, you should review the trust documents thoroughly, ensuring that you comply with any provisions concerning the trust's closure.

Next, send written notices to all beneficiaries and interested parties, indicating the trust's dissolution date.

Ensure that you obtain signed documents from beneficiaries, acknowledging their receipt of the trust distributions. Then, prepare trust dissolution documents including details like the trust's name, its creation date, the names of grantors and settlors, and the dissolution date. If you're closing the trust prematurely, consent from all beneficiaries is required.

Based on understanding of the guide provided, here's general timeline estimates for each step:

In total, it is generally expected for the trust settlement process to take anywhere from several months to over a year, given the various steps and potential complexities involved.

However, every trust is unique, and it is not uncommon for the process to take longer in more complex scenarios.

As you can see, trust administration is no easy job - although you are carrying out the duties of the deceased, this doesn't mean the successor trustee's job goes unpaid. We have created a guide for successor trustee compensation which you can read: here

** Please remember these timelines are just estimates, and the actual time taken can depend on various factors.

Expert Help is Just a Click Away

Now that you have an understanding of what it actually takes to administer a trust (which seems like a lot), you might feel overwhelmed. And that’s ok. We’re here to help.

Here, at ClearEstate - we have a team of trust specialists that specialize in trust administration in California.

If you need expert help, or don’t know how to start administering a trust - book a FREE consultation with us today, we’ll help you understand what needs to be done in a clear and comprehensive way - tailored to your unique situation.