Your Duties as a Trustee
1. INTRODUCTION: This memo is for a trustee under a trust1 that is governed by Nevada law and that was originally established as a revocable trust but which has become irrevocable because of the settlor’s or surviving settlor’s2 death. Perhaps some of these tasks have been done by a predecessor trustee, but we recommend that you review this entire memo. Your task is to administer and distribute the trust estate3 as directed in the trust document. This memo outlines your duties as trustee, and gives a simplified overview of the trust administration process. In this memo, “you” and other second-person pronouns refer to the trustee designated in the trust or appointed under its terms. “We”, “us”, and other third-person plural pronouns refer to Lee Kiefer & Park, a Nevada limited-liability company doing business as Lee Kiefer & Park If you ever have a question about this memo or about what you should and should not do, please call us.4
1.1 Title to Trust Assets: A “trustee” is the person designated in the trust instrument (or in accordance with the trust instrument) to be the owner and manager of trust assets. Persons acting jointly as trustees are called co-trustees, and unless the document creating the trust specifies that duties of each co-trustee are different, the trustees have equal authority and power. Also, unless the trust document specifies otherwise, co-trustees act by majority vote. For the purposes of this memo, we will assume that there is one trustee, and if there are co-trustees, you should confer with us regarding the division of duties and responsibilities among all of the trustees.
1.2 Trust Instrument: Because a trustee is legally obligated to follow the terms of the trust instrument, you must read the entire trust document carefully. Do not sign any document indicating that you are willing to be bound by the trust document until you have read and understood all of its provisions.
1.3 Official Appointment: You have authority to act as trustee as soon as you have complied with the terms of the documents regarding your appointment. Because different trusts have different requirements, it is impossible to outline all specific requirements in this memo.
(a) As a general rule however, to become trustee, you must:
(1) Sign a “certificate of incumbency”5 indicating that you are the incumbent (i.e., acting) trustee and declaring that you are willing to follow the terms of the trust instrument.
(2) Attach to the certificate of incumbency a copy of: (a) your predeces- sor’s death certificate; (b) your predecessor’s resignation; or (c) declarations from physicians stating that your predecessor is incapacitated to the point that he or she can no longer act as trustee.
(3) Have the certificate of incumbency recorded in the county in which the trust is considered located (often referred to in the documents as the “situs” of the trust) and in each county in which real property owned by the trust is located.
(b) You can choose, if you wish, to have your appointment confirmed by the probate court [NRS 164.010], but normally this formal court proceeding is not necessary. On the other hand, if there is a dispute as to your appointment or qualifications or if you anticipate that some of your decisions may be challenged by beneficiaries, court confirma- tion and a trust administration proceeding in the probate court may be appropriate.
1.4 Preliminary Steps: There are two notices that we encourage the trustee to give.
(a) Notice to Creditors. If your appointment came as a result of the settlor’s death, we recommend that you sign a “notice to creditors” and have it published in an approved newspaper [NRS 164.025]. The same notice should be mailed by certified mail, return receipt requested, to known creditors, particularly if you do not know the amount of their potential claims, if there are insufficient assets to pay them, or if you intend to dispute all or part of their claims. Each trust beneficiary and each omitted heir should be sent the same notice because some of them may argue that the deceased settlor owed them money, usually under an alleged contract. The creditors have 90 days in which to file claims, or the claims become “forever barred.”
(b) Notice of Irrevocability. When a revocable trust becomes irrevocable (or even a part of the trust becomes irrevocable), the trustee should send a notice to the trust beneficiaries and to heirs who think they should be beneficiaries explaining that the trust has become irrevocable and they have 120 days to contest the validity of the declaration of trust or trust agreement, including any amendments. If this is not done, a beneficiary or omitted heir can bring their contest years later.
1.5 Irrevocable Subtrusts in Two-Settlor Trusts: It is common for couples to create two-settlor trusts that divide into two or more subtrusts when one of the settlors has died. In many cases, one of the subtrusts will remain revocable, but at least one of the subtrusts will become irrevocable, and this memo applies to each irrevocable subtrust created under the terms of such a trust.
(a) Instructions regarding the division of the trust into subtrusts are given in a separate memo titled “Dividing a Trust into Subtrusts after a Settlor’s Death”. If a copy of that memo has not been given to you, request one, or download it from our web site.6
(b) To accomplish the intended objectives of a trust that divides into subtrusts, it is imperative that the division of the trust be properly documented and that each trust be respected as a separate entity. Each irrevocable subtrust should have its own tax identification number, and you will need to file a fiduciary income tax return (IRS Form 1041) for each such trust.
(c) As to each irrevocable trust for which you are both the trustee and a beneficiary, special care is required in the administration of each subtrust to avoid violating the duties of a trustee, as outlined in subsection 2.1 of this memo, especially the duties of loyalty and impartiality. To avoid breaching your duties, it is very important that you regularly confer with us or with other legal counsel and with a certified public accountant with respect to the administration of the estate.7
2. TRUST ADMINISTRATION:
2.1 A Trustee’s Duties and Standard of Care: As a fiduciary, you are held to a fiduciary standard of care, which generally means that you must take more care with other people’s assets than you would your own. The law summarizes these five primary fiduciary duties, which can be remembered with the phrase “A CLIP”:
(a) You must ACCOUNT to the beneficiaries and keep them informed as to the management of trust assets.
(b) You must COMPLY with the trust instrument and applicable state and federal law. This includes the duty to pay debts, taxes, and other property expenses, as well as to make the distributions permitted or required under the trust instrument.
(c) You must be LOYAL to the beneficiaries of the trust, which means that you cannot make decisions that favor yourself or anyone else more than the trust’s beneficiaries.
(d) You must be IMPARTIAL when it comes to different beneficiaries of the trust (unless the trust document specifically allows you to favor a beneficiary or group of beneficiaries); you cannot “take sides”.
(e) You must be PRUDENT in the investments you make and in the management of the trust’s assets.8 You must take ownership and control of all assets9 belonging to the trust, and you must evaluate the prudence of either retaining those assets or converting them in to more appropriate investments.
2.2 Powers: Under Nevada law, a trustee can convey good title except as restricted by the document that transferred title to the trustee. [NRS 164.067] Of course, you are liable to the beneficiaries if you breach your duty as a trustee by failing to act prudently [NRS 164.705 et seq.] or by failing to follow the trust instrument. Most trusts have specific and detailed provisions relating to the powers of the trustee, which you must read carefully.
3. PROHIBITED ACTS: You must NEVER:
(a) Act without the consent of your co-trustee (or a majority of all co-trustees, if there are more than two) except as pre-arranged by the co-trustees;
(b) Make unwise, speculative investments or engage in “self-dealing” transactions that have the potential to benefit yourself, your business, or closely related persons, except as specifically authorized either by a court order or by the trust document and all co-trustees;
(c) Make a distribution not specifically authorized in the trust agreement or before the time authorized in the trust instrument;
(d) Deposit trust funds into a personal account or deposit personal funds into a trust account;
(e) Make loans without adequate documentation and proper security under the circumstances;
(f) Invest in speculative investments or in any investment which is not adequate- ly documented;
(g) Engage in purchases or other transactions between yourself as trustee and yourself (or any trust or business entity directly or indirectly controlled by you) without prior court permission;10
(h) Place trust assets into an individual’s personal safe deposit box;
(i) Make cash disbursements to a beneficiary or any other person without getting a signed receipt;
(j) Co-mingle the assets of the trust estate with those of any other entity or person; or
(k) Take title to assets in your own name without reflecting your capacity as trustee.
4. COLLECTION AND MANAGEMENT OF ASSETS: Your primary duties are: to take possession of the trust’s assets; to see that debts, claims, taxes, and other expenses are provided for; to see that assets are properly invested; and to see that distributions are made to beneficiaries as directed in the trust instrument.
4.1 Inventory: Your primary responsibility as trustee is to account for and manage trust assets, and the first step is to ascertain the trust’s asset and make an inventory of them. The inventory must include a value for each item. Bank accounts, publicly-traded securities, and vehicles listed in the “blue book” can be listed without a formal appraisal. Real estate, valuable jewelry, and other special collections should be appraised by an independent appraiser, whom you may select. We can help you select appraisers if you do not know any who are qualified and whose fees are reasonable. The value shown on the inventory should reflect the net value of each asset.11
4.2 Protecting Assets; Limiting Liability: It is your duty to see that assets are preserved and protected.
(a) Securities (especially bearer bonds), jewelry, and other items of substantial value should be kept in a safe deposit box. Please let us know if there are any items you think should remain, or be placed, in the possession of another person.
(b) Accounts at financial institutions12 belonging to the trust should be given early attention. The balance of each account should be transferred into a federally-insured trust account, registered something like this: “JAMES DOUGH, Trustee of the DOUGH 1990 TRUST dated 1-2-90″. The trust should have its own tax identification number.13 Outstand- ing checks made by the deceased settlor should be itemized and, in most situations, honored. Accounts owned by the deceased settlor as a joint tenant with another named person do not necessarily belong to the trust; and the surviving joint tenant may have the legal right to collect the account. If there are joint accounts, call us so that we can discuss the details.
(c) The proceeds from life insurance and other death benefits are payable to the designated beneficiary or beneficiaries. If the trust is the designated beneficiary, the appropriate benefit claim form should be obtained, completed, and submitted as soon as reasonably possible. If the trust is not the designated beneficiary, such benefits are not assets of the trust estate. If there are no surviving beneficiaries, the probate estate may be the beneficiary under the terms of the applicable contract, and the trust will receive its entitlement, if any, through the probate proceeding (assuming that there is a will making the trust the beneficiary of the probate estate).
(d) All credit cards issued solely in the deceased settlor’s name should be cut, and the pieces should be returned to the issuer promptly with a request to cancel the account. If there is a joint account holder, advise each credit card company of the date of the deceased settlor’s death and let it know that the surviving account holder will be solely responsible for any charges made thereafter. Please advise us of any action you take.
(e) Trust assets should be adequately insured against damage, theft, loss, and personal injury claims. Make sure existing policies continue in force after the deceased settlor’s death. You may need to replace existing policies, or the trustee — or you as trustee— may need to be added as an insured on a rider to existing policies. If an insurance claim is denied because you failed to take reasonable steps to continue or replace insurance policies, you may be personally liable for the amount that the insurance policy would have paid.
(f) Some assets may require maintenance and repair, and it is your duty to see that this is done. Of course, you need to make sure that funds belonging to one beneficiary are not used to maintain the assets belonging to other beneficiaries. Depending on available funds and the interests of different beneficiaries, you may have to notify beneficiaries that you do not have resources to maintain assets and give them the opportunity to preserve and maintain their assets at their own expense.
4.3 Disbursements: Keep meticulous records of all disbursements from trust accounts and assets. We strongly recommend that money be disbursed in the form of a check so that there is a written audit trail for all transactions. Document any cash transactions with written receipts.
4.4 Investments: Unless restricted by the trust instrument, you can generally invest in any type of asset, but keep in mind that Nevada law does not permit “speculative” investments by trustees and “safety” must always be a key factor in your selection of investments.
(a) You are required to act with “reasonable care, skill and caution”. [See NRS 164.745(1).]
(b) “A trustee’s decisions concerning investment and management as applied to individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as part of an overall strategy of investment having objectives for risk and return reasonably suited to the trust.” [NRS 164.745(2)]
4.5 Impartiality: Unless the trust specifically authorizes you to favor one beneficiary (or class of beneficiaries) over another, you must be fair and impartial to all beneficiaries. “If a trust has two or more beneficiaries, the trustee shall act impartially in investing and managing the trust property, taking into account any differing interests of the beneficiaries.” [NRS 164.720] Even if the trust authorizes you to favor one beneficiary or class of beneficiary, you cannot completely disregard the interests of other beneficiaries.
4.6 Record Keeping: You must keep an exact record of all receipts and disbursements. Your records should reflect the source of each receipt, and should indicate whether it represents principal or income14. A trustee’s account is discussed in Section 6 of this memo.
4.7 Sale of Trust Assets: It may be necessary to sell trust assets to avoid depreciation or other loss, to raise cash needed for expenses, or to comply with the terms of the trust document. Unless the trust document states otherwise, you can proceed with the sale of trust assets without prior notice to the trust’s beneficiaries or to the public.
4.8 Advisors: You may retain accountants, investment advisors, property managers, and other advisors to help you make wise tax-planning, asset-management, and investment decisions. We are prepared to give you legal advice upon your request; however, if the trustee (you) or the trust becomes a party to a lawsuit, it may be necessary to retain another law firm to act in behalf of you and/or the trust. We do not provide investment or property-management advice, including advice relating to the advisability of retaining, repairing, selling, or replacing assets, and you will need to consult with other advisors for that type of advice.
4.9 Nontrust Assets: The trust governs only those assets legally owned by the trust. Assets that are not owned by the trust are not generally subject to the trust’s terms and are not your responsibility.
(a) Nontrust assets include assets passing by right of survivorship or by beneficiary designation. This includes property held by a deceased settlor in joint tenancy with another person. Nontrust assets also include life insurance, IRAs, and retirement plans for which a beneficiary has been designated (so long as that beneficiary survives). The trust does not govern assets passing by right of survivorship or assets passing by beneficiary designation (unless the trust is the designated beneficiary).
(b) The “probate estate” consists of assets payable to the estate (such as life insurance, retirement plans, IRAs, and other similar assets for which there is no designated beneficiary who survives, together with assets held in the name of a decedent alone. If there is a “probate estate”, a probate proceeding may be required, and you should discuss that with us. The probate estate becomes part of the trust estate only if there is a will that leaves the probate estate to the trust.
(c) Even though nontrust assets are not governed by the trust, nontrust assets are included in the taxable estate for federal estate tax purposes. If you sign a federal estate tax return (IRS Form 706), all nontrust assets should be included.15
(d) Occasionally, a trust instrument will provide that a beneficiary’s share of the trust is to be reduced by the value of nontrust assets received by that beneficiary, and you need to follow the terms of the trust.
5. FEDERAL AND STATE TAXES: If there is no court-appointed executor or administrator, you may be required to pay the deceased settlor’s federal taxes, including income, gift, and estate taxes. A number of IRS publications are available from the IRS outlining a fiduciary’s responsibility with regard to federal taxes.16 You can obtain IRS forms, publications, and instructions online (www.irs.gov) or you can ask your accountant or us to obtain them for you.
5.1 Income Taxes: The income tax returns that are required will depend on the various entities that exist and the amount of income each has. You should make arrangements with your accountant or other qualified return-preparer to have the necessary returns prepared. If there is a court-appointed executor or administrator, you must coordinate the preparation of tax returns with him or her.
(a) Trusts — From the time the trust becomes irrevocable at the time of the deceased settlor’s death, the trust is required to file income tax returns (IRS Form 1041) for each calendar year. It is your responsibility to see that this is done. There may be several irrevocable trusts created under one document that require separate tax returns.
(b) Individual — Unless there is a court-appointed executor, you may also have other tax responsibilities. The deceased settlor’s final income tax return (IRS Form 1040) must also be filed and the taxes must be paid for the year of the deceased settlor’s death. If the deceased settlor dies before filing the income tax return for the prior year, you may have to file it and pay the applicable taxes, also.
(c) Probate Estate — Income paid after the deceased settlor’s death usually belongs to the deceased settlor’s probate estate, and the court-appointed executor or administrator may have to file a fiduciary income tax return (IRS Form 1041) for the estate and pay the income taxes, except with respect to income distributed to beneficiaries.
5.2 Federal Transfer Taxes. Any person who makes lifetime gifts or death-time transfers having a cumulative value equal to or less than the “applicable exclusion” for the federal gift and estate taxes does not incur a federal gift or estate tax.
(a) The applicable estate-tax exclusion is$5.45 million for a decedent who dies in 2016 and $5.49 million for a decedent who dies in 2017.17
(b) A gift tax return is due for all gifts made other than annual exclusion gifts of $14,000 per recipient per calendar year.18 No gift tax is actually due unless the cumulative gifts exceed the applicable exclusion for gift tax.
(c) A federal estate tax return is due if the gross value of the decedent’s estate19 plus the net value of lifetime gifts (other than annual gifts of less than $14,000 per recipient per year) exceeds the applicable exclusion. The estate tax rate depends on the date of death.20 There are circumstances in which an estate tax return is required even though no tax will be due because of deductions and exclusions. On the other hand, if the trust is a two- settlor trust that divided into separate subtrusts upon the death of the first settlor, it is possible that the assets in one of the subtrusts will be excluded from the surviving settlor’s taxable estate.
(d) A generation-skipping transfer tax may also be due if transfers to grandchil- dren and other lower generations exceed the GST exemption.21
(e) If a gift or estate tax return is required, we would be happy to prepare it at your request or to assist your accountant in doing so.
5.3 State Taxes: In Nevada, there is currently no income tax, gift tax, estate tax, or generation-skipping transfer tax. If the federal government re-enacts the estate tax law to include a state death tax credit, Nevada will be entitled to a portion of the federal estate tax. Other states may have additional taxes that apply, depending on where the trustee is domiciled, where beneficiaries reside, and where assets are located. The rules are complicated, so be sure to consult with your accountant to determine if other states’ taxes may be due.
5.4 Tax Payments: You should consult us or an accountant before paying any tax to make sure that you do not pay taxes owed by one person or group from funds belonging to another person or group.
6. TRUSTEE’S ACCOUNTS; DISTRIBUTION: Unless the trust instrument and applicable law provide otherwise, you should account annually to the trust beneficiaries for everything you receive and everything you disburse.
6.1 Trustee’s Accounts: Until a trust is fully distributed, Nevada law requires the trustee to prepare a trustee’s account and to provide it to each beneficiary who requests it, but usually only once a year.
(a) The beneficiaries entitled to an account include “current beneficiaries” and “remainder beneficiaries”. “Current beneficiaries” are all persons to whom the trustee is currently permitted or required to make distributions from the principal or income of the trust. “Remainder beneficiaries” are future beneficiaries who will be permitted to receive distributions of principal or income upon the occurrence of an event, such as the death of the current beneficiaries.
(b) The following individuals are NOT entitled to request a trustee’s account:
(1) A “remote beneficiary”, which is a person “who may become a current beneficiary upon the death of two or more persons or upon the occurrence of some other event that cannot possibly occur during the beneficiary’s lifetime.”22
(2) The beneficiary of a trust that is revocable other than the person holding the power to revoke.23
(3) A beneficiary who, under the terms of the trust instrument, is not entitled to a trustee’s account; however, a reviewer can be designated to receive the trustee’s account confidentially without revealing information to the beneficiary.24
(c) In most circumstances, each trustee’s account should show assets on hand and their values as of the beginning of the accounting period, all receipts and disbursements, and the assets on hand at the end of the accounting period. In trusts that specify whether distributions are to be made from income or principal, the annual account must distinguish between receipts and expenditures of income and principal. A trustee’s account can be provided electronically, and an accountant-prepared summary can be provided in lieu of a complete account if the details are made available to the beneficiary.25
(d) As a courtesy to the trust’s beneficiaries, keep them advised as to the progress you are making with respect to settling the deceased settlor’s debts. As a protection to you, it is prudent to keep the beneficiaries advised as to the trust’s investments, the liquidation of assets, and major decisions relating to the management of estate assets.
6.2 Copy of Trust: Each beneficiary who is entitled to a trustee’s account is also entitled to receive a copy of the document or documents that govern the trust. That would include the original declaration of trust or trust agreement, as well as each amendment and documents that exercise a power of appointment under the trust.26 In some cases, it may be appropriate to provide a beneficiary with a redacted copy in which the trust provisions that do not affect the beneficiary’s interest are obscured or omitted, but you should consult us or other legal counsel before doing so. In most cases, it is best not to hide anything, except as expressly provided in the trust documents.
6.3 Division and Distribution: The ultimate goal of this process is to get the trust assets distributed into the hands of those entitled to it. The trust instrument may provide for distributions upon the deceased settlor’s death or for periodic distributions until a particular date or until the occurrence of a particular event.
(a) It is common for a trust to be divided into shares for various beneficiaries or groups of beneficiaries. Sometimes the trust requires a division into separate trusts instead of shares. Sometimes those divisions are motivate for tax purposes27, and sometimes the division is simply to segregate shares or trusts so that the investments, income, and expenditures for one beneficiary do not affect those of another. Regardless of the reason, be sure to comply strictly with the requirements of the trust instrument.
(1) Unless the trust provides otherwise, when the trust specifies that assets are to be divided into shares that are equal or based on a fraction or percentage, the allocation should be done on a “pro rata” basis, meaning that each beneficiary receives the specified fraction or percentage of each asset.
(2) A pro rata allocation is fair, but it is sometimes impractical, especially with hard-to-divide or hard-to-share assets, such as homes and cars. Most trusts permit the allocation of specific assets based on their values at a specified time. If the trustee is going to pick and choose assets for various shares, the trustee must make sure to take into consideration any appreciation or depreciation in assets between the time of valuation and the time of distribution or allocation to shares. For example, suppose that at the time of the settlor’s death there is a bank account with cash totaling $100,000 and a home valued at $100,000. After six months, the trustee is ready to give the bank account to one beneficiary and the home to another beneficiary, but that would be unfair if the home had decreased in the meantime to be worth $80,000 because of a downturn in the real estate market. The trustee needs to be fair about those things, and most trusts permit (if not require) equitable adjustments.
(b) Distributions that are required “upon the deceased settlor’s death” can be made as soon as you determine that there are sufficient assets to meet the trust’s obligations to creditors, to the IRS, and to other beneficiaries. Before that determination has been made, a partial distribution can be made whenever you deem it appropriate.
(c) Periodic distributions are either mandatory or discretionary.
(1) Mandatory distributions are those payments required in the docu- ment, such as quarterly income distributions. They should be paid as directed in the trust instrument. If the trust requires payments to begin at a certain date, and such payments cannot be made on time for one reason or another, be sure to make up the payments as soon as possible.
(2) Discretionary distributions are those payments which the trust instrument permits but does not require, such as payments for a beneficiary’s education. Discretionary distributions also include distributions that are mandated by the trust document where the time and/or the amount of the distribution is left to your discretion.
(A) We recommend that you consider all relevant factors in making distribution decisions and that you keep a written record of the factors you weigh. It would be almost impossible to properly make discretionary distributions without conferring with the beneficiary and others.
(B) It is appropriate to ask the beneficiary to provide documents and information relevant to his or her financial condition, such as copies of paycheck stubs and federal tax returns.
(C) Some trust documents will allow payments “for” as well as “to” a beneficiary. This means that you can pay bills directly, buy assets for a beneficiary’s use, and provide services to a beneficiary without having to make direct payments to the beneficiary.
(d) The beneficiaries and other distributees should always sign receipts acknowledging receipt of the distribution which you have made.
(e) When the trust assets are all distributed and the beneficiaries have all signed receipts, the trust administration is complete.
6.4 Anticipating Disputes: If you anticipate that some of your decisions may be challenged by beneficiaries, if you know that there will be some decisions that will favor one beneficiary (or group of beneficiaries) over another, or if some of the trust provisions are ambiguous requiring court interpretation, there are a number of methods you can use to reduce the potential for controversy.
(a) You may wish to simply get the written consent of all affected beneficiaries. When minor or even unborn beneficiaries might be affected, this informal option does not work.
(b) For some actions you might take, NRS 164.725 allows you to give the beneficiaries of the trust a formal “notice of proposed action”. This “proposed action” could relate to the selling of an asset, decisions relating to the trust’s investments, or an adjustment of what is treated as distributable to the trust’s income beneficiary. If no beneficiary objects to the proposed action within 30 days, you may proceed without liability. If a beneficiary objects, you can either not proceed with the proposed action, or you can petition the court for a ruling (which is recommended if the objection of the beneficiary is without merit). This is usually the best option, but it does not apply in all situations.
(c) If the previously mentioned options are not appropriate, it may be wise to have your appointment as trustee confirmed by the Court and to otherwise seek court approval of your actions, especially if you are about to make a decisions that is controversial. This gives the beneficiaries an opportunity to express their concerns to the court, but once the court has made a decision, your compliance with the court order cannot be subsequently challenged.
7. CONCLUSION: The trust administration process will take your time and effort. We hope you will call upon us when legal questions are involved and whenever you feel we can help simplify the trust administration process.
7.1 Time: Although you can legally begin distributions immediately after assuming your duties as trustee, it is usually not prudent to do so. It will take months before the simplest trust can be safely distributed. It takes time to locate and appraise assets, to prepare tax returns, to ascertain and pay debts, and to otherwise comply with the trust document. If you make a distribution to a beneficiary that makes it impossible for you to pay all creditors’ claims and all taxes that are legally due, you will be personally liable for the amount distributed to that beneficiary (unless the beneficiary returns the property distributed). To avoid personal liability for federal estate taxes that are owed to the IRS, you should not make a final distribution without settling with the IRS, which will usually take at least 18 months from the deceased settlor’s death. Disputes with beneficiaries, heirs, creditors, and other claimants can complicate matters and lengthen the time it takes to complete the trust administration process. Selling trust assets can also delay the final settlement of the trust. Partial distributions may be appropriate, but be sure to keep a reserve fund that is sufficient to pay unanticipated expenses, as well as known obligations. It is best to be patient and do things right, rather than trying to do things hastily.
7.2 Beneficiaries: Unless you are the only trust beneficiary, we recommend that you communicate frequently with all the trust’s current beneficiaries, keeping them apprized of your activities, particularly those that affect them. If you have concerns about trust investments or discretionary distributions, conferring with the trust’s beneficiaries may avoid misunderstandings later. Timely written correspondence to the trust’s adult beneficiaries and to the parents or guardians of minor beneficiaries regarding your actions and decisions is your best defense against potential litigation later.
7.3 The Burden of Responsibility: From the day you assume the duties of a trustee until the beneficiaries have signed receipts indicating that they have received all they are entitled to, the primary responsibility for the trust rests on your shoulders. Our task is to help ease your burden in every way possible, so if you need help, please let us know.
7.4 Your Compensation: Unless the trust instrument provides otherwise, you are entitled to “reasonable compensation” for your services, which is taxable income to you.
(a) “Reasonable compensation” can be based on an hourly fee or a percentage fee. Bank trust departments customarily charge an annual fee equal to approximately one percent (1%) of the current value of the trust’s assets. Sometimes a lower fee is quoted, but transaction charges often make up for the difference. In addition to the regular management fee, there is frequently also a distribution fee when assets are distributed out of the trust to one or more beneficiaries.
(b) If there are two or more trustees, the compensation should be allocated among the co-trustees according to their services, as they agree.
(c) If the trust instrument provides for more specific compensation, you should follow the trust instrument. If you feel that the compensation provided for in the trust is unreasonable, you can either resign or petition the court for additional compensation.
(d) A trustee’s fee is usually paid quarterly, and is normally paid one half from trust income and one half from trust principal [NRS 164.900(1) and 164.905(1)(a)], although an “acceptance fee” is generally charged entirely to the trust principal [NRS 905(1)(b)].
(e) If you intend to waive your compensation, consult us or your accountant about how to document this to avoid having taxable income imputed to you even though you are not going to receive it.
NOTE: This memo provides general information only and does not contain legal, accounting, or tax advice. For brevity, this memo is oversimplified and should not be relied on for any particular situation.
Notes 1 – 27
A “trust” is the legally recognized arrangement under which a trustee owns and manages trust assets for designated beneficiaries. Sometimes, we also use the word “trust” to refer to the document that creates the trust arrangement, but usually we will refer to the document as the “trust instrument”, “trust document”, “trust agreement”, or “declaration of trust”. For the purpose of this memo, those terms include any pertinent trust amendments.
The terms “settlor”, “grantor”, and “trustor” are used interchangeably to refer to the person or persons who originally established the trust. “Surviving settlor” refers to the last settlor living where there are two or more settlors who created the trust. “Deceased settlor” refers to the settlor or surviving settlor whose death makes the trust irrevocable.
The “trust estate” consists of all assets belonging to the trust, whether they were originally owned by the trustee, received under a contractual beneficiary designation (such as under a life insurance policy or other contract providing death benefits), or received as a distribution from the settlor’s probate estate.
You are not obliged to engage us for any legal work. If you choose to engage another attorney or firm to assist you, references to “we” and “us” should be read as references to the attorney or firm you engage to advise you.
In some states, this is referred to as an “Affidavit of Successor Trustee”, but the function and purpose are the same.
By providing this memo, we are not accepting any duty as your legal counsel. That is done only through a formal, written engagement agreement that is signed by us.
NRS 164.705 to 164.775 contains Nevada’s “Uniform Prudent Investor Act”, which provides guidelines that all trustees must follow except to the extent the trust instrument specifically provides otherwise.
In legal terminology, the words “property” and “assets” are used interchangeably.
NRS 163.050 and 163.060 provide some exceptions to corporate trustees, but require court permission in all other circumstances.
The “net value” is the gross value of the asset less the value of any known liens or encumbrances, including mortgages and other liabilities. The inventory should reflect the net value and how it was calculated.
Such as banks, savings and loan associations, credit unions, thrift companies, etc.
You can apply for the tax identification number (also referred to as an employer identification number) online on the IRS web site or you can have your accountant or us apply for it on your behalf.
“Principal” refers to all assets, such as a bank account, stock, car, home, and the like. “Income” refers to revenues generated from the principal includes interest, dividends, rent, royalties, and the like. Income also includes compensation for the deceased settlor’s personal services, such as salary and bonuses. Some payments may include income and principal, such as a mortgage payment.
See section 5 and footnote 19 of this memo.
For example, IRS Publications 559 and 950. These publications explain the duties of an executor, but, whether or not you are appointed as the executor for the settlor’s estate, a trustee may be considered the executor for federal tax purposes.
Internal Revenue Code § 2010(c) provides for an “applicable exclusion”, which is the cumulative amount that can pass free of gift and/or estate tax. The applicable exclusion is$5,430,000 for 2015, $5,450,000 in 2016, and $5,490,000 in 2017.
During each calendar year, each taxpayer can exclude certain gifts from the imposition of the gift tax. There is an “annual exclusion” applicable to gifts made to each donee (recipient) during each calendar year. This amount is $14,000 for gifts in 2013 through 2016 and is subject to cost of living increases. Other exclusions that have no dollar limitation include: (1) tuition you pay directly to the educational institution for someone else; (2) medical expenses you pay directly to the health-care institution for someone else; (3) gifts to your spouse; and (4) gifts to a charitable organization for its use. The “applicable exclusion” that is available for taxable transfers during life and at death will not be affected except as to gifts that exceed these exclusions. Gifts that exceed the annual exclusions and the lifetime “applicable exclusion” will trigger a gift tax.
The “estate” for federal estate tax purposes includes the probate estate, plus most assets passing from the decedent by operation of law or contract, such as joint tenancy assets and life insurance. We can help you determine what assets are to be considered and whether or not an estate tax return is required.
The maximum rate imposed for federal estate tax purposes is currently 40%.
The federal generation-skipping transfer tax (“GST tax”) is imposed at the highest rate imposed for federal estate tax purposes, which is shown in note 20. For 2011 and beyond, the GST exemption has been the same as the applicable exclusion for estate tax. (See note 17.)
A beneficiary who is not entitled to a trustee’s account under the trust instrument is entitled to designate an accountant or an attorney as a reviewer, who will report to the probate court as to whether the beneficiary’s interest has been properly accounted for. See NRS 165.141, 165.143, and 165.145 for the procedure that applies in this situation.
See NRS 165.135(4).
See NRS 165.147.
It is common to divide a trust into separate trusts upon the death of one spouse so that the “applicable exclusion” of the first spouse to die can be preserved. That division is explained in a separate memo, which you should request if you have not already received it. For trusts that may continue for more than one generation, it is also important to divide trusts that become irrevocable into “exempt” and “non-exempt” trusts for federal generation-skipping transfer tax purposes. Whether or not these allocations are made and maintained can make a significant difference in the amount of estate and generation-skipping transfer taxes that are imposed.