A step-by-step guide for the novice.
Congratulations — and my sympathies. If you are reading this, then you have probably just been appointed as a trustee. You may have asked for this position, been talked into it, or just fallen into it because nobody else wanted the job. Regardless, you are now responsible for the fortunes of people who are related to each another and have your phone number on speed-dial.
You are also probably wondering what to do next. Take heart! Administering a family trust is not that different from managing your own finances or a small business, except that a trustee has an obligation to manage it to specific set of standards. Rest assured, with a little research and a big dose of common sense, you will be up and running in no time.
Having personally walked this road before, settling the estate of my wife’s late grandmother, I understand how confusing and stressful it can be to take on such a complex project for the first time. While not all trusts arise from death in the family (and this article is not specific to it) if you have recently experienced on, please accept my condolences.
Let’s walk through a generic, sample workflow to get you jump-started. The following is based on my own personal experience, so you may have other sources of information and come to somewhat different conclusions. That’s find — as trustee, you are in the driver’s seat.
Disclaimer: I am not an attorney and this is not legal advice. It is general business information only. For legal advice, talk to a lawyer.
1. Read Documentation
Before you spend a single dime, educate yourself on a trustee’s rights and responsibilities. It doesn’t matter if the reading is dull or you don’t understand half of it. You will still gain a general understanding of what you are up against and create a more solid foundation for future decision-making.
The Trust. This is a legal document, drafted by an attorney and signed by the person or persons who originally set it up. It describes the nature of the trust (e.g. revocable or irrevocable), lists the beneficiaries and trustees by name, and outlines your powers and responsibilities.
- Obtain the original document with the original pen-and-ink signature. A photocopy won’t suffice because, from time to time, you may have to show the original to banks and other institutions. (If no original exists, consult with an attorney before proceeding.)
- Read it front to back. This is one of two critical documents that will govern most of your major decisions.
- Scan or color-copy a high-quality backup, in case the original is lost to fire or theft.
- Make additional digital or print copies to distribute to beneficiaries, banks or other entities who may be entitle to receive all or part of the document.
- Store the original where it will be safe from fire, flood, theft etc. and from where you can retrieve it when necessary.
Reports. Just like a business, a trust will probably issue periodic reports on its financial condition.
- Obtain the originals, if any exist; if this is a brand-new trust, they won’t, of course.
- Browse through them to get a sense of the trust’s history. Later in the process (see the section Determine Solvency below), you will study them more thoroughly.
- Copy and store them in a safe place.
Related trusts. Sometimes one trust will be the beneficiary of another trust, or there may be sub-trusts governed by the main trust, or whatever. It is unlikely that you will encounter this, unless you have some very rich aunts and uncles who own half the state and know how to shuffle their money around. But if you do, obtain a copy of any related trusts that you are entitled to read.
Correspondence. There should be a paper trail of letters, emails and other communications, especially if you are taking over from the previous trustee.
Will (if applicable). Some wills are “flow through” documents that place all of the deceased’s assets into a trust. You might even the executor.
Death certificate (if applicable). Ask your county records department how to obtain one. Ask for twenty copies, as various interested parties will ask you to provide them for their files.
Power of attorney. If you or anyone else has a power of attorney over a beneficiary or over any of the trusts assets, read it and understand it. If anything raises your eyebrows, talk to an attorney before proceeding.
2. Learn the Law
You are personally responsible for managing the trust in a responsible fashion. Always obey the governing laws, no matter how many sob stories or cries for help you receive from people or institutions who claim that it owes them money. If you slip up, it’s your butt, not theirs, that gets hauled before a judge.
Read the Law
State trust law. This is the other critical document that will govern most of your decisions. Each state has its own set of codes. If you live in one state but the trust was created in another state, you will have to figure out which state’s laws apply, probably the latter.
Legal correspondence. Have any letters from lawyers on file? Read them.
Look for a Lawyer.
Consider retaining a law firm to guide you through the maze. When selecting an attorney,
The law firm should:
- Specialize in trusts of the same type, size and complexity.
- Be licensed in the same state that governs the trust.
Type of relationship.
- If the trust is large and complex, ask if they provide management services or other forms of ongoing support.
- If it is small and simple, ask them about providing advice only when needed.
Costs and billing.
- You should pay attorney fees — along with the fees of any other professional services, such as accountants or real estate agents — directly out of the trust’s checking account (see below), not out of your own personal pocket.
- Decide if you want to pay them an hourly rate or a flat fee. If hourly, assume that whatever they estimate it will cost, assume that it will cost more. Some lawyers will purposefully underestimate the number of hours they will spend on your case, just to land your account.
3. Create Trust Accounts
Never mix the trust’s assets with your own personal assets or bank accounts. You need to place all of the trusts money, investments, real estate etc. into accounts that are in the name of the trust — like it were a business — but controlled by you (and only you).
Assemble Necessary Documents
- The trust document. You will only have to show a few of its pages to the banker, primarily just to prove that it exists and you administer it. The bank has no business asking for the names of beneficiaries or how much money is due them.
- Financial paperwork on any current bank accounts, brokerage accounts, deeds etc. from which you will transfer assets into the new trust accounts.
- Death certificate (if applicable). In some cases, the bank/brokerage will need to see it before opening an account, as an anti-identity theft precaution.
- A federal tax ID number. Don’t use your social security number. Apply for a separate number from the Internal Revenue Service. This will further separate your finances from the trust’s finances.
Create the Accounts
- Checking and Savings accounts. Try not to open them online. While it might seem convenient, in my experience sitting across a desk from your local bank officer at your local bank branch offers much better access to their time and expertise, especially when navigating the pile of printed paperwork necessary to open the accounts.
- Brokerage account. It may be more difficult for you to find a convenient brick-and-mortar brokerage office, especially if you live in a rural area. Just do your best to work with a proper broker who understands your needs, even if it is only over the phone.
- Deed transfers. Ask a real estate agent or an attorney to look over the paperwork to see whether or not any properties that were placed into the trust have been properly recorded as such by the county.
Create the books.
Create a normal set of financial records. At the very least, record every financial transaction in a journal. If the journal or other books already exist, obtain them and study them. If you are audited, you will need it.
4. Determine Solvency
Now that you have a rough handle on structure, it’s time to find out if the trust is solvent. In other words, does it have sufficient assets and/or income to pay its debts, taxes and bills? If it is insolvent (can’t pay its bills):
- Do not distribute any money to the beneficiaries under any circumstances. If you do, unpaid creditors might ask a judge order you make up the loss out of your personal funds.
- Consult with your lawyer and accountant, then settle the trust’s debts as best you can.
Read the Financial Documents
- Trust reports (see above). If any exist and if they are accurate, they will tell you how much money the trust has and how much it owes.
- Receipts, bills, invoices, statements and contracts. These are original “source documents” that you can review to see if they match up with the trust reports. If there are no trust reports, use them to create one.
- Audits. Have any third-parties, such as accountants, reviewed the finances and issued a report? Read it.
- Accountant correspondence. Rinse and repeat.
Talk To an Accountant
Follow the same procedures as when selecting an attorney. Whether or not you need an accountant will depend upon the trust’s financial complexity vs. your own competency.
If your accountant and attorney start to compete over who should be responsible for which responsibilities (and the billings that come with then), make the decisions yourself, divide up the responsibilities and be firm about it. They work for you, you don’t work for them.
5. Manage Distributions
If the trust is solvent, then you can begin studying when and how to distribute money to the beneficiary or beneficiaries.
- Read the Trust. It should outline the names of the beneficiary or beneficiaries. If there are more than one, it should specify how much each one receives, possibly as a percentage. It should also outline your powers: what you must do and, within those parameters, how much decision-making authority you have.
- Read the Law. If the trust document appear to conflict with the law or if you have any concerns about how to interpret either document (not just regarding distributions, but on any topic), talk to your lawyer.
Structure the Distributions
After you have paid the lawyers, plumbers, funeral homes, tax collectors and the kid who mows the lawn, you can start sending money to your screaming cousins and grandkids. Read the trust document to determine the type of distributions required.
- Periodic distributions. You pay a beneficiary a regular stipend — such as once per month — for as long as the trust wants you to and remains solvent, which basically makes you the family Sugar Daddy or Mama for the foreseeable future.
- Lump sums. You sell off the assets, pay the bills and tax man, distribute to the beneficiaries whatever (if anything) is left over, dissolve the trust and walk away. In this case, you may be given a specified number of months or years to settle things.
- Special conditions. If Junior gets arrested, does he lose his stipend? Can you turn the “regular distributions” into a “lump sum” if the bank account reaches a low threshold? Just like a will, there could be all manner of land mines in the fine print.
- Documentation requirements. Don’t just hand out checks at your brother-in-law’s birthday party. You might be required to distribute them in a specific way, such as via registered mail or electronic transfer. Document every distribution and record all receipts, in case a beneficiary loses their check or never receives it and tries to blame it on you.
6. Determine Compensation and Reimbursement
Your eyes just popped open. “You mean I get beer money for this?” Well, maybe. Read the Trust. Read the Law. If the two conflict, talk to a lawyer.
- Compensation. Depending upon the nature and size of the trust, as well as applicable state laws, you might be allowed to disburse money to yourself for your time and trouble, possibly in the form of an hourly rate or a small percentage of its total dollar value. Even if you are entitle to compensation, you might choose not to accept it, especially if you are managing a simple estate. On the other hand, if this is a complex project and your time is valuable to you, it is perfectly legitimate to accept a modest sum, so long as the law permits it.
- Reimbursement. Even if you can’t or won’t accept any compensation, you should still reimburse yourself for any out-of-pocket expenses, such as postage or travel. But to keep the paperwork simple, whenever possible pay for trust expenses directly from the trust checking account, not your personal account.
Remember, the trust doesn’t exist to serve the financial needs of the trustee. The position of trustee exists to serve the financial needs of the trust. Play fair and stay within what the law allows.
7. Set Up a Work Plan
Schedule some time each week to handle any new business. This will keep your trustee activities compartmentalized and separate it from the rest of your work time and play time. Create a schedule for regular tasks, such as:
- Making estimated tax payments, if applicable.
- Paying bills to creditors.
- Making distributions to beneficiaries.
- Reading any new correspondence.
- Writing the reports. Like any business, you may be obligated to report to the beneficiaries on the trust’s finances once per quarter, month, year or however often is required.
Then finish up, walk away from your desk and take some personal time.
One again, congratulations. You have successfully set up and administered a trust, ensured your family’s continued prosperity and learned a thing or two about small business management. Put the scissors file in the closet and the computer to sleep, then have yourself a tall one on me. You deserve it.