Being named a trustee is a significant responsibility that demands careful attention, time, and effort—and missing critical steps can lead to complex legal consequences. In this episode of Absolute Trust Talk, host Kirsten Howe and associate attorney Jessica Colbert delve into real-life cases where trustees overlooked essential duties. They discuss three crucial questions every trustee must ask before making final distributions:
- Have I done everything necessary concerning income taxes?
- Is there a supplemental property tax bill coming?
- Do I need to provide an accounting to the beneficiaries?
With practical guidance on navigating these often-missed steps, Kirsten and Jessica equip trustees with the knowledge to handle their responsibilities smoothly and avoid personal liability. Whether you’re a current trustee or might become one in the future, this episode is packed with essential insights you won’t want to miss.
Time-stamped Show Notes:
0:00 Introduction
1:10 Before diving into today’s topic, Kirsten and Jessica discuss the key responsibilities trustees often overlook and how these can lead to legal complications.
3:00 – Trustee Question 1: “Have you done everything necessary concerning income taxes?” A trustee’s tax responsibilities go beyond filing a final tax return. If you haven’t addressed Form 1041, there may be unresolved issues.
5:58 – Trustee Question 2: “Is there a supplemental property tax bill coming?” Learn why reassessments can lead to unexpected tax bills and what trustees need to know to prepare.
7:27 – Trustee Question 3: “Do I need to do an accounting for the beneficiaries?” Find out why providing an accounting is crucial for trustees to protect themselves from future legal claims.
10:06 – Kirsten and Jessica wrap up with a preview of the fourth question trustees need to ask, which will be covered in the next episode.
Transcript:
Hello, and welcome to Absolute Trust Talk. I am Kirsten Howe, the managing attorney at Absolute Trust Counsel. Jessica Colbert, one of our associate attorneys, is here with me again today.
Every so often, we get a little cluster of cases in the office that all seem to have something in common—some problem in common—that we have to pay attention to. This is happening, and people need to know about it. And this is the subject of today’s episode. It might have to be two episodes because we have quite a bit to say about it.
We recently have gotten a bunch of cases in the office where the trustee, after death, has been administering the trust for a year, maybe two years, maybe six years. They’ve distributed most of the money out to the beneficiaries, and now they want our help with some little problem or obstacle they’ve bumped up against, or they need our help “closing the trust.” I’m saying that in quotation marks because that’s the kind of terminology they use. They don’t know how to close the trust or how to get this job to the finish line.
A lot of times, these trustees have done a fairly decent job of getting things done without our help, without the help of an attorney. It’s not easy; it’s a big job. It takes a lot of time to figure out what needs to be done if you’re not an attorney. But mostly, these trustees have managed.
When we meet with them, we find that they are almost always surprised to learn that there are a few responsibilities they didn’t take care of because they didn’t know about them. Some of these steps are critically important, and that’s what we’re going to talk about today.
The important point is it’s not too late because, in the cases, I’m talking about, they haven’t yet distributed all of the money. So they still have the ability to fix their mistakes or oversights. But I can’t emphasize enough how important it is to check in with your attorney or an attorney before you give out the last of the money if you’re a trustee. Once it’s gone, it’s like toothpaste—you can’t get it back into the tube.
And then, you don’t have money to pay for the things you’re supposed to have done. As we’ve said many times before, trustees can be personally liable for their mistakes as trustees.
Unlike most jobs, if you have an employer and you make a mistake and it costs the employer money, that’s part of business. You’re not required to pay your employer back for your mistakes. A trustee is, and that is a possibility. We don’t like to see that.
So today, we’re going to discuss the four questions—we’ve distilled them down to four—that a trustee needs to ask before making their final distributions. We’ll look at them one at a time.
Jessica, why don’t you start us off with one of these four questions?
One question is about income taxes. The trustee should ask, “Have I done everything I’m supposed to do concerning income taxes?”
Of course, the decedent, as an individual, has to file one final tax return for the year of their date of death and pay any taxes that are owed. So, the trustee will need to make sure that that individual tax return gets filed and any taxes paid.
In addition, many trustees don’t realize that the trust becomes a taxpayer when it becomes irrevocable. That happens when the grantor, the person who created the trust, dies. Now, the trust is irrevocable. It is a taxpayer. It has its own taxpayer identification number and must file its own set of state and federal tax returns every year until the trust is terminated.
On these returns, the trustee will report any income that the trust earns. That could be from dividends, interest, or rental income for the trust’s properties. This will all be declared on Form 1041. That is different than the individual Form 1040. It’s something that we don’t recommend trustees try to do themselves, this Form 1041, and we always recommend that they hire a CPA to help them with that. Because, Kirsten, like you just said, the trustee can be personally liable if they make any mistakes.
Yeah, and you don’t want to mess up and make your mistake in front of the IRS. That’s the worst kind of mistake that you can make. So, hire a CPA who has experience with these. Not all of them do it. Not all of them do trust income tax returns. But find a good one and get it done by a professional.
Tax preparation costs money. You’ve got to hire a CPA, and you have to pay for them. So, it’s important to get all of this done before you’ve given all the money to the beneficiaries. Plus, the trust is going to owe taxes. So, you need to find that out. You need to know exactly where you stand before the beneficiaries get all the money.
The second question also relates to taxes. The second of our four questions is, “Is a supplemental property tax bill coming?”
Maybe. When there is a change in ownership in real estate in California, like upon death, property is transferred from the decedent to someone else. Unless that transfer falls under a specific exception, the property taxes will be reassessed, meaning they’ll go up. Yes, I have never seen them go down. They will go up.
So, if you are a trustee and you know that the transfer didn’t fall under one of these specific exceptions, but your property tax bill didn’t go up, it’s very possible that the assessor is just behind in their paperwork and hasn’t gotten to it yet. It’s not a miracle. It’s not a present. You will very likely get a bill later on for that increased value.
So, you need to factor that in when you’re thinking, “Now I’m ready to distribute all the money I have left in my trustee checking account.” Not until that supplemental tax bill hits. You just got to hang on to what we would call a reserve. That’s very important.
A third question is, “Do I need to do an accounting for the beneficiaries?”
Yes. Very, very good point. A lot of trustees—it seems logical, but that’s logical to us because it’s what we do every day.
But an accounting—just for those of you who aren’t familiar with this concept, the vast majority of the listening public—an accounting is a report that the trustee makes to the beneficiaries that is the story of what they’ve been doing for the last year or two years or six years, whatever it is.
They show to the beneficiaries, “This is what I started with. These are all my assets and worth on the date of death. This is all the income earned by these assets since I’ve been in control. These are all the expenses that I had. And now this is what I have left.”
There are other things in there, very complicated technical things, but that’s what accounting provides. You’ve got to provide that to the beneficiaries unless the beneficiaries and the trustees are exactly the same people.
That’s the rare exception where, no, you don’t have to account for yourself. If you’re the trustee and the sole beneficiary, you can disregard question number three.
It’s really important not to skip this step because, as the trustee, you could be sued by a beneficiary for anything that you did wrong or anything that they don’t like until the end of time or until you provide the beneficiary with this accounting of your actions.
By providing the accounting, that cuts your exposure to a lawsuit down to three years, or in some cases, if the trust has specific language allowing this, it’ll cut the exposure down to six months.
That’s the statute of limitations for actions against the trustee, lawsuits against the trustee for things they did wrong, or something the beneficiary doesn’t like.
The statute of limitations doesn’t start until you produce this accounting. So, if you close up the books and close the trust, walk away ten years from now, the beneficiary could come after you. So, you want to close that down. You do that by producing an accounting report.
We’ve gone through three questions that we believe trustees need to ask themselves before distributing the final amounts of money to the beneficiaries. We started this episode by saying there are four, but we’re running out of time, so we will hit that fourth one in our next episode.
Jessica, thanks very much, and thank you all for listening and watching. We look forward to connecting with you next time.
Resources Related to This Episode:
- Absolute Trust Talk Episode 150: Third-Party Trustees: A Smart Choice for Your Estate Plan? https://absolutetrustcounsel.com/150-third-party-trustees-a-smart-choice-for-your-estate-plan/
- Absolute Trust Talk Episode 146: Trustee and Executor Responsibilities: Best Practices and Pitfalls Part 3 https://absolutetrustcounsel.com/146-trustee-and-executor-responsibilities-best-practices-and-pitfalls-part-3/
- Absolute Trust Talk Episode 145: Trustee and Executor Responsibilities: Best Practices and Pitfalls Part 2 https://absolutetrustcounsel.com/145-trustee-and-executor-responsibilities-best-practices-and-pitfalls-part-2/
- Absolute Trust Talk Episode 144: Navigating Trustee and Executor Responsibilities: Best Practices and Pitfalls https://absolutetrustcounsel.com/144-navigating-trustee-and-executor-responsibilities-best-practices-and-pitfalls/
- Absolute Trust Talk Episode 141: Managing Real Estate Assets as a Trustee https://absolutetrustcounsel.com/141-managing-real-estate-assets-as-a-trustee/
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your own unique needs to effortlessly build a secure future now. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
- Absolute Trust Counsel would love to offer access to our Incapacity Planning resource page: https://AbsoluteTrustCounsel.com/Incapacity-Planning/. We’ve collected our top planning information all in one place so listeners can find videos, guidebooks, blog posts, and a host of information with tips and strategies on implementing, planning, and protecting themselves and their loved ones.
- We’re pleased to provide a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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