a. Generally: Your “fiduciaries” are those persons appointed to act for you in a position of trust, either during life or at death, such as the personal representative of your estate, the trustee of your revocable trust, your agent under a power of attorney, and your guardian. Your documents must name the persons you want to take care of the various aspects of your personal and financial affairs. Your will, trust, and related documents should give your fiduciaries sufficient guidelines so that they understand your intent, and they should give the fiduciaries the power and authority necessary to carry out your intent.
i. Trustee: the person, bank, or trust company who has been entrusted with the trust assets and holds legal title to them. The trustee manages trust assets and makes distributions according to the provisions in the trust.
ii. Personal Representative: A “personal representative” is the court appointed fiduciary to administer the estate and to distribute the estate assets pursuant to the terms of the will (if one exists), or pursuant to the terms of the intestate succession laws. The term “personal representative” is a general title that includes:
1. Executor – person who is nominated under a will;
2. Administrator – person who is named to administer an estate where there is no will; and
3. Administrator with the Will annexed – person who is appointed as administrator when the decedent left a will, but either did not name an executor in the will or the named executor fails or ceases to serve.
b. A Fiduciary’s Duties and Standard of Care: A fiduciary is held to a fiduciary standard of care, which generally means that the fiduciary must use more care with other people’s assets than they would with their own. The law summarizes the five primary fiduciary duties, which can be remembered with the phrase “A CLIP”:
i. The fiduciary must ACCOUNT to the beneficiaries and keep them informed as to the management of trust or estate assets.
ii. The fiduciary must COMPLY with the governing document 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 as instructed.
iii. The fiduciary must be LOYAL to the beneficiaries, which means that the fiduciary cannot make decisions that favor the fiduciary personally or anyone else more than the beneficiaries.
iv. The fiduciary must be IMPARTIAL when it comes to different beneficiaries (unless the governing instrument specifically allows the fiduciary to favor a beneficiary or group of beneficiaries); the fiduciary cannot “take sides.”
v. The fiduciary must be PRUDENT in the investments he/she makes and in the management of the assets.
c. Prohibited Acts: A fiduciary must NEVER:
i. Act without the consent of a co-fiduciary (or a majority of all co-fiduciaries, if there are more than two) except as authorized in the governing document or pre-arranged by the co-fiduciaries;
ii. Make unwise, speculative investments or engage in “self-dealing” transactions that have the potential to benefit the fiduciary, the fiduciary’s business, or closely related persons, except as specifically authorized either by a court order or by the governing document and all co-fiduciaries;
iii. Make a distribution not specifically authorized in the governing document or before the time authorized;
iv. Deposit trust/estate funds into a personal account or deposit personal funds into a trust/estate account;
v. Make loans without adequate documentation and proper security under the circumstances;
vi. Invest in speculative investments or in any investment which is not adequately documented;
vii. Engage in purchases or other transactions between the trust/estate and the fiduciary individually (or any business entity directly or indirectly controlled by the trustee) without prior court permission;
viii. Place trust/estate assets into an individual’s personal safe deposit box;
ix. Make cash disbursements to a beneficiary or any other person without getting a signed receipt;
x. Co-mingle the assets of the trust/estate with those of any other entity or person; or
xi. Take title to assets in the fiduciary’s personal name without reflecting their capacity as fiduciary.
2. SOURCES OF AUTHORITY
a. As a fiduciary is fulfilling their role, they may seek authority as to how to carry out their duties. Trust and estate law is often state specific, and the authority will vary from one state to another. However, the following are some common sources a fiduciary can turn to for guidance:
i. The governing document (i.e. the will or trust)
ii. State statutes
iii. State case law
iv. Uniform Probate Code and Uniform Trust Code – a model law regarding trusts and estates that can be influential in states. These have been totally or partially adopted in a number of states.
v. Restatement (Third) of Trusts – this is essentially a survey and summary of what the common law regarding trusts is in states from across the country.
3. PROBATE OVERVIEW
a. Generally, probate refers to the court proceeding required to formalize the transfer of the assets belonging to a deceased person (“decedent”) that do not pass directly by law or under the terms of a contract. If the decedent leaves a will, he or she has died “testate,” and the executor nominated in the will is appointed by the court, and the estate passes to the beneficiaries named in the will. A person who dies without a will has died “intestate,” and his or her estate will be administered by a court-appointed administrator, and that person’s assets pass to his or her heirs according to the intestate succession laws of the state where the decedent died.
b. Probate Assets: As a general rule, only assets that are part of the “probate estate” are subject to probate court proceedings. It is easier to define the probate estate by first explaining what assets are not a part of the probate estate. Non-probate assets are those that pass by operation of law or under the terms of a contract:
i. By operation of law. This category includes assets held by two or more persons in joint tenancy (which includes a “right of survivorship”) and property held by married couples as community property with a right of survivorship, as well as accounts and securities held with a beneficiary designation, such as “in trust for” or “payable on death to.”
ii. Under the terms of a contract. This includes various contracts that permit the designation of one or more beneficiaries, such as life insurance, retirement accounts (including IRAs, Keogh accounts, and qualified plan benefits), other retirement benefits, annuities, and some buy-sell agreements related to business entities.
iii. Excluded Items. Sometimes assets that would normally be non-probate assets become part of the probate estate. This may happen if the estate is designated as the beneficiary under a contract, the designated beneficiary(s) under a contract predeceased the decedent, or if the person who would otherwise receive something by operation of law or under a contract files a disclaimer waiving the right to receive the asset. Disclaimed assets pass as if the disclaimant were deceased, and if there is no alternate person who takes under that situation, the asset will become part of the probate estate.
iv. The “probate estate” includes all assets that do not pass by operation of law or under the terms of a contract. In other words, the probate estate consists of assets for which there is no co-owner with a right of survivorship and for which there is no beneficiary designation.
c. Duties: Generally, a personal representative’s tasks are to:
i. Collect all assets belonging to the decedent;
ii. Manage, liquidate, and/or invest assets;
iii. Pay taxes, debts and other expenses; and
iv. Distribute the remaining estate to the devisees or heirs.
d. Probate Process: The probate process can be summarized as follows (with an asterisk “*” indicating steps that may not be required for all estates):
i. *Open Safe Deposit Box. Any interested person may file a petition for authorization to open a safe deposit box and remove the decedent’s will, if any.
ii. *Special Administration. If there will be a delay in getting a regular executor or administrator appointed or if there is a special urgency, a qualified person can file a petition for appointment of a special administrator. A special administrator’s primary role is to discover and preserve the assets of the estate until probate can be opened and a personal representative appointed.
iii. Petition for Appointment of Personal Representative. The person or persons entitled by law or under the will to be appointed administrator or executor files a petition to be appointed. If there is a will, the same petition asks the court to admit the will to probate. A “Notice of Hearing” with respect to this petition is mailed to all heirs and will beneficiaries.
iv. *Contest. Heirs and will beneficiaries may file a “contest” opposing the probate of the will and/or the appointment of the petitioner as personal representative. No distributions from the estate will be made until the contest is resolved.
v. Issuance of Letters. Unless there is a contest, it is routine for the petitioner to be appointed as the personal representative. The authority to act on behalf of the estate will be granted by a document called “Letters.”
a. “Letters Testamentary” (for an executor)
b. “Letters of Administration” (for an administrator)
c. “Letters of Administration with the Will Annexed” (for an administrator with the Will annexed)
1. A personal representative has no authority until officially appointed by the probate court.
2. Even if the personal representative is named as executor in the decedent’s will, they have only been nominated; the official appointment comes only by court order.
3. Depending on the state, many actions taken by a personal representative require specific court authorization even after the personal representative has been officially appointed by the probate court.
vi. Estate Administration. The estate-administration period begins when the court grants the order formally appointing the personal representative and ends when the court issues an order formally discharging the personal representative. During the estate-administration period:
1. A notice to creditors is published, and also mailed to known creditors.
2. The personal representative obtains appraisals, gathers assets, and prepares an inventory of the estate. The inventory contains a list of all assets and their respective values (as of the decedent’s date of death).
3. The personal representative pays federal taxes and other priority claims and reviews other non-priority claims.
4. The personal representative makes sure that all estate property is properly protected and prudently invested. As needed, the personal representative petitions for instructions, for confirmation of the sale of assets, for authorization to continue or conduct businesses, and for permission to make specific investments.
vii. Final Account; Decree of Final Distribution; Final Discharge.
1. When a final account has been filed, a petition is filed requesting approval of the final account and a decree of final distribution. If acceptable, the court will order that the final distribution be made.
2. The personal representative makes the approved distribution of the estate’s assets and obtains receipts.
3. Upon the filing of all distributees’ receipts, the court issues an order of final discharge.
4. TRUST OVERVIEW
a. Parties to a Trust
i. Settlor – the settlor (sometimes called a grantor or trustor) is the person who creates the trust and establishes its terms.
ii. Trustee – the person, bank, or trust company who has been entrusted with the trust assets and holds legal title to them. The trustee is the person that administers the trust.
iii. Beneficiary – a person or entity (e.g., charity) for whose benefit the trust assets are being held by the trustee. Most trusts have multiple beneficiaries, including one or more lifetime beneficiaries, as well as one or more remainder beneficiaries.
iv. Multiple parties – There can be one or more settlors, trustees, and/or beneficiaries to a Trust, and the same person can usually be a settlor, a trustee, and a beneficiary of the same Trust.
i. No particular or specific words are required to create a trust; the term “trust” is not required.
ii. Required Elements:
1. Intent to create a trust;
2. Identifiable beneficiary(s); and
3. Assets – property transferred to the trust.
a. A trust has no effect on assets that are not properly transferred to the trust. A pour-over will is recommended to capture any assets that may inadvertently remain outside the trust.
b. Real Property – must be transferred by a deed or other conveyance recognized under the laws of the state in which the property is located.
c. Personal Property – can be transferred to a trustee by a written assignment. It is particularly important that “titled property” (such as vehicles, stocks, and bank accounts) be transferred in a way that will be recognized under state law.
c. Trustee Appointment: A trustee has authority to act as trustee as soon as they have complied with the terms of the document regarding their appointment. Because different trusts have different requirements, it is impossible to outline all specific requirements in this memo.
i. As a general rule however, to become trustee, a person will:
1. Sign a “Certificate of Incumbency”1 indicating that they are the incumbent (i.e., acting) trustee and declaring that they are willing to follow the terms of the trust instrument.
2. Attach to the Certificate of Incumbency a copy of: (a) the predecessor’s death certificate; (b) the predecessor’s resignation; or (c) declarations from a physician stating that the 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.
ii. A trustee can, if they choose, have their appointment confirmed by the probate court, but normally this formal court proceeding is not necessary. On the other hand, if there is a dispute as to the trustee’s appointment or qualifications, or if challenges by beneficiaries are anticipated, court confirmation and a trust administration proceeding in the probate court may be appropriate.
d. Collection and Management of Assets: A trustee’s primary duties are to:
i. Take possession of the trust’s assets;
ii. Manage and properly invest trust assets;
iii. See that debts, claims, taxes, and other expenses are provided for; and
iv. See that distributions are made to beneficiaries as directed in the trust instrument.
e. Administration Generally:
i. Notice to Creditors: If the trustee’s appointment came as a result of the settlor’s death, it is recommended that you sign a “notice to creditors” and have it published. The same notice should be mailed by certified mail, return receipt requested, to known creditors.
ii. Inventory: The trustee’s next responsibility is to ascertain the trust’s assets and make an inventory of them. The inventory must include a value for each item. Real estate, valuable jewelry, and other special collections should be appraised by an independent appraiser. The value shown on the inventory should reflect the net value of each asset.
iii. Protecting Assets; Limiting Liability: It is the trustee’s duty to see that assets are preserved and protected. Accounts at financial institutions belonging to the trust should be held in a federally-insured trust account. Trust assets should be adequately insured against damage, theft, loss, and personal injury claims.
iv. Investments: Unless restricted by the trust instrument, a trustee can generally invest in any type of asset. However, speculative investments are not permitted, and safety must always be a key factor in the trustee’s selection of investments.
v. Trustee’s Accounts: Until a trust is fully distributed, a trustee should prepare a trustee’s account and provide it to each beneficiary (usually on an annual basis).
vi. Distribution: The ultimate goal is to get the trust assets distributed into the hands of those entitled to them. 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.
1. Distributions that are required upon the deceased settlor’s death can be made as soon as the trustee determines that there are sufficient assets to meet the trust’s obligations to creditors, the IRS, and other beneficiaries.
2. Some trusts will allow payments “for” a beneficiary, as well as “to” a beneficiary. This means that a trustee can pay bills directly, buy assets for a beneficiary’s use, and provide services to a beneficiary without directly making payments to the beneficiary.
f. Anticipating Disputes: If a trustee anticipates that some of his/her decisions may be challenged by beneficiaries, if the trustee knows 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 a trustee can use to reduce the potential for controversy.
i. A trustee may wish to simply get the written consent of all affected beneficiaries. When minor or unborn beneficiaries might be affected, this informal option may not work.
ii. Some states allow a trustee to give the beneficiaries of the trust a formal “Notice of Proposed Action.” If no beneficiary objects to the proposed action within a certain amount of time, the trustee may proceed without liability. If a beneficiary objects, the trustee can either not proceed with the proposed action, or he/she can petition the court for approval or instruction.
iii. If the above-mentioned options are not available or appropriate, a trustee may seek court approval for a specific action, especially for actions that are controversial. This gives the beneficiaries an opportunity to express their concerns to the court, but once the court has made a decision, the trustee’s compliance with the court order cannot be subsequently challenged.
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.