In a typical trust administration, the family home is sold, the brokerage accounts are liquidated, and all the funds are sitting in the trust bank account. The trustee’s attorney sends the beneficiaries a letter with the trust accounting and an agreement and waiver. Once everyone signs off, the trustee sends distribution checks to the beneficiaries, while holding back enough in reserve to pay taxes, pay the accountant who prepared the tax returns, and cover any miscellaneous bills that might surface.
Maybe the home cannot be sold right away. Maybe it is taking longer than expected to liquidate the brokerage accounts. Maybe beneficiaries are fighting over the decedent’s personal property. Or maybe there is some other issue that will keep the trust administration open for several more months.
Does everyone have to wait?
Usually not.
A trustee can often make a partial distribution before the trust administration is complete, as long as the trustee follows the trust terms, understands what remains to be done, and keeps enough assets in reserve to cover future expenses.
But before making any distributions, the trustee should consider three things:
For the broader sequence of what happens during the first six months of an administration, see California Trustee Timeline: Day 1 Through Day 180.
What does the trust say?
Most trusts are silent on the timing and number of distributions. Most trusts instruct the trustee as to who gets what, not how many distributions the trustee can make before making the final distributions.
But you still need to check.
If the trust requires the trustee to hold an asset or delay a distribution, the trustee has to follow those instructions. If the trust does not prohibit partial distributions, then the trustee can move on to the next question.
As the trustee, one of your first and most important tasks is to send the California Probate Code section 16061.7 Notice to the trust beneficiaries and heirs within 60 days after the decedent’s death. Usually the trustee’s attorney takes care of this.
The notice must include the statutory warning telling the beneficiaries and heirs that they have a limited time to contest the trust. We explain the notice in more detail in What Is California Probate Code §16061.7?
Once the notice is mailed, the recipient generally has 120 days to contest the trust.
Since that contest period is still open, it is usually not a good idea to distribute substantial trust assets before the 120 days have expired.
Unless the beneficiaries waive the remaining contest period.
In trust administrations where the assets are ready to distribute well before the 120 days have passed, we will often send the beneficiaries a trust accounting and an agreement that includes a waiver of the remaining contest period.
In the letter, we explain that the trustee would like to make a distribution, but under the advice of counsel, the trustee should not do so while the right to contest the trust remains outstanding.
In most cases, the beneficiaries sign.
There is a pretty good incentive.
They get paid.
Once the beneficiaries have signed the waiver, the trustee can usually move ahead with the distribution without waiting for the full 120 days to run.
If the trust does not prohibit partial distributions, and the 120-day contest period has expired or has been waived, the next question is whether there are assets ready to distribute.
Often the assets most ready to distribute are cash from bank accounts, liquidated brokerage accounts, or proceeds from the sale of the family home.
By this point, those funds will usually have been consolidated into the trust administration bank account. We explain that process in How to Open a Trust Bank Account in California After Death.
Suppose the trust has $900,000 sitting in the trust account, but the family home cannot be sold for another six months.
There may be no reason to leave all $900,000 sitting there.
The trustee might distribute $200,000 to each of three beneficiaries, keep $300,000 in the trust account, and continue administering the remaining assets.
Or maybe the house sold quickly, but one brokerage account is taking months to straighten out.
Again, there may be no reason to hold up everything because one asset is not ready.
A delay involving one asset does not necessarily mean the entire trust administration has to stop.
Your brother Kenny tells you he needs his money yesterday, and if he doesn’t receive his distribution ASAP, he will lose his house, his wife will leave him, and his dog will run away.
Believe it or not, we hear this often.
With no prior expectation of an inheritance, a beneficiary all of a sudden can’t live without it.
Well, Kenny has to wait.
He got along okay before Mom died, and waiting a few months for the trust administration to be done correctly won’t kill him.
A beneficiary needing money is not, by itself, a reason for the trustee to make an early distribution.
The trustee still has a job to do. As trustee, you have a fiduciary duty to all of the beneficiaries, not just the one who is making the most noise. We explain that duty in What Is Fiduciary Duty in California?.
On the other hand, if the trustee has substantial cash available, the contest period is over, the remaining expenses are reasonably predictable, and the only thing holding up the administration is one asset that may take months to deal with, a partial distribution may make a lot of sense.
The point is not to distribute money because the beneficiaries are asking for it.
The point is to distribute money when it can be done safely.
Even when a partial distribution makes sense, the trustee should not distribute every dollar sitting in the trust account.
There are almost always expenses that come later.
The trust may still have to pay income taxes, property taxes, insurance, utilities, attorney fees, accountant fees, trustee fees (you should be paid for your work), repairs, or other administration expenses. There may also be bills nobody was expecting.
There is no magic percentage that has to remain in the trust account.
The amount of the reserve depends on what is left to do.
If the trustee reasonably expects another $30,000 of expenses, keeping exactly $30,000 is probably cutting it too close. Leave some room.
It is much easier to send the beneficiaries another check when the administration is finished than it is to call them six months later and ask for some of the money back.
The reserve should also be shown in the trust accounting. We discuss that in How to Prepare a California Trust Accounting.
Sometimes the thing holding up the trust administration has very little to do with the cash.
Personal property is a good example.
Maybe two beneficiaries both want Mom’s jewelry. Maybe everyone disagrees about who gets the furniture. Maybe one beneficiary refuses to cooperate with cleaning out the house.
We discuss those issues separately in Distributing and Disposing of Personal Property During a California Trust Administration.
Those disputes can take time to resolve.
But there may be no reason to leave hundreds of thousands of dollars sitting in the trust bank account while everyone argues over the dining room table.
The same can be true if the family home cannot yet be sold.
Maybe a beneficiary is still living there. Maybe repairs are needed. Maybe one beneficiary wants to buy out the others. We discuss those decisions in What to Do With the Family Home in a California Trust Administration.
A problem with one part of the trust administration does not necessarily require the trustee to put everything else on hold.
Every partial distribution needs to be documented.
If the trustee sends Kenny $100,000 today, that $100,000 needs to be reflected as a distribution to Kenny and credited against whatever Kenny is ultimately entitled to receive from the trust.
The trustee should record the date, the amount, and what was distributed.
That gets more important if different beneficiaries receive distributions at different times or if one beneficiary receives property instead of cash - something we do not recommend. If you intend to make partial distributions, make them equal.
Trust administrations do not always proceed in a nice straight line.
Sometimes the house sells immediately and another asset causes the delay. Sometimes the investments are liquidated within weeks but the house takes six months to sell. Sometimes everything is ready except for a fight over Mom’s furniture.
That does not necessarily mean all of the trust assets have to sit untouched until every issue is resolved.
If the trust permits it, the 120-day contest period has expired or been waived, some assets are ready to distribute, and the trustee keeps a reasonable reserve, a partial distribution can make a lot of sense.
The beneficiaries receive part of their inheritance, and the trustee can continue working through whatever remains.
That is often better than leaving a large amount of money sitting in the trust account for months simply because one part of the administration is taking longer than expected.
If you have been named successor trustee of a California trust and would like help, contact us to schedule a free 15-minute initial call with one of our estate planning attorneys.