The family home has been sold, the brokerage accounts have been liquidated, and the money is sitting in the trust bank account. Mom's bills have been paid, and the beneficiaries are eager to receive their inheritance.
As successor trustee, you're probably ready to finish the job, too.
So can you just divide the money among the beneficiaries, write the checks, and close the trust?
Not quite.
Before making the final distributions, the trustee needs to prepare an accounting, determine how much each beneficiary is entitled to receive, and make sure there's enough money left to pay any remaining taxes and expenses.
In most of our trust administrations, this is fairly straightforward. We help the trustee prepare the accounting, send it to the beneficiaries with an agreement and waiver, and arrange for the distributions. The trustee keeps a reserve for taxes and other expenses, and the remaining money is distributed after those obligations have been paid.
Here's how that process works.
Before distributing the trust assets, the trustee needs to make sure the proposed distributions comply with the terms of the trust.
Most of the trusts we administer provide that after the surviving parent dies, the remaining trust assets are distributed equally among the children. But not every trust is written that way. There may be specific gifts, unequal shares, or provisions requiring a beneficiary's inheritance to remain in a separate trust.
The trustee has to follow those instructions.
The trustee should also consider whether the period to contest the trust under Probate Code §16061.8 has expired. That's 120 days from the trust notice, or 60 days after a beneficiary receives a copy of the trust he or she requested during those 120 days, whichever is later. In our practice, we generally prefer to have that period expire or obtain appropriate waivers before making substantial distributions.
We discussed that issue in Can a Trustee Make Partial Distributions?, and how long the trustee has to finish in How Long Does a Trustee Have to Distribute Assets in California?
Before the trustee distributes the money, the beneficiaries should know what happened to the trust assets and how much they're going to receive.
That's the purpose of the trust accounting - to tell the story of the assets.
In most of our administrations, the accounting is a spreadsheet showing the assets and values at the date of death, the money received, the expenses paid, the assets remaining, and the proposed distributions to the beneficiaries.
It should also show the trustee's compensation, if any, and the fees paid to the attorneys, accountants, and other professionals who helped with the administration.
California Probate Code §16062 generally requires the trustee to account to the appropriate beneficiaries at least annually and when the trust terminates, subject to statutory exceptions. Section 16063 sets out the information the accounting must contain.
For most family trusts, we don't need to prepare a formal probate-style accounting with schedules resembling the documents filed in a probate proceeding. We can usually prepare an accounting that complies with California law using a spreadsheet. The point is to provide the beneficiaries with an understandable explanation of what happened to Mom's money. They want to know what the trust was worth, what it cost to administer, and how much they're getting. The accounting should answer those questions.
We explain how to prepare one in How to Prepare a California Trust Accounting.
When the accounting is ready, we generally send it to the beneficiaries with an agreement and waiver for their signatures. The agreement asks the beneficiaries to review and approve the accounting and the proposed distributions. It may also include a waiver of further accounting and a release of the trustee from liability for the administration, subject to applicable law.
Why do we do this?
Because the trustee has been handling someone else's money, often a substantial amount of it. The trustee wants to know that the beneficiaries understand what was done with the assets and agree with the proposed distributions. If all the beneficiaries review the accounting, understand it, and approve it, there's much less opportunity for disagreement later.
For example, suppose Mom's trust has three equal beneficiaries. The accounting shows that the trust received $940,000 after the house was sold and the investment accounts were liquidated. It also shows $40,000 in expenses, leaving $900,000, and a proposed reserve of $30,000. Each beneficiary can see how the trustee calculated the proposed $290,000 distribution.
If the beneficiaries are satisfied, they sign the agreement and the trustee can proceed.
Not necessarily.
California Probate Code §16004.5 says a trustee cannot require a beneficiary to release the trustee from liability as a condition of making a distribution required by the trust.
The trustee can request a voluntary release, seek approval of an accounting, and maintain a reasonable reserve. But the trustee cannot simply refuse to distribute money that the beneficiary is entitled to receive because the beneficiary won't sign a release.
And a release isn't necessarily effective in every circumstance. For example, Probate Code §16464 limits the effectiveness of releases when the beneficiary doesn't know material facts or the release was obtained through improper conduct.
The beneficiaries receive the accounting, review the numbers, and sign the agreement. They want their inheritance, and the trustee wants to finish the administration.
But if a beneficiary has a legitimate objection to the accounting or refuses to approve it, the trustee should get legal advice about how to proceed.
This is one of the most important decisions the trustee makes before distributing the trust assets. Don't distribute every dollar in the trust bank account.
There are almost always some expenses that come later.
The trustee may still need to pay the CPA to prepare the trust's income tax returns. The trust may owe income taxes. There may be supplemental property taxes from the sale of the family home, an unexpected medical bill, or other expenses that haven't arrived yet.
And sometimes you simply don't know what the final tax bill will be until the CPA finishes the returns.
We generally recommend keeping a reasonable amount of money in the trust account to cover these expenses.
How much?
It depends on the facts and circumstances of the trust administration, such as whether additional bills will arise later or the final returns will trigger a large tax bill. We believe it is better to reserve too much than not enough. The beneficiaries will eventually receive the balance of the reserve, but if you run out of money to pay unexpected expenses, you may have a problem.
Once the accounting has been provided, any concerns about the proposed distributions have been addressed, and the trustee has established an appropriate reserve, it's time to distribute the money.
In most of our administrations, this is the easy part.
The trustee writes checks or wires the funds from the trust bank account to the beneficiaries.
Make sure the amounts are correct. If there have already been partial distributions, those payments must be credited against each beneficiary's share.
If all the trust assets have been converted to cash, distributions are usually simple.
But what if some assets aren't cash?
Sometimes the trust provides for a beneficiary to receive a particular asset instead of cash.
For example, Mom may have directed that her daughter receive the family home, or the beneficiaries may agree that one of them will receive the home as part of his or her inheritance.
In that case, the trustee needs to arrange for a deed transferring the property from the trust to the beneficiary and make sure any required county documents are completed.
If the child plans to live in the home, the trustee should also consider whether the transfer qualifies for the Proposition 19 parent-child property tax exclusion. The property generally must have been the parent's principal residence, and the child must make it his or her principal residence within one year of the parent's death. The required claims must also be filed with the county assessor, and the value limitations apply. If the exclusion does not apply, the property may be reassessed and the property taxes could increase substantially. We explain the requirements in our article on inheriting a home with siblings under Prop 19.
If the trust owns brokerage investments that are to be distributed rather than liquidated, the trustee will need to work with the financial institution to transfer the securities to the beneficiaries. This is always easier if the decedent had a good financial advisor who has been helpful in the trust administration.
The same applies to vehicles and other titled property.
When property is distributed to one beneficiary as part of an equal division, the trustee needs to establish its value and make the appropriate adjustments to the other beneficiaries' shares.
This can get complicated.
That's one reason we generally prefer to liquidate the investments and distribute cash unless there's a good reason to do otherwise.
And don't forget the personal property. Before closing the trust, the trustee should make sure that Mom's jewelry, furniture, vehicles, family photographs, and other belongings have been distributed or disposed of as the trust requires.
We discuss those issues in Distributing and Disposing of Personal Property During a California Trust Administration.
This is often the reason the trustee can't close the trust immediately after making the main distributions.
The CPA may still need to prepare the decedent's final personal income tax return and the trust's federal and California income tax returns.
The trust's federal return is Form 1041. California uses Form 541.
Depending on how the trust's income is treated, the CPA may also issue Schedules K-1 to the beneficiaries, reporting income, deductions, or losses that belong on their personal tax returns.
We explain those returns and how they work in Taxes During a California Trust Administration: What the Trustee Needs to Know.
The trustee should coordinate with the CPA before making the main distributions so the CPA knows what has been distributed and how much remains in the trust.
And the trustee shouldn't close the trust bank account while taxes and other obligations remain unpaid.
The reserve is there to pay those bills.
The trustee made the main distributions to the three beneficiaries and kept the reserve in the trust bank account.
Several months later, the CPA has prepared the necessary tax returns. The taxes have been paid, the CPA has been paid, and all the remaining bills have been resolved.
Now the trustee can distribute the balance in the reserve to the beneficiaries.
The trustee should keep a record of those payments and provide the beneficiaries with the final information showing how the reserve was spent.
If the beneficiaries have previously signed appropriate waivers of further accounting, and those waivers are effective under California law, a separate accounting may not be necessary.
Once everything has been paid and the remaining funds distributed, the trustee can close the trust bank account.
We discussed opening and managing that account in How to Open a Trust Bank Account in California After Death.
Generally, no.
One of the benefits of having a living trust is that the successor trustee can administer the assets and make distributions without going through probate court.
In an ordinary, uncontested trust administration, there's no requirement to appear before a judge to obtain permission to distribute the assets.
The trustee follows the trust, provides the required information and accountings, pays the debts and expenses, and distributes the remaining assets.
That's usually the end of it.
Of course, if there's a dispute over the accounting, a disagreement about who is entitled to an asset, or some other serious problem, court involvement may become necessary.
But that's not how most trust administrations work.
Most of the families we represent want to get the administration completed, distribute the assets, and move on with their lives. We try to accomplish that without making the process any more complicated or expensive than it needs to be.
Once the money has been distributed and the bank account is closed, the trustee may be tempted to throw away the paperwork.
Don't.
Keep copies of the trust and amendments, the accounting, bank statements, records of asset sales, tax returns, signed agreements and waivers, receipts, and distribution confirmations.
If a beneficiary asks a question two years later about a particular expense or payment, you'll want to have the records available.
The trustee should retain the records for an appropriate period, taking into account tax rules and any potential claims concerning the administration.
Closing the trust account doesn't mean there's no reason to keep the paperwork.
In most administrations, we make the main distributions once the accounting has been approved and a reasonable reserve has been established. Then, after the tax returns have been filed and the remaining bills paid, the trustee distributes whatever is left in the reserve.
If you're serving as successor trustee, we can help you with the trust administration from start to finish.
Contact us for a free, 15-minute initial call with one of our attorneys.