Most people do not think about how their living trust will be administered when they die. But there are two important concepts that will help you better design your trust. This article will explain these two important concepts of California trust administration.
Estate planning attorneys will tell you that if you own certain assets, such as a home and investment accounts, your estate will have to go through probate when you die. But if you create a living trust and transfer your assets to it, your family can avoid the high costs and hassles of probate. This is true, but it is also true that your living trust will have to be administered when you die. A trust administration is much simpler and way less expensive than probate, but your successor trustee must follow the California Probate Code rules to administer the trust.
There are two crucial concepts in trust administration that you need to know to help you design your living trust more effectively, and most people do not know them.
Within 60 days of death, your successor trustee must mail a California Probate Code section 16061.7 Notice to all heirs and living trust beneficiaries. Among other things, the Notice states that the recipient may request a copy of the living trust and has 120 days to contest the trust.
There are two categories of people that must receive the Notice and be advised of their right to receive a copy of your trust: 1) Your heirs, and 2) Your trust beneficiaries.
Under California law, your heirs are your children, or the children of a deceased child. If you don't have children, your heirs are your parents. If your parents have passed away, your heirs are your siblings. If you have no siblings, your heirs are your aunts and uncles. If you have aunts and uncles, your heirs are your cousins.
While you are stuck with your heirs, you can choose your beneficiaries.
If you don't want someone who is not your heir to see your living trust after you die, then don't name him as a beneficiary. Anyone you name as a beneficiary of your living trust has a right to a copy of your trust.
The second, and more important concept you need to know regarding your trust administration is that certain beneficiaries can review and scrutinize your trust assets, valuations, and accounting.
One of the primary duties of your successor trustee during a trust administration is to prepare a trust accounting. A trust accounting is usually a spreadsheet itemizing the trust assets, the date of death values, the expenses, and the proposed distribution amounts to each beneficiary.
There are two types of beneficiary distributions: 1) specific dollar amounts or specific property distributions, and 2) percentage distributions, also known as remainder distributions.
For example:
Specific Distribution:
Percentage Distribution:
Specific distributions are easy. Your trustee pays out a predefined dollar amount or transfers a specific property. There is usually no disputing this because the distribution is an amount certain or a clearly identified property.
In contrast, a percentage distribution requires valuing the remaining trust assets and, in many cases, converting the assets to cash, such as selling real property, liquidating investment accounts, and listing the expenses. Your successor trustee must reduce these figures and calculations to an accounting spreadsheet. A simple trust administration accounting may only be one page of a spreadsheet, but many trust administration accountings require many pages.
Anyone you name as a percentage beneficiary has a right to review the accounting and question your successor trustee's figures and calculations. They could even dispute your successor trustee's negotiating skills in the sale of the real property, her timing on the liquidation of your investment accounts, or the expenses.
This may not be a big deal. If your successor trustee is capable and keeps good records, it should not be a problem that the beneficiaries can review the trust accounting - especially if your beneficiaries aren't looking to cause trouble. But of course, that's the point. Some beneficiaries are looking to cause trouble.
Here are a few examples:
Many years ago, we represented a successor trustee who was administering a trust that named five charities as beneficiaries. For some reason, which we never discovered, the director of one of the charities did not like or trust the successor trustee. And rather than sign off on the initial trust accounting spreadsheet, she requested a formal trust accounting.
A formal trust accounting requires significantly more effort than preparing an informal spreadsheet. A formal trust accounting must follow the structure and details outlined in the California Probate Code and usually requires an accountant experienced in preparing accountings for the probate court. These accountings take time and are not inexpensive. And the cost to hire an accountant must be paid out of the trust assets - which means the cost eats into each beneficiary's share, not just the share of the requesting beneficiary.
In this case, the trustee had to hire an accountant to prepare the formal accounting, which delayed the completion of the trust administration by many months. And guess what? After several months and a hefty fee, the accountant's calculations were within a margin of error of the successor trustee's calculations. In other words, it was a waste of time and money. But since California law gives a trust beneficiary the right to demand a formal accounting, she was able to temporarily derail the trust administration because of a personal grievance against the successor trustee.
In another case, we were retained to help a successor trustee, who was the third husband of the decedent. The decedent did not have children, so she named her third husband, two charities, and her nieces and nephews as her trust beneficiaries.
The nieces and nephews contested the successor trustee's trust accounting. They questioned the expenses and the proposed distribution amounts, and they demanded a full formal accounting. They were so aggressive with their demands, as communicated by one of them who was a litigation attorney, that we recommended the successor trustee hire a trust litigation attorney to help him navigate his responses to prepare for a possible lawsuit.
We later learned that the nieces and nephews had no relationship with their deceased aunt. She didn't really know them, and they really didn't know her. She named them as beneficiaries just because she felt a moral obligation to name family as beneficiaries.
Unfortunately, these family members saw the trust administration as a money grab, and they wanted to exploit it.
One year and tens of thousands of dollars of attorney and accountant fees later, the nieces and nephews agreed to the accounting, and the trust administration was finally completed.
If you have children who get along and you intend to leave your estate to your children, then your trust administration should go smoothly. However, if you intend to name charities and individuals other than your children as beneficiaries, be careful.
Sometimes we get a client who wants to name ten or more charities as percentage beneficiaries of their living trust. In those cases, we want to make sure they understand how this will play out. We explain that when they die, all ten charities are entitled to a copy of their living trust and have the right to inspect the successor trustee's accounting and demand a formal accounting.
We also explain that most charities will not make a fuss and will be grateful for the gift. But to hedge against a problem, we encourage them to consider narrowing the number of charities from ten to maybe two or three. Two beneficiaries are less likely to cause problems than ten beneficiaries. In addition, with two beneficiaries, each charity will receive 50% of the total charitable amount, rather than 10%, and a larger gift will have a bigger impact. Less is more.
I strongly recommend you do not name ungrateful, spoiled brat distant relatives as beneficiaries of your living trust.
Choose individuals that you have a relationship with, who will be grateful, and who won't create headaches for your successor trustee.
The inheritance you leave to your beneficiaries will have a big impact on their life. Choose wisely.
Now that you know that your heirs and beneficiaries have a right to read a copy of your living trust after you pass away and that your percentage beneficiaries can demand a formal accounting, let that knowledge inform how you write your living trust and who you name as beneficiaries. BTW, no one has a right to review your living trust while you are alive and competent.
Below are our recommendations:
We have administered hundreds of trusts over the last 25 years, and our experience helps us guide our clients to design their estate plans effectively. Estate planning does not have to be difficult; in fact, it isn't difficult. But it needs to be done with a clear understanding of how it will play out.