trust administration: controlling, protecting, and
TRANSCRIPT
Trust Administration: Controlling, Protecting,
and Distributing Trust AssetsTrustee Duties and Powers, Tax Issues, Advances to Beneficiaries, Fees, Expenses, Investments
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TUESDAY, MARCH 2, 2021
Presenting a live 90-minute webinar with interactive Q&A
Vincent M. Casiano, Founder, Casiano Law Firm, San Diego, CA
Gina M. Ciorciari, Attorney, Greenfield Stein & Senior, New York, NY
Benjamin R. Schwefel, Senior Associate, Murtaugh Treglia Stern & Deily, Irvine, CA
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Trustee’s Duties & Powers and
Disclosure & Notice Requirements
Gina M. Ciorciari, Esq.
Greenfield Stein & Senior, LLP
600 Third Avenue
New York, New York 10016
(212)818-9600
Fiduciary Duties
• A Trustee is a fiduciary who is subject to common law duties and
equitable rules or principles, which, in some instances, have been
codified by statute.
• Fiduciary duties are fundamental to the trust relationship, whether
the Trust is created by Will, deed, or other instrument.
Does a Trustee have the Power?
• When determining whether a Trustee has a certain power, the first step is to examine the trustinstrument. If the trust instrument unambiguously confers or denies the power, there is generallyno dispute. If, however, the governing instrument is silent or ambiguous, the next step is toconsult applicable law.
• Most states now have Trustees' powers legislation. For instance, in New York, the EstatesPowers and Trusts Law (“EPTL”), Section 11-1.1, describes a fiduciary’s, including a Trustee’s,powers.
• Although in the trust instrument, the settlor of the Trust may, to some extent, modify a Trustee’sduties and powers and the notice and disclosure requirements, doing so may not be contrary topublic policy, and at the end of the day, the existence of certain duties is critical to theharmonious existence of the trust relationship.
Duty to Act in Good Faith
• A Trustee must continually demonstrate good faith and reasonableness inadministering the trust and in dealing with its beneficiaries.
• Acting in good faith requires the Trustee to comply with the terms of thetrust, fulfill the intentions of the testator or grantor, and follow applicablelaw in distributing or applying trust income and principal to or for thebenefit of the beneficiaries.
• Any attempt to act contrary to the settlor's directions may be deemed toconstitute a breach, for which the Trustee can be subject to liability.
Duty of Care - Duty of Prudence
• The Trustee has a Duty of Care, which is often referred to as the Duty of Prudence. This duty
requires the Trustee to administer the trust as a prudent person would, while exercising reasonable
care, skill, and caution.
• This duty encompasses several duties relating to both the management and investment of the trust
property, which include:
• the duty to collect and preserve the trust property;
• the duty to segregate the trusts assets and not commingle them with the Trustee’s own assets or
assets of other trusts; and
• the duty to invest the trust property as a prudent investor would, while honoring the grantor’s intent
and the interests of the beneficiaries.
Duty to Collect & Preserve Trust Property
• A Trustee must collect all assets belonging to the Trust and place them into a trust account or correctlytitle them in the name of Trust.
• If a Trust property is subject to a mortgage, the Trustee must take reasonable steps to prevent loss ofthe property by foreclosure.
• Similarly, the Trustee is under a duty to protect the Trust property by paying, accurately and on a timelybasis, all legitimate taxes.
• A Trustee must keep the Trust property, such as buildings and equipment, in repair and prevent theft/damage from acts of others.
• A Trustee whose failure to do so results in loss to the trust is ordinarily subject to surcharge. If, as aresult of such a failure, the premises become untenantable, the Trustee may be liable for the loss ofrentals.
Duty to Segregate Trust Property
• A Trustee must keep the Trust property separate from theTrustee's own property; separate from that of other trusts; andmust earmark Trust property as that belonging to the Trust.
• A Trustee who comingles trust funds is guilty of a breach oftrust even if the Trustee does not use the commingled funds forthe Trustee's own purposes.
Duty to Invest as Prudent Investor
• A Trustee must exercise the care and skill of an ordinary prudent person. The Trustee should not use thediligence she employs in her own affairs but rather should comply with the objective standard of the“prudent person,” unless, the Trustee has greater skill than the ordinary prudent person, and then theTrustee’s duty is to use her actual skills.
• The test of prudence is one of conduct not of performance. Whether a breach of trust has occurred dependspurely on whether the Trustee’s decisions and actions were prudent, and not on the outcomes of thosedecisions and actions.
• Where Trust property is lost or destroyed or declines in value, the Trustee will only be liable for surcharge ifshe has failed to exercise reasonable care and skill.
• With a corporate Trustee, one should look to the corporation’s internal organization, and whether thatorganization has functioned properly. To avoid surcharge, the corporate Trustee must be able to show that itconsidered the decision at hand in accordance with its own internal procedures.
Duty to Invest as Prudent Investor
• In New York, EPTL §11-2.3 codifies the “Prudent Investor Act” and provides:
• “A Trustee shall exercise reasonable care, skill and caution to make and implement investment
and management decisions as a prudent investor would for the entire portfolio, taking into
account the purposes and terms and provisions of the governing instrument.”
Duty to Invest as Prudent Investor
• A Trustee has a duty to diversify investments, to minimize the risk of loss. A Trustee should not
invest more than a reasonable portion of the trust estate in a single investment or type of investment.
• The Uniform Prudent Investor Act, for example, provides: "A Trustee shall diversify the investments
of the trust unless the Trustee reasonably determines that, because of special circumstances, the
purposes of the trust are better served without diversifying." Restatement Third of Trusts. See also
EPTL 11-2.3 (b)(3)(c).
• While the Trust may allow a Trustee to invest a larger portion of the corpus in a single investment or
type of investment than would otherwise be proper, or to retain property that was part of the initial
corpus even though doing so would not otherwise be proper, the Trustee ordinarily remains subject to
the duty of prudence, notwithstanding the fact that the terms of the trust purport to waive the duty to
diversify.
Duty to Invest as Prudent Investor
• See e.g., Matter of Hunter, 100 A.D.3d 996, 998, 955 N.Y.S.2d 163, 165 (Surr. Ct., Westchester Co, 2012), as revised (2d Dep’t, 2013), petitioner violated both the prudent-person rule of investment and the Prudent Investor Act by maintaining a concentration of Kodak stock in the Trust for more than 20 years. Contrary to the petitioner's contention, the record supports the findings that the petitioner never formulated any investment plan for the trust that included diversification of the concentration of Kodak stock, that it acted contrary to its own internal policies, which restrict the retention of any one stock unless certain circumstances existed, none of which were present here, and that it failed to establish that it took steps to determine whether it was in the interests of the beneficiaries to retain non-diversified holdings in the trust in light of the purposes and terms of the trust.
Duty of Impartiality
• This is the duty to administer the Trust with impartial consideration for the interests of all the beneficiaries. The Trustee should
endeavor to act in such a way that a fair result is reached regarding the interests of the current or income beneficiaries and those
who take possession of their interests at a subsequent date, keeping in mind any priorities set by the settlor. The duty of impartiality
does not mean the Trustee must treat all beneficiaries equally, but rather the trustee should not unnecessarily show a preference either
for the current beneficiaries or for the remainder beneficiaries who may be or become entitled to principal at a future date. A settlor
may provide guidance to the Trustee to prefer one beneficiary or category of beneficiary over others, and the Trustee must follow
that guidance.
• See e.g., Matter of Mendleson, 46 Misc. 2d 960, 966, 261 N.Y.S.2d 525 (Sur. Ct., Albany Co, 1965): “Fair dealing requires equity for
all and while the balancing of interests might be a problem, a determined effort must be made at all times to follow the middle
course, else a breach of duty may result.”
• The duty of impartiality also has what the Restatement Third of Trusts calls a "procedural" aspect. The duty of impartiality requires
not only that the actual results of the trust's administration reflect due regard for each of the beneficiaries' interests, but also that
the process of administration itself be impartial. Thus, for example, the Trustee must communicate to the beneficiaries in a manner
that fairly reflects the diversity of their concerns and beneficial interests.
Duty of Loyalty
• The Trustee must administer the trust solely for the benefit of the beneficiaries and exclude the
interests of others as well as the Trustee's own personal interest, i.e., to avoid “self-dealing.” Self-
dealing transactions are those by which the Trustee benefits at the expense of the Trust. If the
Trustee engages in self-dealing, the Trustee may be surcharged for any loss the trust has incurred, as
well as for any gain the trust has forgone.
• A Trustee who sells trust assets at an inadequate price without engaging in self-dealing is ordinarily
accountable for only what the Trustee should have received for the trust assets, i.e., their value at the
time of the sale. In contrast, when a Trustee sells trust property that the Trustee is under a duty to
retain, the beneficiaries are ordinarily entitled to set the sale aside and to recover either the property
itself or its value at the time of the decree.
Duty of Loyalty
• As explained by New York’s Court of Appeals in Matter of Rothko, 43 N.Y.2d 305, 321 (1977), “The reason for allowing appreciation damages, where there is a duty to retain, and only date of sale damages, where there is authorization to sell, is policy oriented. If a Trustee authorized to sell were subjected to a greater measure of damages he might be reluctant to sell (in which event he might run a risk if depreciation ensued). On the other hand, if there is a duty to retain and the Trustee sells there is no policy reason to protect the Trustee; he has not simply acted imprudently, he has violated an integral condition of the trust.”
Trust Administration: Control and Protection of Assets
Presented by: Ben Schwefel, Esq.
Murtaugh Treglia Stern & Deily, LLP
Control and Protection of Assets in Trust Administration
www.murtaughlaw.com
Overview:
www.murtaughlaw.com
1. Identify and inventory assets
2. Be careful and identify special circumstances that may exist
3. Marshall and take custody of trust assets
4. Adequately protect and safeguard trust assets
Step #1:
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1. Review title to assets (and create an inventory with appraisals)A. Assets in trust (or sub-trusts)
i. Deeds; account statements; ownership documentation; leases; gift tax returns; estate tax return for deceased spouse; distribution agreement
B. Assets outside the trust (subject to distribution by Will)i. Is legal action required to collect assets into trust?
C. Assets outside the trust (not subject to distribution by Will)i. Beneficiary Designations / Joint tenancy accounts
Step #2:
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2. Identify special circumstances that may affect trust administration
A. Operating Business Interests (buy-sell provisions?)B. Out-of-state real estate
i. Ancillary probate proceedingsC. Depreciating or wasting assetsD. Assets subject to special regulatory or contractual controlsE. Assets subject to options/life estates/rights of occupancyF. Safe Deposit Boxes
Step #3:
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3. Marshall the assetsA. Certification of TrustB. Work with advisers for investment assets
i. Institution-specific forms and processesC. Take possession of the real estate
i. Record Affidavits with County RecorderD. Inventory and take custody of tangible personal propertyE. Forward mail related to trust assets to Trustee (you never know what you’ll
discover!)
Step #4:
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4. Protecting the AssetsA. Notification to Beneficiaries (e.g., Cal. Probate Code Section 16061.7)B. Attend to payment of debts
i. Determine nature and amount of outstanding liabilitiesii. Identify potential creditors and outstanding lawsuitsiii. Optional: creditor’s claim procedure
C. Insurancei. Secure comprehensive coverage for all trust assets (real property,
automobiles, etc.)
Duty to Provide Notice
• The duty to provide notice is critical to the administration of a trust, because the
beneficiaries must have information in order to monitor the Trustee and the decisions
made with respect to trust property.
• The Trustee is under a duty to give the beneficiaries, upon request, complete and
accurate information as to the administration of the trust, unless the request is,
under the circumstances, unreasonable. The beneficiaries are entitled to know what
the trust property is and how the Trustee has dealt with it, and they may examine the
governing instrument, the trust property, the Trustee's accounts, and any other
documents that relate to the trust or its administration.
Duty to Keep Accurate Records
• A Trustee also has a duty to keep clear and accurate records. These records should show
exactly what the Trustee has received and spent. They should show all investment gains
and losses. If the Trust is for successive beneficiaries, the accounts must also allocate all of
the receipts and expenditures between income and principal.
• The Court will resolve all doubts against a Trustee who fails to keep proper records, as the
Trustee should gain no advantage from failing to keep proper records. Any expenses and
costs that arise as a result of the Trustee's failure to keep proper accounts are chargeable
against the Trustee personally, rather than against the trust. If the Trustee fails to keep
proper accounts, the court may in its discretion deny the Trustee compensation for
administering the trust or decrease the amount of compensation otherwise allowable.A Trustee's failure to keep records may also be grounds for removal.
Duty to Account
• Additionally, the Trustee has a duty to render an accounting upon a beneficiary's
reasonable request.
• This can be done informally. However, any beneficiary can compel an accounting in
the appropriate Court. If a beneficiary does so, the Trustee will have to judicially settle his account.
Duty with Respect to Co-Trustees
• In New York, there is no duty on the part of one co-Trustee to ensure the conduct of another co-Trustee, and
the former is not liable for a breach of trust by the latter where it has not aided or participated in the latter's
breach of trust.
• However, a Trustee is under the duty to exercise due care, diligence, and prudence with respect to watching
its co-Trustees and guarding the trust estate against their defaults and breaches of trust, and if it fails to do
so, it is liable for all ensuing losses to the trust estate. The standard of care, diligence, and prudence required,
as in other cases, is that of an ordinarily prudent man or woman in the conduct of his or her private
affairs, and where the Trustee watches its co-Trustees with this standard of care, it is not liable for their
defaults or breaches of trust.
• If, however, a Trustee permits a co-Trustee to dominate the management of the estate, it must assume the
responsibility for the co-Trustee's acts.
• When a Trustee learns of a breach of duty by a co-Trustee, it must take reasonable action to redress the breach
and restore to the trust the diverted asset.
Duty to Enforce Claims,
Pay Debts & Defend Claims
• A Trustee has a duty to take reasonable steps to enforce all claims held in trust. If a claim that would have been
collectible becomes uncollectible because of the Trustee’s delay in enforcing it, then the Trustee is likely subject to
surcharge for the full amount of the claim, plus interest.
• If a debtor fails to pay a debt due to the trust, it is ordinarily the duty of the Trustee to enforce payment. If,
however, it appears reasonable for the Trustee not to bring such an action, whether because the expenses of the
action would exceed the likely recovery, because of doubt as to whether the action would be successful, or because
of doubt as to whether the judgment would be collectible, the Trustee need not do so.
• Similarly, the Trustee will only have a duty to defend claims against the trust when it is reasonable under the
circumstances. Ordinarily, a Trustee should defend actions that might result in a loss to the trust. A Trustee who
loses in the trial court may be under a duty to appeal to a higher court, if, under all the circumstances, it would be
unreasonable not to do so.
Duty to Wind up the Trust
• The Trust terminates not on its termination date but only when the Trustee has
rendered a final accounting and conveyed the trust property to those who are entitled
to it.
• After the termination date, the Trustee must endeavor to wind up the trust within a
reasonable time. What constitutes a reasonable time depends, of course, on the
circumstances. Sometimes, a considerable period elapses before it is possible to wind
up the trust and distribute all the trust property. During this period, the Trustee has
such powers as are necessary to preserve the property and to ensure that the property
remains reasonably productive.
Questions?
Gina M. Ciorciari, Esq.
Greenfield Stein & Senior, LLP
600 Third Avenue
New York, New York 10016
(212)818-9600
Trust Administration: Dealing with Beneficiaries
Presented by: Ben Schwefel, Esq.
Murtaugh Treglia Stern & Deily, LLP
Dealing with Beneficiaries
www.murtaughlaw.com
Overview:
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1. Identify beneficiaries, provide notice as required by law, and be mindful of family dynamics
2.Understand distributive provision for each beneficiary
3. Communicate with beneficiaries regularly
4.Making distributions and accounting to beneficiaries
Step #1: Identify Beneficiaries
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1. Identify beneficiaries and provide notice as required by lawA. What are the ages of the beneficiaries taking under the instrument?B. Are there charitable beneficiaries involved?C. Are there specific bequests beneficiaries?D. Be aware of family dynamics! Look for:
i. Strained relationships between siblingsii. Afterborn children/ex-spousesiii. Lifetime gifts to certain childreniv. Conflict of interests (beneficiary and trustee)
Step #2: Distribution Provisions
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2. Determine operative distributive provisions for each beneficiaryA. Common Trust or Separate Shares?B. Outright distribution? At specific ages?
i. Other withdrawal rights?C. Distribution for HEMSD. Distributions for other specific purposes
i. Incentive provisionsE. Fully discretionary distributions
Step #3: Communication
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3. Communicate with Beneficiaries (per state law and trust)A. Send initial notification of trusteeB. Provide regular reports to the beneficiaries
i. Monthly/Quarterlyii. Big milestones (sale of property; transition to next steps)
C. Optional: Sharing regular financial updates with beneficiariesD. Remember family dynamics and adjust accordingly
i. Engage a trust litigation attorney early if you suspect potential litigation to arise
Step #4: Distributions and Accounting
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4. Distributions and AccountingA. Distributions
i. Specific Distributionsii. Preliminary Distributionsiii. Distribution Agreementiv. Receipts
B. Accountingi. Waiver of account or informal accounting (and release of Trustee)ii. Court-approved accounting
Trust Administration: Controlling, Protecting, and Distributing Trust Assets
V. Division and Distribution of Assets
Presented by Elder Law and Estate Planning AttorneyVincent M. Casiano, Esq.
• Read the Trust completely and identify all provisions regarding distributions as well as provisions regarding allocation of principle and income.
• Division and distribution is decidedly different where the administration is following the death of a spouse compared to a RLT where both Trustors have passed.
• Many trusts include specific distributions that generally are distributed from the trust estate before the remaining trust property is divided and distributed.
• Itemize specific distributions including the beneficiary, timing, and any contingencies – i.e. property (cash or TPP), when distribution should be made, is distribution subject to encumbrances, survivorship requirements (when does inheritance vest)
• Remainder provisions – outright distributions vs distributions held in trust – get complete contact info for beneficiaries
Trust Validity• Ensure that all persons entitled to notice of trust
administration have been served with notice under Prob Code §16061.7 and that the 120 - day period has expired before making any distributions.
(h) If the notification by the trustee is served because a revocable trust or any portion of it has become irrevocable because of the death of one or more settlors of the trust, or because, by the express terms of the trust, the trust becomes irrevocable within one year of the death of a settlor because of a contingency related to the death of one or more of the settlors of the trust, the notification by the trustee shall also include a warning, set out in a separate paragraph in not less than 10-point boldface type, or a reasonable equivalent thereof, that states as follows:
“You may not bring an action to contest the trust more than 120 days from the date this notification by the trustee is served upon you or 60 days from the date on which a copy of the terms of the trust is delivered to you during that 120-day period, whichever is later.”
Determine Tax Liabilities
• Work with CPA or other tax professional to determine tax liability for decedent’s personal tax returns, trust, capital gains tax liability as well as other potential liabilities to determine if any reserve is need before making distributions• Will distribution of assets cause a recognition of income?• Income in respect of a decedent (IRD) refers to untaxed income that a decedent had earned or had a right to receive during their lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income• 26 CFR § 1.661(a)-2 - Deduction for distributions to beneficiaries
Timing of Distributions
Distributions before end of taxable year:65-day election under [IRC §663(b)]General rule. “If within the first 65 daysof any taxable year of an estate or atrust, an amount is properly paid orcredited, such amount shall beconsidered paid or credited on the lastday of the preceding taxable year.”
Division of Assets• Joint trusts oftentimes include mandatory division of assets upon the death of the first spouse that fund subtrusts• Normally an administrative trust is created with the decedent’s separate property and ½ of the community property which then pays last illness expenses and administrative costs and allows time for the trustee to determine what allocations need to be done.• Provisions will provide guidance on the allocation and funding of the survivor’s trust, marital trust, credit shelter trust, etc.
Duty to an Account
16062. (a) Except as otherwise provided inthis section and in Section 16064, the trusteeshall account at least annually, at thetermination of the trust, and upon a changeof trustee, to each beneficiary to whomincome or principal is required or authorizedin the trustee’s discretion to be currentlydistributed.
Provide Account and Proposed Plan of Distribution
In an unsupervised trust, provide an accountand proposed plan of distribution and utilizethe protections provided in Prob C §16461(c):
“… a provision in a trust instrument thatreleases the trustee from liability if abeneficiary fails to object to an item in aninterim or final account or other writtenreport within a specified time period …”
Obtain Consents and Releases
Prob C §16463- any beneficiary who has consentedto particular action by a trustee may not hold thetrustee liable unless a statutory exemption applies.
Prob C §§16004.5 and 16464(b) - a beneficiary whohas released a trustee cannot after doing so hold thetrustee liable, but it must be voluntary and therelease may not be contingent upon the beneficiaryreceiving a distribution for which they are entitled
If consents are not forthcoming wait 180 days afterserving account and proposed distributions
Obtaining Court Approval
In unsupervised trusts consider whether court confirmation of account is prudent (balancing cost vs trustee liability) under ((Prob C §17200(6) (Petition for written instructions) or utilize the notice of proposed action under (Prob C §§16500-16504) if no objection is expected to a particular action or non-action, but want to minimize trustee liability
Receipts
Ensure you obtain beneficiary social security numbers by sending a W-9 before making distributions
Obtain written receipts for distributions.
VI. Disbursement of fees and expenses
Disbursement of Expenses
Payment of administrative expenses is normally an ongoing process throughout trust administration. Sometimes trustees will pay from their own funds administrative expenses or incur costs for which they request reimbursement. All expenses disbursed are required to be itemized in an account filed with the court if the trust is court supervised.
Disbursement of Expenses
In a non-court supervised trust, accounts provided to beneficiaries do not comply with all requirements under Prob C §§ 1060-1064. However, it is best to provide a summary of expenses at a minimum. Trustees should be cautious of relying on a beneficiaries’ waiver of an account as no statute of limitations begins to run.
Distribution of Trustee Fees
Need to determine how much trustee is entitled to be paid.
As a general rule trustee compensation is governed by the trust instrument.
Ordinary compensation vs extraordinary compensation.
Distribution of Trustee Fees
In court supervised trusts, counsel needs to review local court rules and published guidelines to determine allowable compensation guidelines and then must obtain court approval of any compensation.
See Prob C §§17300–17354
Petition for approval
The more compensation requested the more detailed the explanation of duties or services performed, the time spent, the hourly rate charged, the necessity of performing the task, the difficulty of the task, the results achieved and the benefit to the trust is warranted and expected by the court.
Related Note
Allocation of compensation to income and/or principal. Uniform Principal and Income Act (UPAIA) (Prob C §§16320–16375) governs all trusts existing on or after 1/1/2000, unless trust instrument states otherwise.
Disbursement of Attorney Fees
Payment of attorney fees from a trust needs to obtain court approval in a court supervised trust and there is a difference between ordinary compensation and extraordinary compensation.
Attorney Fees in Trust DisputesDifferentiation between litigation involving third parties and litigation involving disputes brought by beneficiaries alleging trustee misconduct and litigation involving a trustee defending the validity of the trust. Where a trustee successfully defends against removal, attorney fees are generally allowable from the trust. Similarly, where a trustee successfully defends a contest to invalidate a trust attorney fees are generally approved.If the trust includes an authorization to defend claims challenging the validity of the trust, attorney fees will probably be granted even if the defense is unsuccessful.
Attorney Fees in Trust Disputes
Underlying principle is the allowance of attorneys’ fees incidental to litigation from the trust is that litigation is a “benefit and a service to the trust”. Estate of Schloss (1961) 56 C2d 248, 256
Statutes Cited
I have compiled a list of statutes referenced in this presentation and am more than willing to provide that list to anyone who requests it.
Email: [email protected]
Phone: 619-800-6820