Law Office of Eric Holk

Certified Specialist in Estate Planning, Trust & Probate Law
The State Bar of California Board of Legal Specialization

60 Garden Court, Ste. 205
Monterey, CA 93940
Phone: 831-622-8808
Fax: 831-655-3660

EXECUTORS & TRUSTEES: WHAT YOU OUGHT TO KNOW

THE DIFFERENCE BETWEEN AN EXECUTOR AND A TRUSTEE

An Executor is the person named in a Will and appointed by the court to be in charge of probating the Will and settling the estate under the court’s supervision. In order to be appointed by the court, a petition for probate must be filed with the court, and if the nominated Executor agrees to serve and no one objects, the court will issue “letters testamentary” which authorize the Executor to gather up the estate assets, open an estate bank account, sell assets, pay creditors, and ultimately, upon court authorization, distribute the estate assets (after debts, taxes and administration expenses are paid) to the heirs in accordance with the terms of the Will.

A Trustee is the person in charge of the assets held in a trust, and is normally named as trustee in the trust. If the trust is a living trust, probate will be avoided for the assets held in the trust, and court supervision is usually not necessary. In such a case, the Trustee may perform many of the same tasks that the Executor would otherwise handle, except without the burden of probate. If the trust is created in the deceased person’s Will, it is a testamentary trust and it will be subject to the supervision of the Probate Court. In either case, the Trustee is responsible for managing and distributing the trust assets to or for the benefit of the beneficiaries of the trust in accordance with the terms of the trust.

SELECTING A TRUSTEE OR AN EXECUTOR

The choice of a trustee or executor is a decision that should not be made lightly. Serving as a trustee or executor is not just an "honorary" role -- it requires someone who is:

  • honest and trustworthy
  • conscientious
  • able to do the work
  • available
  • willing to serve
  • organized
  • savvy about investments and taxes
  • neutral & unbiased
  • a good listener and communicator
  • attentive to details
  • able to handle & resolve conflicts
  • careful about keeping records

Most often, people name a spouse or adult child as executor/trustee, but this is not always the best choice. Consider the above qualities – if your family member doesn’t measure up, pick someone else.

You don’t have to name a family member. It may be better to name a friend, your accountant, a professional fiduciary, or a bank or trust company.

WHAT DOES AN EXECUTOR OR TRUSTEE HAVE TO DO?

The responsibilities of Executors and Trustees are very similar (see The Primary Responsibilities of the Executor and Duties of a Successor Trustee . . .*), but there are some important differences.

  • Executors must deal with probate; trustees of revocable living trusts normally do not.
  • Once probate is concluded, the executor’s job is done; a trustee may have ongoing trust administration responsibilities for a period of years if the trust assets are not distributed right away.
  • Executors must account to the court for the assets of the estate; trustees may or may not have to account to the court (but they must account to the beneficiaries).

* Note: The checklist of Duties of a Successor Trustee is very generalized, and should not be construed to address everything the successor trustee may have to do. The “Duties” checklists are somewhat different for surviving spouses who are the trustee for simple spousal trusts or A-B trusts.

Both Executors and Trustees can have a lot of work to do in administering the estate, and it is not a task to be taken lightly. If someone does the job badly, it can create major problems for the heirs.

HOW MUCH TIME WILL IT TAKE?

That all depends. A simple probate in California may take 9 to 12 months (sometimes more) to complete. The settling of an estate where assets pass by revocable living trust, joint titling, and/or beneficiary designations can be completed in much less time if there are no tax issues involved. If the estate is a taxable estate, it may take up to 15 months (or longer) to settle, whether or not probate is involved. If there are complications or litigation or the trust is designed to continue on for a period of years or for a beneficiary’s lifetime, it could take many years before the trustee’s duties are completed.

WHAT ABOUT COMPENSATION?

An Executor is entitled to a “statutory fee” for services performed. This amount is a percentage of the value of the assets that are subject to probate.

A Trustee is entitled to receive “reasonable compensation” for services rendered as trustee. What is “reasonable” depends on the circumstances, the trustee’s skill level, the nature and extent of the assets in the trust, and other variables. Banks and trust companies normally have standard fee schedules for trustee services. Co-trustees should be compensated in accordance with the amount of work each person performs.

In either case, compensation paid to the Executor or Trustee will be taxable income to them. [Note: You can leave a bequest “in lieu of” compensation that will be tax-free to them.]

CAN I NAME MORE THAN ONE PERSON AS EXECUTOR OR TRUSTEE?

YES. You can name two (or more) Co-Executors or Co-Trustees. However, you must decide whether each person should be authorized to act alone for the estate or trust, or if both must act together. Also, consider the possible complications, and what is to be done if they cannot agree.

It is possible to name an individual and a bank or trust company as Co-Executors or Co-Trustees, and this sometimes can be the best solution to provide a combination of personal attention and professional accountability.

WHAT IF YOU ARE ASKED TO SERVE AS AN EXECUTOR OR TRUSTEE?

Consider this very carefully. Know what you are getting yourself into ahead of time. Ask lots of questions (see “Questions You Should Know the Answers to …”). Make sure someone else is named as your backup, just in case you cannot serve (or are no longer willing to serve) when the time comes.

Beware of surprises:

  • Blended families that don’t get along.
  • Problem children (drugs, alcohol, schizophrenia, prison, etc.).
  • Family business with no succession plan.
  • Taxes & debts with insufficient liquid assets to pay them.
  • A family member who won’t move out of the family home.
  • Joint accounts that end up passing outside the will or trust.
  • Parents who decide on an unequal distribution to the children but who never warned them that this was what they planned to do.
  • Unusual or hard-to-value assets in the estate.

If there is a possibility that any of these situations may exist, you need to have a serious discussion with the person whose estate you will have to administer. You need as much detail as you can get about what to expect and any advice on how to handle it.

REVIEW YOUR EXECUTOR/TRUSTEE DESIGNATIONS REGULARLY

Changed circumstances regularly require changing one’s designated Executor or Trustee. Death, chronic illness, estrangement, relocation, and changing family obligations are some of the most common reasons why a named Executor or Trustee may no longer be the best choice. Keep your will or trust current!

FOR MORE INFORMATION:

The Executor’s Guide: Settling a Loved One’s Estate or Trust, by Mary Randolph; Nolo Press.

How to Settle an Estate, by Charles K. Plotnick & Stephan R. Leimberg; Consumer Reports Books.

How to Settle Your Living Trust, by Henry W. Abts III; Contemporary Books.

The Executor’s Handbook: A Step-By-Step Guide to Settling an Estate for Personal Representatives, Administrators, and Beneficiaries, by Theodore E. Hughes and David Klein; Facts on File.

Executor & Trustee Survival Guide, by Douglas D. Wilson; Fiduciary Pub.

How to Administer an Estate: A Step-By-Step Guide for Families and Friends, by Stephen G. Christianson; Career Press.

GENERAL PRINCIPLES OF TRUSTEE FIDUCIARY DUTY:

  • The trustee has a duty to administer the trust according to the terms of the trust. The trustee must therefore read the trust document and become familiar with its terms. The trustee should retain counsel to provide advice and guidance.
  • The trustee has a duty to administer the trust solely for the benefit of the beneficiaries of the trust. Where there are multiple beneficiaries, the trustee must deal impartially with all beneficiaries: the law prohibits favoring one beneficiary over others unless the trust expressly requires that.
  • The trustee has a duty of loyalty and must avoid conflicts of interest. (The trustee should not borrow money from the trust or use trust funds to invest in the trustee's own business ventures, for example.)
  • The trustee has a duty to keep control of and preserve the trust property; to make the trust assets productive (income-producing) unless otherwise stated in the trust; to keep trust property separate from other property; to enforce claims on behalf of the trust; and to defend actions that may result in a loss to the trust.
  • The trustee generally may not delegate trustee duties to others, except for investment and management functions permitted by law. If an individual trustee is not knowledgeable about investments, the prudent course of action is to hire an investment advisor to assist with the structuring and monitoring of the trust investment portfolio. [Hiring an attorney or an accountant to advise the trustee and prepare trust tax returns is not a delegation of duties.]
  • The trustee (if the trust is irrevocable) must periodically account to the trust beneficiaries -- the trustee cannot keep his/her actions secret. Beneficiaries are entitled to receive a copy of the trust when the trust becomes irrevocable.
  • If a trust has two or more co-trustees, each trustee is legally required to participate in the administration of the trust and make sure no other trustee commits a breach of trust.
  • The trustee must comply with the provisions of the Prudent Investor Rules as set forth in state statutes (see below).
  • Trust litigation is expected to be a booming legal field in the years ahead as trusts become increasingly common. Much of the litigation will center on the actions of the trustee and whether the trustee failed to comply with the law.

[The California statutes governing the duties of a trustee are set forth in Probate Code §§16000-16105.]

UNIFORM PRUDENT INVESTOR ACT [CA Probate Code §§16045-16054]

  • These rules apply only to irrevocable trusts, not to trusts that are still revocable. [But note that revocable trusts typically become irrevocable at the death of the person who established the trust.]
  • The trustee must manage the trust assets for the benefit of both current and future beneficiaries without favoring one over the other. This means that trust assets may not be invested solely for current income or for future growth. (For example, a conservative portfolio consisting entirely of money market funds and U. S. Treasuries would not comply with the Prudent Investor Rule.)
  • An investment portfolio must be structured to take into account: (1) the purpose of the trust, (2) the needs and other resources of the beneficiaries, (3) the risk/return ratio of individual investments, (4) the possible effects of inflation and other economic conditions on the trust assets, (5) the tax consequences of investment decisions, (6) the expected total return, and more.
  • Diversification is mandatory "unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying." If the trust consists primarily of a closely-held business or a single large real estate holding, the diversification requirement may be waived.
  • Trustees are now permitted to delegate investment and management functions, so long as the trustee monitors the persons handling these functions.

QUESTIONS YOU SHOULD KNOW THE ANSWERS TO IF YOU ARE NAMED AS SOMEONE’S EXECUTOR OR SUCCESSOR TRUSTEE

The Executor/Successor Trustee needs to ask the following questions [not all questions will apply in every case]:

  • Where do you keep your will or trust?
  • Do you have any special directions for them regarding how your assets are to be distributed (especially tangible personal property like jewelry, art, books, collectibles, furniture, etc.)?
  • What sort of assets do you have? (Real estate, stocks, bonds, mutual funds, life insurance, annuities, U.S. savings bonds, bank accounts, partnerships, a business?)
  • (If you have a living trust . . . ) Are all of your assets properly titled in trust name?
  • Do any of your beneficiaries owe you money? If so, how should this be handled? Will this be considered a part of that person’s share of the estate, or what?
  • Will there be enough cash available to deal with foreseeable expenses and taxes?
  • If there will be estate taxes due and payable, what assets will be used to pay for this?
  • What are your debts/liabilities (and contingent liabilities) and how will these be paid?
  • Is there any life insurance? If so, who is the beneficiary? Where is the policy?
  • Are there other assets that will pay death benefits? If so, how do I claim these?
  • Who are the designated beneficiaries on IRAs, annuities, and other such assets?
  • Will there be any ongoing support obligations for dependents?
  • Where are your important papers kept? [deeds, vehicle “pink slips”, savings bonds, stock certificates, investment and bank account statements, insurance policies, pension information, etc.]
  • Do you have a safe or safe deposit box? If so, where is it located, and where is the key/combination kept?
  • If there is a business involved, what is the plan for business continuation or transfer upon your death? Where are the business records kept?
  • What are the names, addresses and phone numbers of all your beneficiaries?
  • What are the names, addresses and phone numbers of your accountant, attorney, investment advisor, insurance agent?
  • Do you have a cemetery plot or prepaid mortuary arrangements? If so, where?
  • Are there any special circumstances involving your beneficiaries that I should know about? [problem relationships, troubled marriages, substance abuse problems, physical or mental disability, financial irresponsibility, threatened lawsuits, etc.]
  • If you keep your financial records on a computer, please give details and password.

PRIMARY RESPONSIBILITIES OF THE EXECUTOR

  • Probate the Will and get appointed by the court.
  • Obtain certified copies of death certificate.
  • Submit claim(s) for life insurance benefits if the estate is the beneficiary (get Form 712 from insurance company and consider mode of payment - lump sum, annuity, etc.).
  • Submit claim(s) for pension and profit-sharing plan benefits, if any.
  • Secure the decedent’s home and arrange for distribution/sale of personal property.
  • Inventory safe deposit box and close out decedent's bank accounts.
  • Notify creditors and close any existing credit accounts.
  • Open estate checking and savings accounts.
  • Account for all assets in the estate and file inventory of assets with the court.
  • Get date of death appraisals for all real property and securities.
  • Take care of any of decedent's unpaid medical and funeral expenses.
  • Verify and pay valid debts and expenses of the estate.
  • Obtain copies of all gift tax returns filed by decedent, if any.
  • File final Federal and State individual income tax returns for decedent by April 15 of the year following the year of death.
  • Arrange for ancillary probate administration for out-of-state real property, if any.
  • File Federal Estate Tax return (and possibly State forms) if the estate exceeds the allowable estate tax exclusion amount – return and taxes are due 9 months after date of death.
  • Pay the attorney, accountant, appraiser, etc., for their services.
  • File final accounting or informal family agreement.
  • Arrange for final distribution of assets and recording of court order affecting real property.
  • Record "Affidavit of Death of Joint Tenant" for any real property held in joint tenancy with right of survivorship titling. For property transferred to decedent’s children, arrange to file the Claim for Reassessment Exclusion for Parent-Child Transfer.

Note that many items on this list will require the involvement of some outside professionals, such as a lawyer, accountant, appraiser, realtor, stockbroker, etc., and that this is not an exhaustive listing of all executor duties. More complicated estates involve many additional duties.

If the decedent's assets were held in a revocable living trust, there may be no need for a probate, so some of these functions related to probate will not be necessary. The trustee, however, will perform many of these functions.

THE COST OF PROBATE

The fees paid to the executor and to the estate's attorney in California for their services in handling a probated estate are set by law (See California Probate Code Sections 10800 through 10814), and represent a portion of the value of the assets that go through probate. These "statutory fees" range from 4% of the first $100,000 of assets that go through probate down to 1/2 % or a "reasonable amount to be determined by the court" for probate estates in excess of $25,000,000. [Note that estates valued below $100,000 are normally exempt from full probate proceedings; assets are typically transferred by affidavit.]

The percentages set forth in the California Probate Code are as follows:

4% of the first $ 100,000
3% of the next 100,000
2% of the next 800,000
1% of the next 9,000,000
1/2% of the next 15,000,000

These fees work out to the following amounts paid to both the executor and the attorney for the estate:

Value of
Probate Estate
Statutory Fee
$100,000 $ 4,000
200,000 7,000
300,000 9,000
400,000 11,000
500,000 13,000
600,000 15,000
700,000 17,000
800,000 19,000
900,000 21,000
1,000,000 23,000
1,200,000 25,000
1,500,000 28,000
1,800,000 31,000
2,000,000 33,000
2,500,000 38,000
3,000,000 43,000
3,500,000 48,000
4,000,000 53,000
5,000,000 63,000
6,000,000 73,000
7,000,000 83,000

These fees are based upon the gross value of the assets that go through probate as shown on the estate inventory, plus the income (dividends, rents, interest) collected during probate, plus any gains from the sale of estate assets, less any losses upon the sale of estate assets. Either the executor or the attorney can waive all or a part of their statutory fee. If taken, the fee is taxable income to the recipient. If there is more than one executor or attorney, the fee is divided accordingly.

Extraordinary fees (i.e., fees payable in addition to the above statutory fees) are granted for appraisals, tax work, costs of sale of estate assets, litigation, expenses for running the decedent's business, and any unusual matters. All of the statutory and extraordinary fees are paid by the estate at the conclusion of probate and upon a court order.

In addition to these fees, there are separate fees for the probate court filing fee (which can range from a few hundred dollars to several thousand dollars, depending on the size of the estate), a legal notice publication fee, appraisal fees, and fees for certified copies of court documents.

 

60 Garden Court Suite 205
Monterey, CA 93940
ph: 831-622-8808
fax: 831-655-3660
office@trusts-etc.com

Information is copyrighted by Eric N. Holk, 2012.

No information on this website shall be construed as legal counsel.
If you need legal advice, please contact Mr. Holk or another qualified attorney.
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