A trust is a legal document that a grantor (also known as a trustmaker or settlor) creates. The grantor creates the trust for the benefit and use of a beneficiary. A trustee is a third party who is tasked with maintaining the trust assets and ensuring that they are handled properly.
“Trust administration” concerns the trustee’s job—namely, distributing and maintaining the trust. In this article, we’ll go through the basics of trust administration.
What is Trust Administration?
Trust administration is the last main stage of the trust. It goes into effect when the grantor is incapacitated, dies, or otherwise indicates that he or she wants the trust to be administrated. Trust administration is a process, and it is the trustee’s job to faithfully carry out the wishes of the grantor.
What Does a Trustee Do?
Once the grantor dies, the trustee becomes responsible for a myriad of tasks. These tasks include (but are certainly not limited to) providing copies of the trust and notice of the commencement of administration to all beneficiaries/heirs. State statute or the trust document will specify the format to which the copies and notice must adhere.
The trustee must notify the state of the grantor’s death, request a taxpayer ID from the IRS, file an estate tax return, and handle the process of distributing trust assets and/or proceeds to the proper beneficiaries. The process of trust administration is usually faster, more efficient, and less publicized than court-supervised probate.
However, many trustees are unfamiliar with these procedures. This is why it is important for a trustee to work with a lawyer, CPA, and/or financial advisor to ensure everything is done correctly. This collaboration is yet another important task for the trustee.
Advantages of a Trust
Trusts have many advantages; chief among them is avoiding probate court. According to CNN Business, the basic trust plan will cost between $1,600 to $3,000 (though this is just an estimate—costs can vary). In many states, the typical probate cost will be 5%-10% (again, estimated) of the total value of the estate.
In addition to being faster and more private, trusts are usually more cost-efficient than the probate court process. Depending on the type of trust, trusts can protect your property and assets from lawsuits and creditors.
Trusts can reduce gift and estate taxes. During trust creation, you can name your trust administrator and put conditions on your posthumous asset distribution. This level of personalization is a major benefit of trusts.
Disadvantages of a Trust
As with any legal document, trusts and trust administration have their disadvantages, including the loss of control over assets if you make the trust irrevocable (which means that the trust cannot be changed once the document is finalized).
If you make the trust revocable (which means that the trust can be changed, even after finalization), that revocability may have tax-related consequences. It might also have negative effects on stamp and estate duty and asset protection.
Lastly, bad trustees are out there. You might appoint someone that you think is trustworthy, only to find out that that was a miscalculation. Luckily, courts offer remedies to protect you in the event of trustee misconduct.
It is relatively rare, but it does happen. When a trustee commits misconduct, this is called a “breach of fiduciary duty.” In Florida, there are four main examples of a breach of fiduciary duty: self-dealing, excessive compensation, poor investment choices, and stealing assets.
The first is self-dealing. For example, a trustee who is selling property or using assets for personal gain is self-dealing by using trust assets to benefit his own wallet.
Secondly, a breach might involve excessive compensation. This occurs when the trustee is paying himself too much. Though trustees are legally permitted to accept payment for their efforts, said payment must be reasonable.
Third, a breach occurs if a trustee is making inappropriate or poor investment choices. These choices might be the result of impaired judgment, self-dealing, or both. For example, a trustee investing trust assets into his own underperforming, badly-managed business has engaged in both self-dealing and in improper investment.
Fourth, is just plain old theft. A trustee breaches his fiduciary duty (and may be susceptible to criminal penalties) for stealing assets from the trust. Pilfering assets usually requires intentionality.
The main defense to a breach of fiduciary duty is showing that the trustee was acting within the bounds of the trust document. This process—the allegations and the defense against them—will be handled in a court of law.
Remedies for Breach of Fiduciary Duty
The main defense to a breach of fiduciary duty is showing that the trustee was acting within the bounds of the trust document. This process—the allegations and the defense against them—will be handled in a court of law. The court will hear both sides and determine what relief, if any, is required by law.
There are legal and equitable remedies available to grantors if a trustee breaches his fiduciary duty. These remedies include appointment of a new trustee, damages, a constructive trust, injunctive relief, and even criminal penalties.
When deciding whether to set up a trust, you should consider all the advantages and disadvantages. Even in the event of misconduct, a court can still offer relief. Talk to an attorney about the best decision for you and your property, and learn more from our website.