Trust Administration

What to do if There is a Recent Death and you are Appointed as an Executor, Representative, or Successor Trustee.

Trust Administration after a Grantor (i.e., the maker of the Trust) Dies.

• Successor Trustees

A Successor Trustee is the person who takes over for the Original Trustee should the time come.  This can occur because the Original Trustee passes away, becomes incapacitated, or simply chooses not to manage the Trust anymore.  A Successor Trustee can be an individual you designate in your original documents, or it can be a private company or law firm (such as Cantor Law Group) that runs the Trust for you.  This is sometimes known as “Trust Administration.”

Successor Trustees Appointed by the State.  Pursuant to ARS 14-10704 of the Arizona Trust Code, a Successor Trustee will be appointed by the State when there is a “vacancy” created by one of the Trustees.  A specific order of appointment must be followed in this priority: (1) first priority is a person designated by the Trust to act as Successor Trustee; (2) next by a person who the Qualified Beneficiaries unanimously agree upon as being a Successor Trustee; and lastly (3) by a person the Court appoints.

Although it appears that only the Qualified Beneficiaries can appoint a Successor Trustee, this does not mean that the Non-Qualified Beneficiary has no say.  All Non-Qualified Beneficiaries can file a Petition with the court to remove a Trustee who is appointed by a Qualified Beneficiary, if they can show it would be in the Trust’s best interest.

A Successor Trustee needs to be Empowered by the Trust documents to act on behalf of the Trust itself.

• The first thing a Successor Trustee needs to do is review all Trust documents.  If we have designed the Trust for you, they can contact Cantor Law Group and we will help explain these documents and the duties that they require.  Once the Successor Trustee has reviewed the documents, they need to decide if they actually want to serve.  If they do agree to serve, then they have a duty to show that they are qualified to handle this role.  At your direction, we will create a “Certificate of Trust,” which will include all circumstances of how the Successor Trustee came to be nominated by you, the Grantor.  Once that information is set forth in the Certificate of Trust, then anyone who deals with the Successor Trustee in connection with your Trust, can reasonably be assured that they are dealing with the right person.
• Next, inside of your Trust Agreement we shall include, a list of all Specific Powers and abilities that the Successor Trustee is allowed to undertake on the Trust’s behalf.  If this “Trust Powers Provision” is not included in the Trust document, then there is a presumption that the Successor Trustee is not allowed to act on the excluded transaction.  This can have the unintended consequence of going against the Grantor’s original intent.  This is why it’s important to speak in detail with your Cantor Law Group Estate Planning Attorney, in order to cover all potential “Specific Powers” that you wish the Successor Trustee to obtain.

Fiduciary Duties of a Successor Trustee

The Arizona Uniform Trust Code Requirements that are Imposed on All Successor Trustees.  

• Per the Arizona Uniform Trust Code (AZUTC), it contains very specific requirements and duties that the Successor Trustee must abide by.  For example, a Successor Trustee is required to provide all the Qualified Beneficiaries with copies of the Will, Trusts, and Estate Planning documents.  In addition, they should always provide an Inventory of all assets, and an accounting of all money, stocks, and property.  In some cases, this has to be done in 60 days or less.  Consult your Cantor Law Group Estate Planning Attorney immediately upon becoming a Successor Trustee.

Additional information that a Successor Trustee should provide to the Beneficiaries is their contact data, and how to formally make objections to any planned distributions or changes that the Successor Trustee plans to make with Trust Assets.  One of the biggest issues that we see arise is the Trustee’s appetite for market risk.  Most Grantors of a Trust are fairly conservative when it comes to market risk, and this sometimes goes against the wishes of the Beneficiaries, who wish to jump on the newest hot stock or hot business trend.  Lastly, the Arizona Attorney General might need to be notified of the Successor Trustee’s appointment, should they be taking over a Charitable Trust.  Contact your Cantor Law Group Estate Planning and Trust Attorney to find out your immediate duties as a Successor Trustee.

Lastly, these duties continue throughout the life of the Trust, and during the Successor Trustee’s reign.  At a minimum, full accountings and disclosures should take place at least on an annual basis to all Qualified Beneficiaries.  This should also happen upon the Conclusion and wrapping up of a Trust.  A Successor Trustee also has to be aware of the differences in laws should a piece of property reside outside the State of Arizona.  Each individual State has separate requirements and it is necessary to navigate the rules and regulations of each State in regards to property management and Trust Administration.  Again, Cantor Law Group’s Estate Planning and Trust Lawyers can help you secure legal representation in any state in the U.S. where a piece of property is located.

 

• Husband and Wife “A-B Trusts,” and Trust Divisions 

At Cantor Law Group, we will specifically draft Trust Agreements that provide spouses with the ability to divide the Trust into two Sub-Trusts upon the passing of the first spouse.  This is done for Estate Tax purposes, in order to take advantage of the Estate Tax “Coupon.”  This particular tax-saving devices allows each spouse to transfer $13.61 million dollars of their estate (as of 2024) to others without incurring Estate Taxes – which can run as high as 40%.  By splitting the original Trust into two Sub-Trusts, we can take advantage of the Deceased Spouse’s “Coupon” and combine it with the Surviving Spouse’s Coupon.  The Estate Plan then needs to specifically state what assets are allocated to each Sub-Trust, as to fully take advantage of the combined “Coupon” at the passing of the second spouse – thereby totaling $27.22 million in “Exemption” before Estate Taxes would come into play.

• Beware: If a division and a Sub-Trust is not accomplished after the passing of the first spouse, then the Grantor’s goals may not be met.  For instance, if the Surviving Spouse wishes to change Beneficiaries, or marries another, and the full “Coupon”/Estate Tax Exclusion may not occur.  Many lawsuits have occurred over poor planning in this regard.  An A-B Trust should always include language on how the surviving spouse is either authorized, or not authorized, to make certain changes to the Trust, and under what circumstances in which they are allowed.

Allowing a Surviving Spouse to reap the benefit of the Deceased Spouse’s Estate Tax “Coupon” is accomplished through a concept known as “Portability.”  This full value of the Coupon can be transferred to the Surviving Spouse only if items are properly titled and it passes within the Trust (i.e., not outside of the Trust).  To accomplish this, the Surviving Spouse must elect “Portability” by filing IRS Form 706 within 9 months of the Deceased Spouse’s death.  This form is almost 30 pages long, and we recommend that a Certified Public Accountant assist a Successor Trustee with the filing of this particular form.

The Four Stages Of Trust Administration After Death

Stage 1:  Establish Asset Values

• The main purposes of establishing an Asset Value is in order to determine what the actual Estate Taxes will be. As of 2024, a person has a lifetime exemption of $13.61 million dollars which could be left to his Surviving Spouse or Beneficiaries without triggering Estate Taxes.  If a person’s Estate is valued at more than $13.61 million, then the highest tax rate could be up to 40% of those remaining assets.  By establishing the valuation, you can then determine the Estate Tax “Coupon” that can carry over to the Surviving Spouse.

One of the main examples of setting a valuation on the date of a person’s death has to do with the primary residence the couple lives in.  If the house was purchased at $100,000 and is now worth $1 million dollars, that means it has increased by $900,000 in value.  If that house was sold before death, taxes would be due as a “Capital Gain” on that $900,000. By calculating the actual valuation of the house upon the first spouse’s death, you can determine the “Stepped Up Cost Basis” of the house.  Now, the Surviving Spouse inherits a $1 million dollar house, but only $900,000 counts against the $13.61 million dollar Estate Tax “Coupon.”  If the Surviving Spouse sells the house the next day, there will be no Capital Gains taxes whatsoever on that $900,000.

Remember: The Trust Administrator must value all of the Decedent’s assets as of the date of death for these IRS purposes and tax determinations.  This is true even if the heir never plans on selling any of those inherited assets.

Stage 2:  Notifying Creditors

• In order for a Trust Administrator to properly notify credits in Arizona, they must publish a “Notice of Death” for three successive weekends in a largely-distributed newspaper.  This is true for all known and unknown creditors.  If the actual creditors are “known creditors,” then the Trust Administrator must also send them a copy of the Death Notice.  Known creditors are sometimes defined as any creditor who sent a bill to the Personal Representative (i.e., Executor) or the Successor Trustee at any point in the past.  All of this notification is done in order to ensure that the creditors are paid off before the assets have distributed.  If this is not properly done, the Trust Administrator could personally be on the hook for paying off those creditors, even though all the money’s been distributed and spent by the heirs.
• Arizona Revised Statute 14-3805 sets up the order and hierarchy of all creditors who are to be paid by the Estate first.  Some common debts that are paid include:  final medical bills; funeral/cremation expenses; and other household contractual expenses which are routine in any normal household.  A Trust Administrator must be knowledgeable in the Community Property Laws and all laws which are in place to protect the Surviving Spouse (i.e., to prevent them from becoming homeless), or a Vulnerable Adult who may still be dependent on the Decedent’s assets.  Arizona law always seeks to keep Surviving Spouses, children, and Vulnerable Adults from becoming destitute.

Stage 3:  Filing of Proper Tax Documents

Before the Final Tax Return can be filed, the Trust Administrator is required to collect assets, value those assets, and pay off all creditors.  This could have been as simple as filling out life insurance forms in order to get a Beneficiary paid, or transferring titles on various assets as delineated in the Trust documents.  Once all this has occurred, then the Final Tax Returns can be prepared.

Remember: It is always important to consult with a CPA when having these final documents prepared.  As a Qualified Trust Administrator will know, there are actually two “tax years” that occur in the year the Grantor of the Trust dies.  The first tax return is from January 1st until the date of their death.  The second tax return will be from the date of death until December 31st of the year they died.  Make sure that you use a highly-skilled Trust Administrator who brings in the services of a CPA when filing the Final Tax Return.

Stage 4:  Distributing the Assets to the Beneficiaries

• The Beneficiary Designation in certain legal forms will govern who actually receives the asset.  For example, whoever’s designated in a life insurance Beneficiary form, or in 401K retirement agreement, will be the one entitled to those assets even if it differs from what is stated in a Will and a Trust.  IRA/401K transfers are very complex, and involve how to properly utilize the Estate Tax Exclusion via the Estate Tax Coupon. It is imperative that a top-rated Trust Administrator is being used in order to finalize a person’s Estate.
• Beware: When a Trust Administrator does not know how to properly use the Tax Exclusion Credit, this is where the most errors occur which gets the Personal Representative (i.e., Executor) and Successor Trustee’s into trouble.  This includes high levels of damages.  It’s also imperative that a Qualified Trust Administrator always informs All beneficiaries of what assets exist, and how they are to be distributed.  Paperwork, which includes the Will and Trust, should always be given to these Beneficiaries. 

Finalization and Conclusion of a Successor Trustee’s Administration Duties

Once Trust assets have been fully distributed to the Beneficiaries, and the Successor

Trustee is concluding their Administration, they need to file Final Tax Returns.  They also need to send a “Closing Letter” to all of the Beneficiaries detailing how all of the assets will be finally distributed.  If this involves transferring everything to the Surviving Spouse, then the Surviving Spouse must be instructed how to properly title all of the assets into the remaining sub-Trust.  If there is no Surviving Spouse, then there shall be directions in the Trust document to the Trustee on how to make the final distribution to Beneficiaries.  Once a Beneficiary is fully informed, and a distribution has been made, then the Qualified Trust Administrator should always get a Receipt of the Distribution, along with the Release Of Responsibility and Liability.