Trusts come up in just about every discussion on estate planning. There are those who tout trusts as a one-size-fits all approach to getting one’s financial affairs in order. But, while it is true that trusts can be a helpful estate planning tool, establishing a trust is many times only the beginning. Trusts can help people avoid probate, but trust administration itself requires oversight and has its own set of expenses. To assist with this trust administration, trustees should consider seeking the counsel of an Arizona trust attorney.
A common misconception is that establishing a trust precludes the need for oversight later. The truth is, however, that while trust assets transfer to beneficiaries without passing through probate, the trust itself still requires administration. This is not to say that setting up a trust serves no purpose, as trust administration can be simpler than handling complex probate matters. But, similar to personal representatives in the probate process, Arizona trustees must pay close attention to detail and fulfill fiduciary duties while administering a trust.
Fiduciary duties for Arizona trustees include preserving trust funds, complying with state and federal law, and transferring assets to trust beneficiaries in accordance with the terms of the trust. Trust administration can become complex, and an Arizona trust attorney can help trustees fulfill their duties. Trustees should take the following steps with the assistance of an Arizona trust attorney:
1. Get an appraisal and make an inventory of trust assets
The first step for trustees is to ascertain the value of every asset held in the trust. Sometimes, the trust document itself describes the assets and their corresponding values, and other times the trustee must do some investigating. Either way, trustees must get an accurate appraisal because the decedent’s net worth determines whether the estate is subject to federal estate tax. The trustee should then create a trust inventory to document her findings, and update it as the estate’s value goes up or down.
2. Pay taxes
Beginning in 2011, Arizona trustees must file a federal estate tax return for any trust valued at more than one million dollars. Many times, however, those with large estates have used tools to effectively reduce or eliminate the estate tax. The exemption trust is the most common of these tools, and it requires additional oversight from trustees. Trustees of exemption trusts must be particularly careful to make certain transfers and file special accountings. Trustees who do not comply with federal guidelines can increase the estate’s tax obligations considerably. An Arizona trust attorney can help exemption trustees comply with the relevant laws.
In addition to federal estate taxes, trustees must handle other tax matters for the estate as well. Many times, trustees must file the decedent’s personal income tax return. Trustees are also responsible to file income tax returns for the estate. An Arizona trust attorney who is familiar with tax law can help trustees prepare the trust to receive the most advantageous tax treatment.
3. Give notice to beneficiaries.
Arizona trust law allows everybody who may benefit under the trust to request copies of the trust document; and providing notice gives them an opportunity to do so. As such, Arizona trustees must provide every trust beneficiary with notice, if the trust became irrevocable when the trustor died. Also, where there is a Will, the trustee must file it with the Superior Court in the trustor’s home county. Lastly, trustees must send notice of death to the County Assessor in each county where the trustor owned real property.
4. Fulfill duties
Arizona trust law requires trustees to fulfill certain obligations. Trustees who disregard their obligations may be required to repay the trust, and can be removed from their position as trustee. At a minimum, trustees are expected to:
- Abide by the terms of the trust, and follow trust instructions.
- Always act in the beneficiaries’ best interest.
- Never give preferential treatment to one beneficiary over another.
- Never use trust assets for personal benefit, and keep trust property separate from personal property.
- Invest and administer the trust assets cautiously.
- Diversify investments to protect the trust.
- Maintain detailed records, and provide reports to trust beneficiaries.
5. Exercise powers.
In addition to their duties, trustees can choose to exercise certain powers in the interest of preserving a trust. Generally, trustees have power to carry out each term of the trust, unless it conflicts with Arizona law. To fulfill a trust’s terms, trustees have a range of powers to choose from, including:
- Investing prudently.
- Buying and selling assets.
- Purchasing insurance.
- Making reasonable repairs to trust property.
- Distributing payments to trust beneficiaries.
When Personal Representatives & Trustees Fail to Act
When personal representatives fail to administer an estate
All too commonly, personal representatives neglect their duty to properly administer the estate. Those who neglect to administer and close the estate can leave estate assets unsold for years after the decedent’s death. Sometimes, personal representatives do this intentionally, as in cases where the personal representative neglects to sell a home so that he can live in it rent-free. Other times, personal representatives simply do not have the knowledge or capacity to properly fulfill their obligations. Either way, Arizona probate law allows beneficiaries under the Will to have the personal representative removed for good cause.
Anyone with an interest in the estate can petition the court to have the personal representative or administrator removed for cause. This person is typically a beneficiary who may inherit from the estate. After petitioning the court for removal, the person must notify the personal representative of the pending action. From this point forward, Arizona probate law prohibits the personal representative from acting for the estate, except for routine accounting, correcting mistakes, and preserving estate assets.
The court may remove a personal representative for any of the following reasons:
- If it is in the estate’s best interest.
- If the appointment was made on a material misrepresentation of facts.
- If the personal representative has disregarded court orders; failed to perform his or her duties; or has become incapable of acting as personal representative.
- If the personal representative has disregarded the wishes of the decedent.
Fluctuations in market values can compound problems when an personal representative fails to properly administer an estate. For instance, when an personal representative fails to swiftly sell estate property (such as a home), a drop in the relevant market can cause significant losses to the estate. Through no fault of their own, beneficiaries may lose much of their inheritance because the personal representative failed to sell estate assets in a timely fashion. Under Arizona probate law, personal representatives in these types of circumstances may be held personally liable to the beneficiaries for the lost inheritance. Sometimes, personal representatives are even ordered to pay attorney fees and court costs for beneficiaries who successfully petition the court for removal.
When trustees fail to properly administer a trust
Arizona trustees are held to a high standard because they are acting on somebody else’s behalf with assets that are not their own. As such, trust beneficiaries have a wide range of remedies for breach of trust. If a beneficiary or other interested party brings action for breach of trust, the court may apply any of the following remedies under A.R.S. Section 14-11001:
- Compel the trustee to perform the trustee’s duties.
- Enjoin the trustee from committing a breach of trust.
- Compel the trustee to redress a breach of trust by paying money, restoring property or other means.
- Order a trustee to make an accounting.
- Appoint a special fiduciary to take possession of the trust property and administer the trust.
- Suspend the trustee.
- Remove the trustee.
- Reduce or deny compensation to the trustee.
- Void an act of the trustee, impose a lien or a constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds.
- Order any other appropriate relief.