One of the most popular additions to a comprehensive estate plan is a trust. A trust is an extremely flexible estate planning tool that can help accomplish a wide range of objectives, from protecting the inheritance of a minor child to paying for your funeral and burial after you are gone. Every trust must have a Trustee whose overall job is to administer the trust. Whether you are considering incorporating a trust into your estate plan or you find yourself named as the trustee of a trust, knowing what is involved in the administration of the trust is crucial.
Administering a Testamentary Trust vs. a Living Trust
Some basic knowledge about trusts helps to better understand the trust administration process. A trust is created by a Settlor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. A trust can be a living trust or a testamentary trust, the difference being that a living trust activates during the Settlor’s lifetime whereas a testamentary trust activates after the death of the Settlor. As such, a trust can be administered while the Settlor is still alive or after the death of the Settlor.
If the trust is a living trust, the administration of the trust begins the moment the trust agreement takes effect. If the trust is a testamentary trust, administration of the trust begins right after the death of the Settlor. With a living trust, the Settlor should have already funded the trust with sufficient assets to carry out the trust purpose. In the case of a testamentary trust, however, funding the trust can be a bit more complicated. Because the Settlor recently died, the Settlor’s estate must go through the probate process. As a general rule, assets owned by a decedent must pass through probate before they can be distributed to the intended beneficiaries and/or heirs of the estate. Assets held in a trust, however, bypass probate and are distributed according to the terms of the trust without any judicial oversight. Assets may first need to marshalled and transferred into the Trustee’s name before the administration can actually begin.
Administration of the Trust
Whether the trust is a living trust or a testamentary trust, administration of the trust is essentially the same. The Trustee of the trust is responsible for administering the trust. The Trustee’s overall job is to manage and invest trust assets and administer the trust according to the terms created by the Settlor. The Trustee must follow those terms exactly as written by the Settlor unless they are impossible, illegal, or unconscionable Administration of the trust includes things such as:
- Managing and protecting trust assets. Trust assets can include almost anything of value. Consequently, this could mean something as simple as reconciling bank statements or something as complex as maintaining real property.
- Investing trust funds using the “Prudent Investor Standard.” A Trustee is handling someone else’s assets, meaning that the Trustee is in a fiduciary role. Investments, therefore, should never be risky. Guarding the principal is more important than a huge return on investment.
- Communicating with trust beneficiaries. A Trustee has an obligation to keep the beneficiaries of the trust informed of all pertinent trust business.
- Resolving conflicts among beneficiaries. It is not uncommon for a dispute among beneficiaries to occur. The Trustee must remain neutral and attempt to resolve the conflict before it turns into litigation. If the trust allows for future beneficiaries as well, the best interests of those beneficiaries must be taken into account as well.
- Distributing trust funds to beneficiaries. The primary purpose of a trust is to protect assets for beneficiaries until it is time to distribute those assets. The trust terms created by the Settlor determine when assets can be distributed.
- Keeping detailed trust records. Detailed records of all trust business must be kept by the Trustee in case there is ever litigation involving the trust.
- Preparing and paying trust taxes. A trust is a separate legal entity. As such, a trust is taxed. The Trustee must see that a tax return is completed for the trust each year and any taxes due from the trust must be paid out of the available trust assets.
Contact an Illinois Trust Administration Attorney
For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about trust administration, contact an experienced Illinois trust administration attorney at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.
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