What are the Legal Obligations of a Trustee?

Dear Len & Rosie,

Both of my parents are now deceased, the most recent being my step-dad. Are the four of us adult children legally due to receive a financial statement of how funds were spent during my dads illness? Are we entitled to a copy of the trust at no charge, along with the financial statement? The lawyer hired by the trustee is charging $1.000 for a copy of the trust, if we want it, and it has been stated that no one will receive a financial statement until after all funds are dispersed at the end of a waiting period. We were told the waiting period was 120 days but are now hearing it could be six months.

Bill

Dear Bill,

As beneficiaries of an irrevocable trust, the trustee is legally obligated to provide you a copy of the entire terms of the trust, at no cost. The trustee was supposed to provide you a notice pursuant to California Probate Code section 16061.7 within 60 days of your stepfather’s death telling you this.

Having said that, we find it hard to believe that the lawyer representing the trustee is telling you that it’ll cost you $1,000 for a copy of the trust document. This sounds more like a demand from trustee who thinks that he or she gets to make the rules.  Our best guess is that the $1,000 is a fee quote from a lawyer the trustee consulted with for some trust administration work and that the trustee thinks, incorrectly, that you ought to pay for it.

The trustee is required to provide an accounting to all of the beneficiaries presently entitled to distributions of trust income or principal. And by “accounting” we don’t mean a simple financial statement. We mean a formal accounting following the rules of the court which is really an exercise in double-entry bookkeeping that most people don’t know how to do themselves. This accounting usually runs from the date-of-death to the distribution of the trust assets. An accounting can be avoided if all of the beneficiaries agree, but your trustee isn’t creating an environment of trust and cooperation that would make a waiver of accounting likely.

The 120-day waiting period is mentioned in that notice you were supposed to have received. Once the notice is mailed out, a 120-day countdown begins. When it ends, you will lose your right to contest the trust. By “contest the trust” we mean filing a court petition asking the court to declare that the trust document is void. You will still be able to enforce your rights as a trust beneficiary, including the right to compel the trustee to provide you with an accounting.

The best thing for you to do is to have a lawyer write a letter to the trustee (or the trustee’s lawyer if there is one) demanding a copy of the trust and an accounting. If the trustee hasn’t got a lawyer, such a letter is usually enough to goad the trustee into hiring a lawyer who will help make sure the job is done correctly.

Len & Rosie

What are Dynasty Trusts

Dear Len & Rosie,

I am helping my 85-year-old mother ensure that her estate plan is in order, and I am also planning for myself. I am very interested in the dynasty trust, but am confused about a few aspects. What are they all about?

Norman

Dear Norman,

One of the questions about estate planning is what happens to the inheritance you pass on to your children. Will they spend it? Will they lose it in a lawsuit? Will they give it to their spouse instead of leaving it to your grandchildren? Do you want your ex-son-in-law driving a Lexus bought with what used to be your money?

Dynasty trusts are designed to protect the inheritance you leave to your children from creditors, spouses, and future estate taxes. Your mother can update her estate plan to leave you an inheritance in a dynasty trust instead of giving it to you out right. There are several advantages to this.

First, since it’s in a trust, your inheritance isn’t really your property, even if you are the trustee. That means your inheritance will benefit from creditor protection. While we cannot guarantee that you would never lose your inheritance in a lawsuit, a properly drafted and managed dynasty trust should protect you if you ever get sued.

Second, since your inheritance is held in a completely separate trust, segregated from your other assets, it’s easier to protect its status as your separate property than if you held everything directly in your name. Since you don’t really own your dynasty trust, neither will your spouse, even if you get divorced.

Third, and perhaps most importantly, a dynasty trust creates a dynasty. The amount of your inheritance that is exempt from Generation Skipping Transfer Tax may be held within the dynasty trust for generation after generation with no additional estate tax due on your death, or the deaths of your descendants. The duration of the dynasty trust is limited only by a law called the Uniform Statute Rule Against Perpetuities, which requires a final outright distribution of the trust within 90 years of your mother’s death. And it’s even possible to create a dynasty trust in certain states (not California) that may last forever. The point here is that if you invest your inheritance instead of spend it, then it can continue to grow for generations while continuing to avoid federal estate tax at each generation.

If your mother creates a dynasty trust for your inheritance, she will be able to decide what, if any, rights you have to decide who gets to inherit the trust upon your death. Maybe she’ll let you cut your wife in for a share. Or maybe not. She could even create a dynasty trust for your benefit with someone else as trustee if you’re not so good with money. With a dynasty trust, your mother can provide for her descendants for generations to come.


Len & Rosie