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Provisions to know in decedent’s testamentary instrument

With the assistance of an attorney it is important to determine the decedent’s intent. For this, ask whether distributions are to be made outright to the beneficiaries or to continuing trusts for their benefit, and if there are continuing trusts whether they are separate share trusts or “family pot” trusts through examination of decedent’s estate planning documents. Additionally, determine whether the trust instrument grants the trustee power to distribute assets on a non-pro rata basis or prohibits non-pro rata distribution. (If the trust instrument is silent, or if there is a written agreement permitting non-pro rata division, the trustee under California law may distribute assets on either a pro rata or non-pro rata basis.)

Additionally, estate taxes, if any, need to be promptly dealt with. For this, examine the trust provisions for payment of estate taxes. If the trust instrument and will are silent on how estate taxes are to be paid, the default rule under California and Federal law is equitable proration. Equitable proration applies to the entire gross estate, not just to property contained in the trust.

It is also essential to find out how income earned by estate assets during administration of the estate should be treated. Either the income must be distributed to the beneficiary who receives the asset, or it may be used for administration expenses. Along the same lines the trustee must review the proper allocation between principal and income. If the trust does not provide any direction nor give the trustee a discretionary power of administration, allocation must be made in accordance with the Uniform Principal and Income Act. Nonetheless, the trustee has the power to make adjustments between principal and income as needed to fulfill the trustee’s duty to administer the trust impartially, unless the trustee is a beneficiary of the trust.

In regards to the trustee’s fiduciary duties, a trustee must know if the trust instrument modifies any of his or her duties, i.e. whether the trust modifies accounting responsibilities or obligations under the Uniform Prudent Investor Act (UPIA). Under the UPIA the trustee must analyze the portfolio rather than individual investments, balance between risk and return on investment, and diversify investments (in other words no categorical restrictions on types of investments.) However, under the act it is permissible for the trustee to delegate investment and management functions given the complexity of the portfolio. In the event the trust includes mutual funds or securities with dividend reinvestment plans, consider terminating the dividend reinvestment provision to increase liquidity in order to pay trust expenses and identify depreciating or wasting assets and immediately dispose of them if so empowered by the trust instrument.

A trustee should also be aware of provisions that address transfers and transactions. A trustee should know if the trust includes any generation-skipping transfers. A direct skip are those transfers to beneficiaries more than one generation below the settlor, or transfers to continuing trusts with beneficiaries more than one generation below the settlor. Also, whether the trust instrument waives the requirement that interest be paid on pecuniary gifts. If the instrument does not waive interest, a pecuniary gift bears interest beginning 1 year after the settlor’s death.

Identify and review the asset schedule, if any, attached to the trust. The asset schedule attached to the trust instrument provides a snapshot of the assets transferred to the trust (or at least intended to be transferred to the trust) at its inception. Determine whether the assets listed on the schedule were properly transferred into the trust. Be mindful as well of assets that pass to beneficiaries by operation of law (i.e. outside the trust such as life insurance proceeds, retirement plan benefits, and pay-on-death or transfer-on-death accounts, etc.) Assets generally fall into one of the following three categories

  • Assets in the trust
  • Assets not in the trust that pass outside of probate, or
  • Assets not in the trust that require probate or summary administration

The trustee has no legal obligation to deal with assets outside the trust, but he or she must determine the nature and extent of assets to be reported on the estate tax return when there is no executor.