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Trustee's Duties


Duties of a Trustee when Administering a California Irrevocable Trust
Creating an Irrevocable Trust in California
The Trustee's Initial Duties
The Trustee's Legal Obligations
Determine the Value and Distribute the Trust's Assets
Making Payments from a Trust
Trust Investments
Accounting and Record Keeping
Taxation
In Summary


Duties of a Trustee when Administering a California Irrevocable Trust
Whoever acts as the trustee of an irrevocable trust in California acts as a "fiduciary" and is responsible for performing the legal duties of a trustee as prescribed by law. If the trustee fails to do so properly and is challenged in court, he or she may be liable for any loss the trust incurs. Additionally, the trustee may be liable for punitive damages claimed by one or more of the trust's beneficiaries and have to pay all court costs involved in the settling the case, including the legal fees for both sides.

If challenged in court, the trustee will have to prove that his or her actions were proper and were done for the benefit of the trust and its beneficiary or beneficiaries.

By its nature, an irrevocable trust can only be changed or amended by a court order, one that is extremely difficult to receive. The trustee of an irrevocable trust can still invest the trust's assets, which can be sold or purchased, and make payments to the trust's beneficiary or beneficiaries in accordance with the trust's provisions, but little else.

Blood relationships do not exempt the trustee from the legal responsibilities, and it is not unusual for a child or children to sue a parent they feel has mismanaged a trust. Nor is it uncommon for siblings to sue each other. The children who are set to receive the proceeds of an irrevocable living trust retain legal rights, even if the trustee is the sole surviving parent. They may demand an accounting of the trust and its activities, they may inquire as to the nature of any investments, and question payments of principal made from the trust for the surviving spouse's health or support. They may even claim mismanagement of the trust and bring legal proceedings against the surviving spouse.

Trustee's Duties

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Creating an Irrevocable Trust in California
Since living trusts in California are considered revocable unless the documents establishing the trust specify otherwise, it is necessary to specify that the trust is irrevocable when it is created. This can be done when the trust is first established as a living trust or when a "springing trust" is formed as part of the will of someone who dies. Both the living trust and the "testamentary trust" impose on the trustee the same duties and responsibilities.

Irrevocable trusts can be any of the following:

  1. Either a "B" or "C" trust that results from the death of the first spouse of a couple who established a living trust.
2. An "A" and "B" trust, or "A,""B," and "C" trusts, that are created when the surviving spouse dies.
3. A trust that is created following the death of a single person.
4. A charitable remainder trust, which is a trust that provides payments to someone during his or her life with the assets going to a charity or charities when that person dies.
5. A trust initially created as an irrevocable trust, such as for children or grandchildren.


A husband and wife often establish a living trust to avoid probate and estate taxes. When the first spouse dies, the trust is split into subtrusts, typically called Trust A and Trust B, or trusts A, B, and C. Trust A most often continues as a revocable trust for the benefit and use of the surviving spouse, and Trust B, or B and C, are irrevocable trusts. In many trust documents these subtrusts have different names such as survivor's trust or marital trust for Trust A, family trust or exemption trust for Trust B, or qualified terminable interest trust (QTIP) for Trust C. The types, nature, and functions of trusts are the same, regardless of the name.

When both spouses die, all of their trusts become irrevocable. This occurs even if the trusts are scheduled to terminate and have their assets distributed to the couple's children, a process that can take anywhere from six months to several years to conclude. During this time the trusts continue to require administration by a trustee or trustees.

The couple who establishes the living trust may have set it up to continue after their deaths and benefit a child, children, or grandchildren. They may have done so by specifying the trust continue for a period of time or that it will last for someone's lifetime. Trusts of this kind are also irrevocable.

To avoid probate on his or her assets, a single person may have set up a living trust. After this person's death and until all of its assets have been distributed, this trust becomes irrevocable. If the trust was designed so that it continues for a period of time after the person's death, either whole or in part, the trust or trusts will also be irrevocable.

A couple may also establish an irrevocable trust as a way to make gifts to their children or grandchildren, or establish an irrevocable charitable remainder trust to save taxes and benefit a charity. They may also create an irrevocable trust to hold the proceeds of a life insurance policy to pay estate taxes on the policy that will be due following their deaths. To accomplish any of these goals, the trust must have been irrevocable from the time it was established.

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The Trustee's Initial Duties
Even though someone is named in the trust agreement to act as the successor trustee, he or she is under no legal obligation to do so and cannot be forced to act as trustee. Anyone named as the successor trustee may legally decline to act, in which case the next named trustee will take over administration of the trust. If no one who is named as successor wishes to serve, the local Superior Court can be petitioned to appoint a bank or individual to fill the role.

Trust Agreement - Successor Trustee

After agreeing to act as trustee, that person, although he or she may resign, may not be replaced or relieved until the next named trustee takes over. The person taking over may be one who was named in the trust documents or may be appointed by the court.

The new trustee should start by carefully reading the trust documents, including the trust agreement and any mention of the trust in the will. Particular care should be taken to see what duties are assigned to the trustee, and what actions must be performed by him or her. The new trustee should immediately determine what assets are currently in the trust and which may be coming into it through probate or as the beneficiary of a life insurance policy or retirement plan.

The trustee must be prepared to notify certain people, as follows:

  1. If, because of someone's death, the trust becomes irrevocable, the trustee is required to provide a specific notice to anyone who has, or may have, an interest in the trust as well as to all the heirs at law of the deceased. This notice, whose language is specified by law, must advise the recipients that they have 120 days to contest the trust by court action and that they may request a copy of the trust and any amendments that have been made to it. If the trustee fails to issue this notification, he or she may be liable for legal actions and costs.
2. If the trust was previously irrevocable and the only change is that of the trustee, then a notice must be sent to all trust beneficiaries and anyone who may have a future interest in the trust notifying them of the name and address of the new trustee.


A special notice must be sent to the county assessor for every parcel of real estate that is owned by the trust. This notice must alert the assessor of the change of trust ownership and notify the assessor if the property is subject to reassessment for California real estate taxes or not.

The assets in the trust must be quickly reregistered in the trustee's name as trustee. Once done, the assets should show a registration of "Joe Smith, Trustee of the Ann B. Smith Living Trust, dated January 16, 2004." If the trust, until now, was in one of the originating spouse's Social Security Number, the trustee must complete Internal Revenue Service form SS-4 to obtain a Tax Identification Number for the trust. This form must be sent to the local Internal Revenue Service Center, who will issue the number. The tax identification number, once received, will be used instead of the Social Security Number for all assets contained in the trust and for all trust income tax returns.

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The Trustee's Legal Obligations
The general legal duties for a trustee are set forth in the California Probate code, sections 16000-16042. These duties include:

  1. Administer the trust in accordance with the trust's provisions.
2. Administer the trust solely for the benefit of the beneficiaries or beneficiary of the trust.
3. Deal impartially with the beneficiaries if there are two or more.
4. Avoid using any asset that is the property of the trust for the trustee's benefit or profit.
5. Avoid becoming a trustee of another trust that has adverse or conflicting interests with the current trust.
6. Keeping trust assets registered in the name of the trust and separate from any assets the trustee may own.
7. Avoid delegating to others the trustee's duties.
8. Take reasonable steps to preserve and control trust property.
9. Use his or her skill in running the trust.
10. If there are co-trustees, to participate with them jointly and not to turn over administration of the trust to them.

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Determine the Value and Distribute the Trust's Assets
When the creators of the trust have died and the trust has become irrevocable as a result, its assets are subject to federal estate or "death" tax. The trustee must determine the value of all the trust's assets as of the date of death and also if a federal estate tax return is due. If a return is due, the trustee has nine months from the date of date to file it, and if more time is needed, may apply for an extension of up to six additional months.

If the trust, previously, was irrevocable and all that's changed is the name of the trustee, then the new trustee must obtain income tax information on the current value of the assets and their cost basis.

Trust Assets Distribution

If the trust is set to terminate and its assets distributed to several people, unless the provisions of the trust prohibit it, the trustee is allowed under California law to distribute different assets to different people, all based on the asset's current fair market value. Thus, if the assets are set to go to three children, it is not necessary to divide each asset by three and give each child one-third. The trustee may, instead, give all of one asset to one child, all to another, and so forth, as long as the current value of the assets received by each child is equal.

If the trust had a provision to be separated into separate subtrusts, one for each child, for instance, then the trustee must divide the assets accordingly and register them properly. As an example, the assets for Elizabeth Smith, child of John and Ann Smith who originated the trust, would be registered in the name of "Joe Smith, Trustee of the Ann B. Smith Living Trust, dated January 16, 2004 f/b/o Elizabeth Smith." The f/b/o used here stands "for the benefit of" and is followed by the beneficiary's name. Each individual trust will require its own, separate records, and a separate tax identification number must be obtained for each subtrust and used on trust tax returns if they are required.

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Making Payments from a Trust
Payments are often made to the trust beneficiary or beneficiaries if the trust continues after the death of the originator. These payments can be of several types. The trustee can issue discretionary payments for the "health, support, and education" of the beneficiary, or the beneficiary can receive the income from the trust while the trustee issues payments from the principal for those three purposes.

The interest, dividends, and net rental income generated by the assets in a trust make up its income. The principal includes the trust assets along with any gain or loss that resulted from the sale of any of the trust's assets. Any capital gain that results from the sale of an asset held in an irrevocable trust normally remains in the trust, which is taxed for the gain. California's Principal and Income Act has several provisions that define what is "income" and what is "principal." The law also defines how unusual assets, such as oil royalties, and unproductive assets, such as real estate that was held for several years and later sold but that never produced any income, should be treated.

Effective January 1, 2000, California law allows a trustee, under certain circumstances, to adjust a trust's income by increasing or decreasing the amount paid to a trust beneficiary or beneficiaries. If the trustee wishes to adjust a trust's income this way, he or she must notify all the parties who would be affected by the change at least thirty days before the adjustment is made. If anyone objects to the proposed change, no adjustment can be made without court approval.

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Trust Investments
How the trustee can invest the assets of a California trust is determined, in part, by the "California Uniform Prudent Investor Act." This act states that the trustee "shall invest and manage trust assets as a prudent investor would, by considering the purpose, terms, distribution requirements, and other circumstances of the trust," and then issues several guidelines. A trustee needs to invest while diversifying the assets, and needs to balance the income with the future growth of the assets. He or she may not invest totally for asset growth, or wholly for income, unless such a course is specified in the trust document. Depending on individual circumstances, the assets may be split 60-40 or 40-60 between growth and income.

An investment counselor may be hired by the trustee to manage the investments. If certain requirements are met, the trustee, in such a case, is not liable to the trust beneficiary or beneficiaries for the decisions made regarding investments, nor for any action taken in that regard.

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Accounting and Record Keeping
The trustee has the responsibility to keep detailed records of the trust and to provide an accounting to the trust beneficiary or beneficiaries. This accounting is usually done every year, but is not required if the trust document waives it, if the trust beneficiary or beneficiaries has waived it, or where the trustee and the beneficiary are the same person, or if the trust is revocable.

Accounting of Trust Assets

Nor is an annual accounting required if the living trust was created by a trust agreement or declaration prior to July 1, 1987 or if a testamentary trust was created by a will that was signed before that date.

Other than those exceptions, the trustee must provide an accounting of the trust at least annually. He or she must also provide an accounting to each trust beneficiary who will receive income or principal from the trust when it is terminated. This annual accounting must include the following items:

  1. A statement of any receipts and disbursements.
2. A statement of assets and liabilities.
3. A list of any agents hired by the trustee, their relationship to the trustee, and the amount of their compensation.
4. The trustee's compensation for the year.
5. A statement notifying all recipients of the accounting that they may petition the court for a review of the acts of the trustee and of this accounting.
6. A statement that all recipients have three years after receiving the accounting in which to file a claim.


The trustee must keep detailed records of trust income in addition to providing the annual accounting. The trust income records will include every dividend, every interest payment, and every item of income received. The trustee must also record the sale and purchase of any trust asset and any payments made from the trust, including tax payments, other payments, and the compensation the trustee has received. In case any payments are questioned, statements of payments should be retained.

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Taxation
To prepare annual income tax returns for the trust, an accountant, tax preparer or enrolled agent needs to be employed.

There will be an estate tax return due when the trustor, who originated the trust, dies. This return is due within nine months of the date of death, but an extension is available.

Both federal (Form 1040) and California (541) trust income tax returns must be filed by April 15 for the previous year ending December 31. These returns must report all taxable income received by the trust in the form of interest, dividends, rents, capital gains and losses, and all other taxable income. The return should also include any allowable deductions for such things as interest paid, California income taxes for the Federal return, real estate taxes, trustee's and accountant's fees, tax preparation fees, and other deductible expenses.

If the income is received by the trust and then paid out to a trust beneficiary, the trust income tax return will list the payment as a deduction and the payment is taxed to the beneficiary. These payments are listed on form K-1, which is attached to the trust's tax return, and a separate form is used for each trust beneficiary. Each Form K-1 will show the name of the beneficiary, his or her address and Social Security Number, and will include any taxable income the beneficiary received from the trust. A copy of the form will be given to each beneficiary so the income can be included on his or her own personal tax return.

The trust, if it owes tax, may be subject to estimated taxes that have to be paid during the year. If the trust has been broken into several subtrusts, each with its own Tax Identification Number, a separate return is required for each one.

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In Summary
The trustee of an irrevocable trust is a position that requires a great attention to detail and a lot of hard work. The trustee must carefully attend to all legal and tax rules regarding the trust as well as any conditions imposed by the trust documents. If the trustee violates, misses, or ignores any of these rules, however innocently or well intentioned, the trustee may be held personally liable for any monetary loss that occurs.
To avoid any potential problems, anyone assuming the role of trustee should carefully select a qualified and experienced estate planning attorney as well as an accountant or tax preparation specialist familiar with trust taxation. The trustee must relate well with the trust beneficiary or beneficiaries, prudently invest the trust's assets, and follow a maze of legal requirements, and must do so to the satisfaction of everyone involved. THE MAMOLA LAW FIRM, APC is conveniently located throughout Orange County. For additional information, please contact us at (949) 333-6543.

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