ESTABLISHING A TRUST

A Revocable Living Trust is an important estate planning tool created for your benefit during your lifetime. When structured properly, it also helps avoid probate, which allows your assets to transfer to your beneficiaries upon your death with minimal disruption and legal costs.

As of 2024, in California, if the gross value of a decedent’s estate exceeds $184,500, probate is typically required. Trust assets are not part of an estate, so for people whose assets are placed in their Trust, probate may be avoided.

It is recommended to use a qualified estate planning attorney to establish a Trust. Every attorney has different recommendations and procedures, but most will typically include the following when preparing estate planning documents:

• Declaration of Trust (the trust document)
• Last Will and Testament
• Durable Power of Attorney
• Health Care Power of Attorney
• Living Will

TRUST ADMINISTRATION

Trust administration is not overseen by the Probate Court. Rather, it is overseen by a trustee, who is selected by the decedent and named in the Trust document. The Trust also establishes the trustee’s duties and powers. First and foremost, a trustee’s job is to manage the trust property responsibly for the benefit of the beneficiaries in accordance with the trust document. The trustee also has duties that may not be included in the Trust document, such as; duty to carry out terms of the trust, duty of loyalty, duty of impartiality, duty to avoid conflicts of interest, duty to disclose information to beneficiaries, duty to enforce or defend claims, duty to keep trust assets segregated from personal assets.

Because a trustee’s job is to manage the trust property responsibly for the benefit of the beneficiaries in accordance with the trust document, a trustee may be liable to the beneficiaries if the trust assets are not managed and distributed properly. As such, a trustee should work with qualified professionals to ensure the trustee is acting accordingly. Depending on the requirements of the Trust or state law, the trustee may be required to provide accounting reports to the beneficiaries.

INCOME TAX RETURNS

One of the trustee’s duties is to ensure compliance with various laws. This includes filing income tax returns, which are separate from the decedent’s final personal tax returns. The Trust files the tax returns using a new Trust tax identification number, which is established when the decedent passes away. To properly file the Trust income tax returns, the trustee must keep track of all Trust income and expenses, along with distributions made to the beneficiaries. As such, proper recordkeeping is required.

Based upon the specifics of each situation, the following federal income tax returns may be required to be filed:

• Trust Tax Return – Form 1041
• Estate Tax Return – Form 1041
• Estate Tax Return – Form 706
• Gift Tax Return – Form 709
• Final Personal Income Tax Return – Form 1040

If you need assistance with Estate and Trust Administration and Income Tax Compliance, I am here to help. Please call me at 805-296-7750 or email me at Paul@PasoRoblesCPA.com