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Guidance to Trustees Regarding Trust Distributions

July 10, 2015

When we represent trustees, and particularly when some aspect of the trust administration may be disputed, we often advise them to manage the beneficiaries’ expectations about when they will receive their inheritance. Many people, having heard that living trusts avoid probate, assume that a trust administration is simple, and that the trust property somehow passes to them automatically. Because of this misunderstanding, many beneficiaries are disappointed to learn that the trust administration process usually takes months rather than days or weeks. Trustees have an easier time with beneficiaries — avoiding misunderstandings, saving time, and reducing costs — if they address unrealistic expectation early in the trust administration.

Trust distributions often occur in several stages. Depending on how quickly the trustee assembles asset and liability information, the trustee may make preliminary distributions of a portion of the trust estate within a few weeks. A second distribution may occur after the trustee has obtained appraisals and can project the expected tax liabilities and expenses with more accuracy, making certain to reserve sufficient funds for payment of estate taxes, income taxes, administrative expenses, attorney and trustee fees, debts and liabilities, etc.

If estate taxes or income taxes are payable, we often recommend that trustees retain a further reserve after payment of taxes until all audits are completed or until the period for assessment of a tax deficiency passes. The reserve protects both the trustee and the beneficiaries. Any legal or accounting fees, and any tax deficiencies assessed by the IRS or FTB are chargeable to the trust. If the trustee has distributed all of the trust assets, the trustee must either bear these expenses personally or seek the return of trust funds from the beneficiaries.

If a beneficiary challenges the trustee’s actions, or contests the validity of the trust, the trustee may have to withhold distributions until the dispute is resolved.

If you are a trustee facing a difficult trust administration, a contested trust accounting, a claim of breach of fiduciary duty, or any trust or estate dispute in Contra Costa, Alameda, San Mateo, Solano, San Francisco, or any other Norther California County, please call our office at (925) 314-9999.

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