As a trustee, you may be required to distribute real property from a trust to a named beneficiary as part of the trust administration process. These types of distributions often come with unique issues requiring certain considerations be made before that real estate is actually distributed. The Northern California Center for Estate Planning and Elder Law can advise trustees about how to handle real estate the appropriate way.
What does trust administration involve?
Trusts are basically fiduciary agreements between a trustee and the grantor, who is the person making the trust. Fiduciary simply means the agreement is based on the trust and confidence. The purpose of the trust document is to authorize the trustee to manage the trust assets and distribute those assets to the named beneficiaries. The distributions need to be based on the terms of the trust agreement. A trust may be used in place of a will or may be used in conjunction with a will where it only applies to certain property.
Regardless of your trust goals, your trust will need to be administered, which involves investment management, implementing charitable giving strategies, risk management, insurance planning and business succession planning, when applicable. The trustee you select to manage your trust and its administration will be responsible for carrying out the terms of the trust.
The responsibility of a trustee
Trustees are responsible for trust administration which requires acting in line with their fiduciary duty. That means acting only in the best interest of the trust beneficiaries. That also means acting within the terms and limitations of the trust document.
With appropriate estate planning and a properly created trust, it may not be necessary to open a probate estate. Nevertheless, if any of the trust beneficiaries contest any of the trustee’s transactions then those beneficiaries will likely file a probate case with the court requesting that the trustee is made personally liable for any mismanaged estate property.
Considerations when dealing with real estate during trust administration
Although the responsibilities of a trustee are pretty black and white when it comes to handling liquid assets (e.g. checking accounts), the same is not necessarily true with non-liquid assets. In fact, the trustee’s responsibility is often more complicated when dealing with real estate.
When an estate includes real estate, the trustee must first determine whether the real property will need to be transferred to one of the beneficiaries. If so, there will be a decrease in the share the remainder beneficiary would receive. One alternative is to sell the real estate on the open market and then distribute the funds among the trust beneficiaries.
Be sure to obtain consent before selling the property
It is highly recommended that trustee obtain written consent from all of the trust beneficiaries before selling any real estate, regardless of what is expected to be done with the property under the terms of the trust. Obtaining written approval protects the trustee from any later claims that the trustee sold the real estate for less than market value, for example. Otherwise, you run the risk of an unhappy beneficiary opening a probate case and requesting that the trustee be personally liable for breach of fiduciary duty.
Consider a situation where the market value of a piece of real property was 300,00OK0 and the property is sold by the trustee for $200,000. Regardless of whether the property is sold to another beneficiary or to a third party, the trustee could be held personally liable for the difference between the sale price and the market value. On the other hand, if the trustee obtained written approval from the beneficiaries prior to selling the property, the trustee will be protected from future liability with regard to that issue.
Ask for professional assistance if you are unsure about what to do
In light of the significant responsibility of a trustee, it is important to seek advice or assistance from the right professional if you need to, particularly when it comes to investments. In fact, management of investments is one of the most highly litigated legal issues related to trust administration.
In cases where trust beneficiaries disagree with how a trust was administered and then file a lawsuit, dealing with that issue can be costly and time-consuming. Consequently, trust assets may be wasted on legal fees in defense of that suit. You should feel comfortable consulting with one of our trust attorneys.
Download our FREE estate planning checklist today! If you have questions regarding trusts or any other estate planning matters, please contact us at the Northern California Center for Estate Planning and Elder Law for a consultation. You can contact us either online or by calling us at (916) 437-3500. We are here to help!