What is trust administration?

What is Trust Administration?

What is Trust Administration?

Trust Administration

What is trust administration? Trust administration is the process of managing and distributing the assets of a trust. When a person creates a revocable living trust and passes, that trust typically becomes irrevocable and enters a phase requiring trust administration so that the assets held in the trust can be distributed to the beneficiaries of the trust. The creator of the living trust, usually referred to as a trustor, settlor or grantor; transfers ownership of their assets to the trust. Typically while the trustor is alive, they also act as the the trustee (the person managing the trust) but designate a successor trustee (the person or people who will administer the trust when they pass or if they become incapacitated) in the trust documents. The successor trustee is responsible for carrying out the terms of the trust and managing the trust assets according to the instructions set forth in the trust document by the trustor. In the process of trust administration, the trustee has a number of duties. Common trust administration duties include:

  • Paying the expenses and debts of the trust
  • Managing the trust assets in a way that is consistent with the terms of the trust
  • Managing any investments held by the trust
  • Maintaining accurate records of all trust transactions
  • Filing any necessary tax returns on behalf of the trust
  • Distributing the trust assets to the beneficiaries according to the terms of the trust
  • Providing accountings to the beneficiaries as required by law or as specified in the language of the trust document

In some cases the administration of a trust can be complicated as well as time-consuming and a professional such as an attorney or trust administration company may be hired to handle or assist with the trust administration. Factors such as the number of beneficiaries, types of assets held in the trust, quantity of assets or the complexity of the trust accounting and taxes may all be considered when deciding if a professional trust administrator should be utilized.

Trust Loans and Avoiding Property Tax Reassessment

Loans to Irrevocable Trusts

Trust Loans and Loans to Irrevocable Trusts in California

Property Taxes in California and Proposition 13

Each state in the US has their own individual laws, rules and regulations that govern estate planning, inheritance and taxation. California for instance has several property tax laws that control how much a persons property tax can increase each year and how you can avoid property tax reassessment on an inherited home.

The primary legislation that stabilizes property taxes in California is know as Proposition 13. Proposition 13 provides three functions in property tax assessment.

  • All real estate has an established base year value
  • A homes assessment can not increase by more than 2% a year
  • A homes property tax base can not exceed 1% of the assessed value (plus additional voter-approved taxes)

Additional information on California Proposition 13 can be found on the Santa Clara Assessors Office website located here.

California Proposition 19 and the Exclusion from Reassessment on an Inherited Home

California Proposition 19 went into effect on April 1st, 2021 and replaced the existing legislation that controlled how a person inheriting a home from a parent could avoid property tax reassessment. The previous legislation was known as Proposition 58. With Proposition 19, a few of the rules for obtaining an exclusion from reassessment on an inherited home changed. Previously under California Prop 58, a child inheriting a home from a parent could apply for an exclusion from property tax reassessment with no value limitation, providing that the home they were inheriting was the parents primary residence. Under Proposition 58 you could also transfer the property tax base from a parent to child on an investment property or second home with a 1 million dollar property tax exclusion limit (per parent). Under Proposition 19, there is now a limit of the current taxable value plus $1,000,000 on a home you will use as your primary residence. Prop 19 also eliminated the ability to avoid reassessment on an inherited home that will not be used as your primary residence. You can view addition information on California Proposition 19, on the California Board of Equalization website located here.

In addition to the Proposition 19 and Proposition 58 property tax transfer rules listed above, there are additional requirements when it comes to receiving an exclusion from reassessment on an inherited home in California. For instance, the California Board of Equalization requires that all trust beneficiaries receive an equal share of assets, if language requiring an equal distribution exists in the trust, which it often does. If an equal distribution is required, a loan cannot be made to the trust by any of the beneficiaries who intend on keeping the home. Doing so would be considered a sibling to sibling buyout by the Board of Equalization and result in a disqualification from a full exclusion from reassessment. They view this as a transfer between beneficiaries rather than a transfer from parent to child.

The following is a simplified example of how an equal distribution of trust assets works when a trust loan is involved. Lets assume the only asset in the trust is a home worth $300,000. One of three child beneficiaries wants to keep the home, and the other two would like to receive cash. A loan would need to be made to the trust for $200,000. In this situation the two beneficiaries who did not want the home would each receive their $100,000 as cash and the other child receives the home with $100,000 equity in it. Since each child received a distribution of $100,000 in trust assets, an equal distribution was made. Detailed information on the California Board of Equalizations requirements for equal distributions and other parent to transfer requirements can be found here on the BOE Website.

Trust Loans and Lending to an Irrevocable Trust

Trust Loans and Loans to Irrevocable Trusts

Trust Loans and Loans to Irrevocable Trusts

A trust loan in a loan to an irrevocable trust that provides enough so that an equal distribution of assets can be made to all beneficiaries. When an irrevocable trust contains insufficient cash assets for an equal distribution to be made, a person will often require the assistance of a specialized lender known as a Trust & Estate Lender. Trust and Estate lenders specialize in making loans to irrevocable trusts and estates that are involved in probate. As documented by the California Board of Equalization, the acquiring beneficiary may not utilize their own funds or make a personal guarantee on the loan. Doing so would create a sibling to sibling buyout, disqualifying them for the full parent to child transfer exclusion. The loan will need to be made directly to the trust (which is usually an irrevocable trust), without first removing the property from the trust or requiring a personal guarantee from the acquiring beneficiary. A conventional lender will almost never lend to an irrevocable trust, and will instead first require that the home is removed from the trust before they will lend to it. Conventional lenders also typically require a personal guarantee from the person taking the loan. An experienced Trust and Estate lender will make a loan directly to the trust, providing enough cash for the equalized distribution to be made with no personal guarantee from the acquiring beneficiary.

A Trust & Estate Lender often works directly with your attorney. A trust loan is typically a short term loan with a term of 6-24 months and does not typically carry a pre-payment penalty. Trust loans usually have higher interest rates than conventional mortgages. Once the inherited home has been transferred from the trust to beneficiary, the loan can be paid off or refinanced into a conventional mortgage. You will want to review all aspects of the transfer with a qualified Trust & Estate Attorney to verify you are doing so in accordance with the California Board of Equalization requirements and that you will be eligible to receive a full exclusion from property tax reassessment on your inherited home. You can learn more about trusts, living trusts and irrevocable trusts here.

Proposition 19 Benefit Calculator for Inherited Properties

You can also use our online Proposition 19 Benefit Calculator to estimate how much you might be able to save by taking advantage of a Proposition 19 Parent-Child Transfer. You can access the Prop 19 Benefit Calculator here.

Free Online Inheritance Calculator

Online Inheritance Calculator

Online Inheritance Calculator

EsatePlanningGuide.org has created a free to use, online Inheritance Calculator / Probate Calculator. The online calculator is designed to help trustees, executors, administrators, beneficiaries and heirs determine the approximate dollar amount of the inheritance of an estate. The inheritance calculator is very simple to use. The calculator breaks down the most common estate assets listed in a will or in probate as well as the typical estate liabilities. To use the inheritance calculator, you simply add any applicable amounts to the asset and liability sections of the calculator. If the estate does not contain the specified asset or liability, just leave it blank. Once you have completed that section of the inheritance / probate calculator, the inheritance calculator will estimate the total value of the estate minus any estate liabilities.

Next the inheritance calculator allows you to specify how many beneficiaries / heirs there are included in the estate. After that has been entered, the estimation of the inheritance per beneficiary is calculated for you. The inheritance calculator also allows you to print the results so that you many share them with the other members of the estate or have them reviewed by the estate lawyer. The following is a screenshot of the inheritance calculator. You may click on the image or the link to try the inheritance calculator for yourself.

Inheritance Calculator

Inheritance Calculator

Click Here for the free online inheritance calculator.

If you would like additional information on estate planning, wills, trusts and probate; please visit the Estate Planning section of our website. For additional online estate planning tools, we also have an Estate Planning Tools section to assist you with that.