Whether as part of an estate administration or otherwise, trusts must be administered properly under both state trust laws and federal tax laws. There are many types of trusts, with the most common being the revocable “living” trust. Upon the death of the grantor of a revocable living trust, it becomes irrevocable and a separate taxpayer, often at higher income tax rates if steps are not taken to reduce applicable rates of tax. Furthermore, they become subject to all applicable state laws concerning how they are administered.

A revocable trust avoids probate by effecting the transfer of assets during your lifetime to the trustee, who is most often you during your life and while you have capacity. Doing so permits your successor trustee to administer the trust after incapacity and eventual death, without the need for court supervised guardianship or probate proceedings. The trustee (your successor, who is often a spouse or one or more children) has immediate authority to manage the trust assets at your death or in the event of your incapacity, without the need for court supervised guardianship or probate process. Avoiding probate may lower the cost of administering your estate and reduce the time delays associated with the probate process. However, the administration of a revocable trust after death is still similar to a probate administration from the standpoint of the need to inventory, value, and transfer assets and has various inherent tax consequences associated with each act. For example, a trustee must collect and value the trust assets, determine creditors and beneficiaries, pay taxes and expenses, and ultimately distribute the trust estate. Tax consequences must be considered at each step. A trustee is entitled to a fee for administration of the trust, as is the personal representative of an estate. To the extent professional services of attorneys, accountants, and estate liquidators are used to complete the process, the savings is generally less than that of incurred in a probate proceeding, and is regulated by Florida statute which infers it should be 25% less than a formal probate process.

Upon your death, a trustee (or your successor if you were the initial trustee) is responsible for paying all claims and taxes, and then distributing the assets to your beneficiaries as described in the trust agreement. Successor trustees often lack the time, resources, or knowledge to personally administer the trust, and therefore may call upon legal, tax, accounting, and investment professionals for assistance. The attorneys, CPAs and staff in our office have the resources and expertise to fulfill the trustee’s legal, tax and accounting responsibilities and investment management is often delegated to one or more professional investment advisors. For example, to reduce the liability exposure associated with investment management, Florida statute permits a trustee (or personal representative) to delegate investment management to a professional money manager and exculpate themselves from liability, if done properly and in accord with the statute.

Serving as trustee is not a simple task. While very important, the prudent investment of trust assets is not a trustee’s only responsibility. A trustee’s powers and duties will depend on the instructions in the trust instrument or as a result of duties and responsibilities imposed by state law. In general, a trustee will:

• File a Notice of Trust within the court in the County of Settlor’s Domicile
  
  
• Provide Notice to Qualified Beneficiaries within 60 days after acceptance of the position as trustee
  
  
• Assemble all assets of the trust and preserve them
  
  
• Use reasonable judgment in investing assets and preventing loss of value from lack of due care.
  
  
• Distribute trust income and/or principal to the beneficiaries, as directed in the trust instrument
  
  
• Make tax decisions concerning the trust
  
  
• Keep records of all trust transactions
  
  
• Issue statements of account and tax reports to the trust beneficiaries
  
  
• Answer any questions the beneficiaries may have concerning the trust

Your trustee or personal representative will be responsible for making sure that all necessary tax returns are completed and filed with the IRS. The following is a list of tax returns that are often required:

• Final Form 1040 of a decedent. This may involve a final joint return with a spouse and planning often involves basis issues and avoiding the lapse of loss carryovers, that may go wasted if not used.
  
  
• Form 1041 for the estate and each trust for each year they exist. Often decisions must be made on whether to take deductions and credits on one or more returns, to avoid waste of them and in order to reduce applicable taxes.
  
  
• Form 706, Federal Estate Tax Return- an inherently legal return in nature and scope, this return is essentially a final reconciliation of a lifetime of asset accumulation and potential liabilities and the last chance for the IRS to assess taxes on a decedent.
  
  
• Form 8971, Information Regarding Beneficiary Acquiring Property from a Decedent. A result of recent regulation and legislation, this new and involved form must be submitted and delivered to beneficiaries in specified ways or serious consequences can occur. For example, if improperly handled beneficiaries may receive a zero cost basis in assets they inherit, substantially increasing their capital gains taxes on future sale. Form 8971 must be filed and served on each beneficiary, providing the cost basis for each inherited asset. Subsequent transfers of the assets necessitates additional reporting
  
  As can be seen from the above, there is significant interplay between state estate and trust laws and federal tax laws. Florida does not have a state income tax, but states where beneficiaries reside or a decedent may own real property often due and planning can often reduce the impact of these taxes. To confront this interplay, we have developed trained teams of attorneys and certified public accountants to cope and confront the applicable issues. Doing so benefit our clients and their heirs by serving their needs in a more efficient manner than often exists where two or more professional service firms are required.

Trustees are subject to heightened duty- a fiduciary duty to serve the trust and its beneficiaries. Below is a list of duties imposed by Florida law, which a trustee is obligated to follow and in which are staff are trained to assist:

• Duty to Administer the Trust- A trustee must administer the trust in good faith, in accordance with its terms and purposes and the interest of the beneficiaries, and in accordance with the Florida Trust Code.
  
  
• Prudent Administration- A trustee must administer the trust as a prudent person would. Consideration must be given to the purposes, terms, distribution requirements, and other circumstances of the trust. A trustee may delegate duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances. 
  
  
• Expenses of Administration- The trustee should only incur expenses that are reasonable in relation to the trust property, the purposes of the trust, and the skills of the trustee. If a trustee has special skills or expertise, the trustee should use those skills or expertise. 
  
  
• Duty of Loyalty- A trustee must administer the trust solely in the interest of the beneficiaries. Any transaction entered into by a trustee which is affected by a conflict between the trustee’s fiduciary and personal interests is voidable by a beneficiary affected by the transaction, unless the transaction was authorized by the terms of the trust, approved by the court, or authorized by a creator of the trust while it was revocable. It should be noted that there is a presumption of a conflict of interest where a trustee enters into a sale, encumbrance, or other transaction with the trustee’s family members, employees, agents, attorneys, or a corporation in which the trustee has an interest that might affect the trustee’s best judgment. There is also a conflict where the trustee, in the trustee’s individual capacity, engages in a transaction if the opportunity to engage in the transaction properly belonged to the trust.
  
  
• Duty of Impartiality- If a trust has more than one beneficiary, the trustee must act impartially in administering the trust property, giving due regard to the interests of all beneficiaries. 
  
  
• Duty to Collect, Control, and Protect- A trustee must take reasonable steps to take control of and protect the trust property. A trustee must take reasonable steps to compel a former trustee or other person to deliver trust property to the trustee and to redress any breach of trust known to the trustee. 
  
  
• Duty to Keep Records- A trustee must keep clear, accurate, and distinct records of the administration of the trust. The property should be kept separate from the trustee’s own property. Trust property should be designated so that the interest of the trust is identifiable in records maintained by other parties. 
  
  
• Duty to Inform and Account- A trustee must keep the qualified beneficiaries of the trust reasonably informed of the trust and its administration. A qualified beneficiary is any beneficiary to whom income or principal must or may be distributed. It also includes a beneficiary to whom income or principal must or may be distributed in the event that current distributees die or in the event that the trust terminates. A qualified beneficiary should be informed of the following:
  
  (a) The acceptance of the trust by the trustee (within 60 days):
  • Inform the beneficiary of the full name of the trustee; and
  • Inform the beneficiary of the address of the trustee.
  
  (b) The creation of an irrevocable trust or the transition of a formerly revocable trust to an irrevocable trust (within 60 days of the trustee acquiring such knowledge):
  • Give notice of the settlor’s name;
  • Give notice of the beneficiary’s right to request a copy of the trust instrument; and
  • Give notice of the beneficiary’s right to annual accountings.
  
  (c) A qualified beneficiary is also entitled to request the following:
  • A complete copy of the trust instrument;
  • Trust Accountings on an annual basis and at termination of the trust (if it is an irrevocable trust); and
  • Relevant information about the assets and liabilities of the trust and the particulars relating to administration.
  
  
• Duty of Good Faith- Where a trustee is given a discretionary power, the trustee must exercise that power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. 
  
  
• Duty to Distribute Income and/or Principal- Generally, unless the terms of the trust expressly indicate otherwise, a person who is both trustee and beneficiary may not make discretionary distributions of either principal or income:
  (a) To or for the benefit of that trustee except to provide for that trustee’s health, education, maintenance, or support; or
  (b) To satisfy any of the trustee’s legal support obligations.
  
  Further, consent must be obtained from the remainder beneficiaries of the Trust when a person who is both a trustee and beneficiary wants to make discretionary distributions of principal to or for the benefit of that trustee. Other specific provisions in the Trust regarding discretionary or mandatory distributions of trust income or principal must be followed by the Trustee.
  
  
• Prudent Investor Rule - A trustee has a duty to invest and manage investment assets as a prudent investor would considering the purposes, terms, distribution requirements and other circumstances of the trust. This requires the trustee to exercise reasonable care and caution.
  
  
• Duty to Diversify - The trustee has a duty to diversify the investments unless, under the circumstances, the trustee believes reasonably it is in the interests of the beneficiary and furthers the purposes of the trust not to diversify.
  
  
• Investment Decisions - Trustees have a duty to pursue an investment strategy that considers both the reasonable production of income and safety of capital. Trustees must also review the investment portfolio of a trust within a reasonable time after acceptance of the trust and make decisions concerning the retention and disposition of preexisting investments.
  
  
• Delegation of Investment Functions - A trustee may delegate any part or all of the trustee’s investment functions to an investment agent if the fiduciary exercises reasonable care, judgment and caution in selecting the agent, and in establishing the scope and terms of the delegation. The trustee should periodically review the agent’s actions in order to monitor overall performance and compliance with the scope and terms of the delegation. If a trustee intends to delegate investment functions, the trustee must give written notice to all beneficiaries eligible to receive distributions from the trust. The notice should be sent within 30 days of the delegation and can be sent by any form of mail or commercial delivery service requiring a signed receipt. The trustee should keep the signed receipt or other proof of notice for the trustee’s permanent records.