Trust Administration and Termination

Trust Administration and Termination 

A trustee is administering the trust when they are executing his or her trustee powers according to the trust.  During this process, the trustee and the beneficiaries share legal and beneficial interests to trust property.

Funding the Trust 

A trust must be funded.  Once the trust instrument is drafted and executed, the settlor and trustee must properly fund the trust with the trust property, which must be properly titled.  The trustee holds legal title to the property.  Tangible personal property may typically be funded in the name of the trustee by the settlor executing an assignment of interest.  Life insurance is generally transferred to the trustee by changing the name of the owner of the policy to the trustee.  When transferring real property, Arizona law requires the deed transferring title to the trustee to disclose the name and address of the trust beneficiaries.  The ability to transfer an interest in a business entity depends on the type of entity and any restrictions placed on transfers under the entity’s governing documents.  The partnership agreement, operating agreement, or shareholder agreement may restrict the transfer of partnership or limited liability company interests or shares in a corporation, respectively.

Governing Law 

The trust is governed by its terms and the law governing trust administration.  The terms of the trust will be interpreted for meaning and effect under the laws under the jurisdiction that is identified in the trust instrument.

Certificate of Trust 

A trustee may execute a certificate of trust and provide the certificate to third parties instead of providing the trust instrument.  This keeps the terms of the trust confidential.  If a third party acts in reliance on the representations in the certificate of trust, then the third party is protected from liability if the third party did not have knowledge the representations were incorrect.  If a third party demands a copy of the trust instrument in addition to the certificate of trust or the trust instrument excerpts, then the third party is liable for any damages if a court determines they did not act in good faith in demanding a copy of the trust instrument.  The certificate of trust contains the following information:  that the trust exists and the date the trust instrument was executed; the identity of the settlor; the identity and address of the current trustee; the powers of the trustee; whether the trust instrument is revocable or irrevocable and the identity of the person with power to revoke the trust instrument; the authority of co-trustees to sign or otherwise authenticate and the number of co-trustees needed in order to exercise powers of the trustee; the manner of taking title to trust property; and that the trust has not been revoked, modified, or amended in any manner that would cause the representations contained in the certification of trust to be incorrect.

Investing Trust Property 

Unless the terms of the trust provide otherwise, the trustee has a duty to invest the trust property under the prudent investor rule.  The investment decisions of the trustee have to be balanced against the various interests of the trust beneficiaries, unless the terms of the trust waive that requirement.  The trustee may seek the advice of accountants, attorneys, and investment managers when making investment decisions.

Distributions 

The terms of the trust determines the amount and nature of distributions to beneficiaries.  The trustee may pay reasonable expenses incurred in administrating the trust from the trust property.  Distribution standards typically fall into one of three categories:  discretionary, ascertainable, or mandatory.

Tax Returns 

Whether the trustee has a duty to file a tax return on behalf of the trust depends on the identity of the trust for tax purposes.  

Proposal for Distribution 

Upon the trust’s termination, or partial termination, the trustee may send the beneficiaries a proposal for distribution setting out how the trustee proposes to pay administrative expenses and distribute the trust property.  If the proposal for distribution informs the beneficiaries they have the right to object to the proposal within thirty days, then the beneficiary’s right to object terminates after the thirty day period.

Following an event that terminates the trust, the trustee must distribute the trust property within a reasonable time, subject to the trustee’s right to retain a reasonable reserve for trust debts, expenses, and taxes.  The trustee must also send a trustee’s report to the trust distributees and permissible distributees and other beneficiaries who request it.  The trustee’s report requirement may be waived by the terms of the trust as to all parties other than qualified beneficiaries who request a trustee’s report.

Termination of the Trust 

A trust terminates at the time prescribed by the terms of the trust, upon the exhaustion of all of the trust property, upon an order of the court to terminate, on the termination of the trust upon the trustee’s determination to terminate, or on agreement of the beneficiaries or interested persons.

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