Wow. Gee whiz! After I wrote Trusts 101 a couple of months ago, Mariella has been fielding salvos of questions about aspects of Trusts. So, yay! I’m almost ready to que the epic music to celebrate while the winter breeze blows through my hair like it always does in corny movies about weirdo superheroes.
It’s really great for an article to generate questions. After all, there’s no way an article from a writer like me can cover the intricacies, let alone the legal gobbledygook endemic to individual Trusts that can fill a 3-inch binder. The subject of Trusts is vast, something that really requires an Attorney to explain in more than general terms such as may apply to your particular needs. Articles about Trusts usually begin at an Estate Planning or Elder Law offices; but because Trusts intersect with real estate practices, real estate Salespeople and Brokers talk about them too. For that reason and more, Real Estate Law is a field of study for licensees at renewal time, especially Brokers.
A disclaimer is in order here. I don’t write as an Attorney but as a retiree blessed with the experience of having worked for years in real estate offices, acted as a Personal Representative for a Decedent, served on a Board of directors for a Bay Area non-profit, set up a Trust, and continues to act as a Trustee. I glean information that’s publicly available and present it in general terms. It doesn’t stand as legal advice but should make enough practical sense to incite those wonderful questions of yours, leading to an Attorney. What may be true in my case probably won’t be the same in yours. You need to consult that Attorney prior to setting up a Trust to confirm that it’s right for you and then you can sort out those specifics with the experts.
Here are some of your questions:
- “Do I need to hire an Attorney or other professional to administer a Trust?”
- “What happens if I can’t find anyone to properly administer a Trust, especially when competing heirs fight one another like howling tomcats on a hot August night?”
- “How does a Professional Fiduciary work and where can I find one?”
A RECAP OF TRUSTS 101
For those new to this newsletter, a Trust is an entity characterized by a fiduciary relationship, created in the form of a corporation in which one party grants the title of a property and/or other assets to another party for the benefit of a 3rd party.” The one who grants a Trust is the Trustor. A natural person to whom one grants a Trust is the Trustee, and the relationship of that Trustee is that of a Fiduciary. The 3rd party benefitted by the Trust is the Beneficiary.
It’s the fiduciary duty of any Trustee to guard and protect the assets of the Trust. That fiduciary relationship is sacred and carries serious legal ramifications. A Trustee isn’t at liberty to convert funds or real property from a Trust for his/her/their own purposes, but in certain cases, a fee may be charged either by contract between Trustor and Trustee or at the direction of a court.
Trust documents include such items as the Last Will and Testament, Powers of Attorney, and Advance Directives for Healthcare. These are documents you really need to execute whether or not you set up a Trust. I can’t stress their importance enough.
Whether a spouse, a close relative, or even a friend, somebody may need to make medical decisions for you when you can’t. Hospitals ask patients about Advance Directives all the time before providing major treatment.
If you pass, institutions with whom you do business will honor the actions of someone you designate in these documents as your Personal Representative, even for a simple matter like placing a block on the bank accounts of the Deceased. Notifying those banks comes right after notifying next of kin because any benefits paid to an account after the account-owner’s death will need to be returned. A bank won’t believe just anyone, of course. If you present your Driver’s License and the Will designating you as Personal Representative, a bank will appreciate the “heads up,” and will expect a Death Certificate as soon as one becomes available. It’s all part of that fiduciary duty applicable to a Personal Representative.
Transactions with creditors also need to be addressed. A succession of Trustees allows administration of issues like mortgages and utilities to continue without interruption while a big scramble to obtain Letters of Administration from a Probate Court may result in delays. Even if there’s no real property and Probate isn’t required, a Will, a Death Certificate, and your Driver’s License as identification can allow transfer of a vehicle Title to whomever the Will directs without question. Without a Will, that transfer can get pretty sticky and may require legal help that you’d be better off not needing.
ADMINISTERING THAT TRUST
While you need to hire an Attorney to assist you in setting up a Trust, you don’t need to hire one to administer it, nor are you required to hire a Professional Fiduciary. For that matter, a Trustee doesn’t need a special degree or license unless they act as such professionally. Many Trusts are “kept in the family.” If an adult family member is competent enough to execute a contract, that person is qualified to act as a Trustee.
In fact, even public Boards of Trustees, such as exist for schools, often consist of elected community members, most of whom aren’t Attorneys and many don’t have advanced degrees. The same would be true for a corporation, though larger ones want administrators with advanced degrees like an MBA. A Trust takes the form of a small corporation.
In fact, a Trustee may commit the management of real property to a Property Manager. There’s a good reason why a Trustee may decide to do so. Consider that the Trustee may be Cousin Bob who lives in Redding but the property to be managed is in Anaheim. Cousin Bob probably can’t travel back and forth from Redding to administer that property so he may decide to commit the property to a Property Manager like the Broker who had been the procuring Agent at the time of purchase.
Property management firms often concentrate on large commercial properties. But real estate Brokers are often contracted for managing residential properties, and sometimes smaller commercial properties as well. Their work consists of drawing up Leases, collecting rents, executing 3-Day Notices and Unlawful Detainers where necessary, arranging maintenance work, and other matters required by contract and laws at the state and federal levels. Contracted amounts typically consist of a nominal monthly fee deducted from rent received.
In many cases, a Broker maintains a Broker’s Trust account at a bank in which a reserve amount determined in the Property Management Agreement allows immediate payment for maintenance services. These are trust funds, kept separate and distinct from other accounts specifically for the benefit of the one who has entrusted them. The Property Manager/Broker must give a monthly account of those funds to the one entrusting them (like Cousin Bob in the aforementioned example) as well as maintaining these records for any audit the state may conduct— and the California Department of Real Estate does exactly that from time to time.
WHEN POTENTIAL TRUSTEES INSIST ON A CATFIGHT
Let’s consider a scenario that may be relevant in the age of COVID-19. Let’s say that you’ve designated a succession of Trustees but each one of them has died. What happens then?
The matter falls to a Probate court to make a decision. Many people set up Trusts in order to avoid Probate, but conditions may render Probate unavoidable. The court will first examine the way the Trust has been structured. Trust documents appear with the contact information of the Attorney who drew up those documents, so a court may be very interested in what that Attorney has to say.
Other factors that may be germane to that decision may include what Beneficiaries exist, their ages, and availability. Availability includes their willingness to act as Trustee. Even if Trust documents appoint someone as a Trustee, that person can decline to act that part for whatever reason, whether long-term illness, conflicts of interest, inability to commit, or whatever. Nor will any court want to appoint someone as Trustee who had been convicted of a felony. Even if not convicted, if there’s suspicion surrounding the purposes of a particular candidate, a court would pass over that person as Trustee. In other words, you can expect that accusations that a Petitioner has the chutzpah of having murdered the named successors would incite the Judge to look askance at the idea of appointing the Petitioner.
If indeed no living adult relative or trusted friend can be found, the Trust may go to a Professional Fiduciary. Professional Fiduciaries are established by the Professional Fiduciaries Act (Chapter 6 of Division 3 of the California Business and Professions Code). The text of this act is publicly available at https://www.fiduciary.ca.gov/laws_regs/act.shtml. This applies to all Conservators, Trustees, Personal Representatives, Guardians, and Agents under a Durable Power of Attorney. Professional Fiduciaries safeguard the well-being of elders, children, and people with disabilities.
To get an idea of the price of a professional to act as Trustee, they often charge 1-2% of the Trust assets per year in the corporate world. In other words, if the Trust has been funded to $5 million, the Trustee makes $50,000-100,000, so that demands that the corporation must continue to turn a profit. Some charge according to a graduated schedule of fees such as 4% of the first $100,000, 3% of the next $100,000, etc. For small estates, private Trustees typically get paid on the basis of hours worked, usually in excess of $100 per hour. This amount can be set forth in the Trust documents; otherwise, the court will specify the amount to be paid. Since private Fiduciaries tend to have less training than those in the corporate world, they’re more likely to commit certain aspects of administration of real property to a Property Manager such as a real estate Broker.
LOCATING A PROFESSIONAL FIDUCIARY
Finding the right Fiduciary can be a bit tricky because Fiduciaries apply to a wide range of services that may or may not be compatible with administering a Trust. Some, especially those who deal in such things as investments and stocks, require a securities license. Others are insurers. These are the Fiduciaries you often find on sites like Yelp. These aren’t the kinds of Fiduciaries one would choose for administering a Trust, but some do work in that capacity. The right Fiduciary may also work out of a law office. The possibilities vary widely. Get referrals.
Professional Fiduciaries must be licensed just like real estate Brokers must be licensed. Just like every consumer should check the license status of any real estate Broker with the California Department of Real Estate at https://www.dre.ca.gov/Consumers/, consumers need to check the license status of any prospective Professional Fiduciary at the Department of Consumer Affairs Professional Fiduciaries Bureau at https://www.fiduciary.ca.gov/consumers/index.shtml. This page is a tremendous resource for any consumer. Not only will you find a link to license verification, this page has a link to a publication with a checklist to guide you when interviewing prospective Fiduciaries so you’re not left at a disadvantage.
GET YOUR ESTATE IN ORDER
Trusts make a lot of sense for many Homeowners and potential Buyers of real property, precisely because they provide an extra layer of protection. By all means, explore this matter further.
Call Mariella at iRealty Shop. As a member former Broker/REALTOR® of the Orange County BAR Association with a strong reputation for specializing in the sale of real property in Probate, she has numerous excellent contacts to whom she can refer you, whether you want to find an Attorney for setting up a Trust or Professional Fiduciaries to whom you can turn for administering a Trust if necessary.
As a licensed real estate Broker, she’s also equipped for Property Management. If you buy a property for the purpose of renting it to tenants, Mariella can manage that property, even if you’re living in another state.
Your needs may involve more than strategizing for a property purchase. You may need an array of services requiring a plan of action to maintain and protect your investment, especially when you do so for another person. Mariella is happy to listen to what you want to do to safeguard your future and that of those who come after you.
Don’t wait. Now more than ever, you need to make your future, and the future of those you love, a reality.
