by Rebecca Klock Schroer
When a trust terminates, beneficiaries are understandably anxious to receive final distributions. They often do not understand that there is a period of time after a trust terminates to allow the trustee to wind up the administration.
For example, we recently represented the trustee of a very old trust that terminated on a date certain. Upon termination, the remaining trust assets were to be distributed among many remainder beneficiaries. After receiving several phone calls, we quickly learned that the beneficiaries expected to receive final checks on the termination date. We explained that, as with all trust administrations, the trustee had to take several steps before issuing checks for the final distributions.
First, the trustee must complete a final accounting that separates income and principal. This is necessary to determine the final distributions, particularly if the income beneficiaries are different from the remainder beneficiaries. Next, the final expenses need to be estimated, so that the expenses can be prepaid or a reserve can be held back for future payment. These expenses might include preparation of the final tax return, trustee fees and attorney fees.
In Colorado, there is a statute that helps limit liability of a trustee that has issued a final accounting. Colo. Rev. Stat. § 15-16-307 provides that a proceeding against a trustee must be commenced within six months of receipt of a final accounting showing that the trust is terminating.
For additional security, the trustee often wants to obtain a release from each beneficiary prior to making the final distributions. Otherwise, the trustee runs the risk of distributing the trust assets and having no assets remaining to defend a lawsuit. If the beneficiaries refuse to grant releases, the trustee may want to seek judicial approval of the final accounting before making the final distributions.
The law provides that the trustee may take a reasonable amount of time to wind up the trust administration. See § 1010 of Bogert’s Trusts and Trustees. In our experience, this can take from sixty days to several months or even longer depending on the facts and circumstances. While it is understandable that beneficiaries are anxious to receive their distributions, they have to allow the trustee to properly finalize the trust administration.