Record Keeping in Trust or Probate Administration

In April 2009, I summarized the proper handling of current estate planning documents. This included recommendations for storage of the original Trust versus the original Will. It also described who should have a copy of the Advance Health Care Directive and Durable Power of Attorney. If you wish to read or re-read that issue, you can find it in my newsletter vault on my website (see the website address below). Past issues of my newsletters are posted in the vault and available to all who subscribe to them.

This newsletter addresses record keeping issues after administration of an estate has been completed. There are several reasons for retaining your records used in the administration but the two main reasons are an IRS audit and potential creditor claims against the estate.

Trust Estate Administration

Upon the death of an individual Settlor, or upon the death of the Surviving Spouse, the Successor Trustee marshals the trust assets, pays all proper debts and expenses of the trust, including income taxes, and distributes the balance of the trust estate to the named beneficiaries as directed in the trust agreement. Once this has been completed, Trustees often ask me; “How long do I have to keep my records of the administration?” Before that question can be answered, the Successor Trustee must determine whether the Internal Revenue Service will audit the Trustee’s fiduciary income tax return.

Once the administration of a trust has been completed, the Successor Trustee should hold onto the trust administration records until he or she has determined that the IRS will not audit the fiduciary returns. The Trustee should obtain advice regarding the proper length of time from the CPA who prepared and filed the fiduciary returns.

Estate Tax Returns

The length of time during which the IRS may conduct an audit may be different for an estate tax return (which is reporting the value of the decedent’s assets on his or her date of death) than it is for a fiduciary income tax return (which is generally an annual return reporting the income of a trust during the calendar year). Once the estate tax return has been prepared, the accountant usually makes a written request for an immediate review of the return which shortens the time in which the IRS audits the return. No Trustee should distribute the trust assets to the beneficiaries until after he or she has received the closing letter from the IRS.

Probate Estate Administration

Probate estate administration differs from the administration of a trust estate. Estates that are subject to probate have the benefit of court oversight. Documents filed with the probate court in Los Angeles County, California during probate administration are now scanned and kept electronically. Copies of filed documents can be obtained directly from the courthouse.

Sometimes the length of time an Executor should retain probate documents is shorter than the length of time recommended for Trustees. One of the reasons for this pertains to potential creditor claims. In a probate proceeding, all ascertainable creditors of the Decedent are notified and requested to present their claims to the Executor. If a known creditor does not present a claim during the prescribed time in the probate process, the creditor is barred from doing so at a later date. So at the end of the probate process, the court is able to order distribution to the beneficiaries under the Decedent’s Will or to the Decedent’s heirs at law (if there was no Will) without concern that creditors will show up at a later date demanding payment.

Moreover, because all the documents filed in a probate matter in Los Angeles County are now scanned and can be viewed or copied by going to the Stanley Mosk Courthouse in downtown Los Angeles, there is little need to keep the original probate file for years after the receipts showing final distribution was made. Although I recommend that a copy of the probate documents be kept until the period of time for the IRS audit has elapsed, once the Executor has been discharged by the Judge, the public probate files can be discarded.

Once the probate has been completed, the Executor may request that the court discharge him or her as Executor. A court’s discharge terminates the Executor’s legal authority to act for the Decedent. If there is an asset belonging to the Decedent which is subsequently discovered, a new probate case will need to be opened in order to properly dispose of that later discovered asset.

Electronic Storage

Using current technology, a Trustee or Executor now has the capability to easily hold onto its records used in preparing the estate tax return, the fiduciary income tax returns, and the probate documents. The documents can be electronically scanned and stored indefinitely either on a computer’s hard drive, a portable flash drive, or even in “the cloud” by way of the Internet. Storing data electronically means that records can easily be kept for long periods of time without requiring the physical space that the paper documents need.

For many Trustees and Executors, some combination of paper documents and electronic copies of the paper documents is the ideal for keeping their records as long as necessary.

Original Wills with the Lawyer

Under the current rules, a California lawyer is required to keep, forever, a client’s original Will. Long ago, before living trusts became popular, it was common for lawyers to keep original Wills for their clients. This made good business sense at the time because the lawyer would often handle the probate of the Will when the client eventually died. However, if the lawyer died with original Wills in his possession, the person winding up the deceased lawyer’s practice could find himself on the hook for locating hundreds of people to return the original Wills to them. Therefore, I have a policy of NOT keeping my clients’ original documents.