How to Settle A Revocable Living Trust
By Adena Mosesian and Stuart R. Simone Esq.
Following a loved one’s death, most people that have been named as the Successor Trustee in their loved one’s Living Trust have no experience as a Trustee. Once the Trustmaker passes away, the Successor Trustee named in the Trust now becomes the Trustee. As a Trustee you have a legal duty to make decisions that are in the best interest of the beneficiaries, so you want to make sure that you get off to a good start and get the best help throughout the process.
There are three main players in any trust, the Trustor, Trustee and Beneficiary. The person who makes the trust may be called the Settlor, Grantor or Trustor. A person who receives money or property from the revocable living trust is called a Beneficiary. (These can loosely be referred to as “Heirs”.) The person who makes the decisions about the money and property in the trust is called the Trustee. A Trustee can be an individual or a financial institution; if there is more than one, they are Co-Trustees. The Successor Trustee acts only if the Trustee (or all Co-Trustees) can no longer fulfill their role. In a Revocable “Living Trust,” the Trustor is also the Trustee (or co-Trustee) until he/she passes away, thus the Successor Trustee then becomes the acting Trustee at that time. If you were named as Successor Trustee in your parent’s Living Trust, when your last living parent dies you are now the Trustee and you suddenly have important responsibilities. You now have Fiduciary Duties to the beneficiaries of the trust.
Here is a list of questions to get answers to when determining if you will need to hire an attorney to assist you with settling your loved one’s revocable living trust: Is the Revocable Living Trust fully funded; was the Trustmaker married; will the Beneficiaries receive their inheritance outright or in trust; will the Estate owe federal or state estate taxes or inheritance taxes; did the Trustmaker own a business; are the Beneficiaries going to fight over their inheritances; is a trust named as a Beneficiary of a retirement account; is an individual named as a Beneficiary of a retirement account? And there surely will be more questions, depending on the circumstances.
This guide will provide a general overview of the four steps required to settle and then terminate a Revocable Living Trust after the Trustmaker dies.
- Locate important papers, including the Living Trust and other estate planning documents, along with recent tax returns, insurance policies, deeds, annuities, etc. and store in a safe place until they can be given to the trust Attorney.
- Make initial phone class, contact immediate family, close friends, and the parent’s employer (even if they are retired, there may be some benefits available).
- Make funeral arrangements, including memorial or flowers and funeral notice for newspapers.
- Order death certificates.
- You may want to change the mailing address to your home address to ensure you get the documents that will be sent to the Estate and to you as Trustee.
Review the Trust Agreement with an Attorney:
Once you have located and sorted through the decedent’s legal documents and other important papers, the next step in settling a Living Trust is to meet with a trust attorney to determine if probate will be required and if the attorney’s assistance will be needed to help with settling and then terminating the trust.
- Within a few weeks after your parent dies, you should consult with a qualified estate planning law firm to review the Revocable Living Trust with your attorney, review all documents, consider estate planning, discuss potential federal estate taxes, and determine the need for a probate administration.
- First and foremost determine who is named as the successor Trustee(s) to settle the trust and who is named as Trustee(s) of any trusts that need to be created now that the Trustmaker has died. The prior Trustee may need to resign first if you’re going to be assuming responsibility and you are not named as the first Successor Trustee.
- Make notes of the following: Who gets the decedent’s personal effects, who gets any specific bequests, who gets the decedent’s residuary trust, the date and location where the trust agreement was signed, who signed the trust (and pour over Will, if any) as witnesses and the Notary Public.
- Have the attorney prepare a “Trust Certification” that verifies your authority as the current Trustee of the Trust.
Your First Tasks as Successor Trustee:
Now it is time to make a complete list of all the various assets and liabilities (credit accounts). This is the “trust estate.”
- Assume control over assets by changing door locks or installing security alarms and safeguarding valuables to limit access to others; “Beneficiary Raids” are common occurrences during these stressful times and can lead to disputes.
- Establish date of death values for all your loved one’s assets by calling all the financial institutions where their assets are, in order to determine if any estate taxes and/or inheritance taxes will be owed; you may need professional licensed appraisers, especially for real property (such as houses) and large personal property such as boats and planes or valuable collectibles. Also note the value of assets that can pass outside the trust, such as property owned as tenants by the entirety or joint tenants, payable on death deeds or transfer on death accounts, liefe insurance, IRAs, 410Ks and annuities with named beneficiaries. Among other things, the values assigned by the appraiser will used for calculating taxes.
- Notify credit card companies, utility companies, mortgage holder, and other creditors about your loved one’s death.
Managing the Trust:
Once the date of death values have been determined for all of the decedent’s assets, the next step in settling the Living Trust is to pay the decedent’s final bills and ongoing expenses related to administering the trust. It is the Trustee’s job to figure out what bills the decedent owed at the time of death, determine if the bills are legitimate, and then pay the bills. You will also be responsible for paying the ongoing expenses of administering the trust, such as legal fees, any accounting fees, utilities, insurance premiums, mortgage payments, and HOA fees.
- Make sure that the homeowner’s insurance does not lapse and remains in force, with you named on the policy as Trustee of the Estate.
- Manage the trust assets safely and pay all bills and taxes in a timely manner while keeping good records and bookkeeping.
- Evaluate whether trust assets, such as real estate or business, should be sold in order to raise case to pay expenses and taxes. If property is to be kept, then you will need to send proof of death (death certificate and affidavit of death) and if the property is left to you, apply to assume the mortgage loan(s).
- Do not make risky investments or withdraw or rollover IRA’s annuities or 401’s without speaking to your attorney. Withdrawing could incur unnecessary taxes and the beneficiaries could sue you. Remember, as Trustee you have legal fiduciary duties.
- Make sure to file your loved one’s final federal and/or state income tax returns and pay any taxes that may be due in a timely manner.
- If the estate earns income during administration, you need to make sure to prepare and file all required federal estate income tax returns (IRS Form 1041) and state.
- If the estate is taxable for federal and or state estate tax purpose, you will be responsible for preparing and filing the federal estate tax returns (IRS Form 706) and/or a state inheritance tax return, and then paying the tax bill(s). While many estates and trusts may not be affected at all by estate taxes, inheritance taxes, gift taxes, or generation-skipping transfer taxes, the majority will be affected in some way or another by income taxes.
Making Distributions and Terminating the Trust
Usually the first question that the trust beneficiaries will ask the successor Trustee is “When will I get my inheritance check?” But unfortunately for the beneficiaries, making distributions of the remaining trust assets to the beneficiaries and terminating the trust is the very last step in settling a Revocable Living Trust. Prior to making any distributions to the trust beneficiaries, you must be certain that every single expense of administering the trust (and the probate process if there is one) an all taxes have been paid or that enough assets have been set aside to pay the final bills and taxes. Always keep in mind that if expenses come up after you distribute the estate, you will have to pay these expenses our of your own pocket.
You as a Trustee have the responsibility to make sure that every single expense of administering the trust (and the probate estate if there is one) and all taxes have been paid or that enough assets have been set aside to pay the final bills and taxes, so it does not come out of your own pocket later on. In addition, if probate of some of the decedent’s assets is necessary, then the beneficiaries will need to wait until the probate estate is closed and the probate assets have been transferred over to you before the trust can be terminated and the beneficiaries can receive their inheritance.
If administration of the trust is expected to take more than a year, then the successor Trustee should work closely with the trust attorney to plan for setting aside enough assets to pay the ongoing trust expenses and then making distributions to the trust beneficiaries in multiple stages instead of in one lump sum.
Gomez & Simone is a full service real estate law firm representing families and business people, homeowners and renters, landlords and tenants, with offices throughout Southern California. This article is informational only and should not be used as legal advice. Please note that laws may have changed since this article was published. Before taking action, we recommend that you consult with one of our attorneys about your specific matter. Please contact your local Gomez & Simone office or call us at 1-855-219-3333 or email us at info@ gomezsimonelaw.com.