Setting up a well thought out estate plan can be a huge mental, emotional, and sometimes time-consuming undertaking. Because of that, once clients have their estate plan they rarely look at it again or fail to consider what happens to their trust property after they pass away. We are going to assume the client properly funded their trust and utilized all the probate avoidance techniques as suggested by their attorney. Understanding the trust administration process will help you make better informed decisions while setting up your estate plan. So, let’s briefly go through the formal trust administration process.
Step One: Get Organized
The successor trustee (the person appointed to take over as trustee when the initial trustee(s) passes away or becomes incapacitated) and the executor (the person/entity appointed in the will to carry out the terms of the will) need to compile all the legal and financial documents and information pertaining to the decedent’s (person who passed away) estate. This means the decedent’s estate planning documents, legal and financial obligations, and their assets and liabilities. In most cases the appointed parties will need to secure the decedent’s personal property, which in most cases means gaining access to the decedent’s residence. Obtaining a death certificate will be required to notify 3rd parties of the decedent’s passing such as social security office and financial institutions.
Step Two: Notice to the Decedent’s Heirs & Beneficiaries
The successor trustee is required to provide notice of trust administration, within the state mandated timeframe, to all heirs and beneficiaries of the decedent’s date of death. The notice must contain information such as the date the trust was created, the successor trustee’s contact information, and that each beneficiary has a right to a copy of the trust document.
Step Three: Inventory The Trust’s Assets
The successor trustee must identify all the decedent’s assets and secure them so that they cannot be misused by bad actors. Ideally, the decedent set up an estate plan management binder to help transition management of the trust’s assets by the successor trustee. If not, hopefully the decedent met with the successor trustee to show them where to find all the necessary documents and information needed to identify and secure the decedent’s assets. If the decedent did not leave an estate plan management binder, meet with their appointed agents, or at a minimum leave a list of important information, then the appointed agents are left with the difficult task of doing detective work to piece together what assets and liabilities belong to the decedent’s estate and what assets were funded into the trust.
Step Four: Setting up a New Trust Bank Account & Notifying 3rd Parties of Change of Ownership
The successor trustee must obtain a Tax Identification Number for the trust. A new trust account must be opened on behalf of the trust in the name of the successor trustee with that tax ID number. If the trust had real property in it, the County Recorder’s Office needs to be notified of the decedent’s death. Financial institutions that hold trust accounts must be notified of the death of the decedent so that the accounts can be transferred into the newly opened trust account. If the trust is named as a beneficiary on any insurance policy or retirement account those institutions must be notified.
Step Five: Lodge the Decedent’s Will with the Court
The decedent should have had a will as part of their estate plan. If so, the will would be lodged with the probate court. This means that any assets held outside of the trust that were not set up to bypass probate will go through the probate process.
Step Six: Provide Notice & Settle Creditor Claims
The successor trustee should provide notice to creditors that the decedent passed away. This will prevent future claims against the trust and the successor trustee for failure to settle a claim on behalf of the decedent. To be clear, the successor trustee is obligated to settle any debts, liabilities, or bills incurred by the decedent who is the initial trustee. These debts, liabilities, or bills can be paid off with trust assets and should be completed before distributing the remaining trust assets to the beneficiaries.
Step Seven: Obtain Date of Death Values
There are many tax ramifications that are in play when someone passes away and their trust property is distributed to beneficiaries. The successor trustee is tasked with identifying the value of each asset in the decedent’s estate at the time of the decedent’s passing. Most financial institutions will assist in this task by providing date of death values of the assets they hold. In other situations, the successor trustee can obtain a date-of-death appraisal for personal or real property. These values will be essential for a CPA to help determine what taxes are owed when the assets are transferred.
Step Seven: File Taxes!!!!
The successor trustee is required to file tax returns and pay the taxes using trust assets on behalf of the decedent and the trust. This includes any property tax or tax assessments. This means the successor trustee may file personal tax returns (on behalf of the decedent) for income earned in the year leading up to the decedent’s date of death (IRS Form 1040) and income earned from the date of death to the final distributions of assets (IRS Form 1041). Then the successor trustee will also need to work with a CPA to file a tax return on behalf of the trust. If assets are to remain in the trust for ongoing management such as in cases of minor children, the successor trustee will be required to file a tax return each year the trust is in existence.
Step Eight: Accounting
There are two types of accounting done by the successor trustee. An informal or formal accounting of the trust’s assets. Generally, beneficiaries are entitled to an accounting on an annual basis from the successor trustee in California. But the trust document may have language in it that either waives the duty to make an accounting of trust’s assets or establish specific requirements for an accounting. If there is an obligation for the successor trustee to keep an accounting, then typical an informal accounting is accepted by most beneficiaries. An informal accounting saves time and money because the successor trustee, with possibly the help of a bookkeeper, uses their own spreadsheets to track all the assets, income, and expenditures made by the trust. However, if a formal accounting is required then the successor trustee must abide by specific rules under the state’s probate code.
Step Nine: Distribute Trust Assets
Assuming Steps One through Eight have been completed and there is no need for ongoing trust management, the successor trustee will distribute assets in accordance with the directions set forth in the trust document. Distributions are typically either outright, staggered, or discretionary. An outright distribution would be funds payable to specific beneficiaries in specified amounts or percentages. A staggered distribution would be used in situations where the trust assets need to be managed over a long duration of time. Thus, distributions would be distributed over time (aka staggered), such as in situations where the beneficiaries are minor children. Discretionary distribution is where the decedent left the decision to distribute trust assets to the discretion of the successor trustee.
Step Ten: Closing Trust Administration
The successor trustee can officially close trust administration once all distributions have been issued and all trust accounts are closed. Typically, you will also see a final accounting to the beneficiaries by the successor trustee.
Take Away for Someone Setting Up a Trust
Now that you know more about trust administration you should ask yourself the following questions:
1) Is the person who I want to appoint as my successor trustee capable of understanding and dutifully completing the trust administration process?
2) What actions should I take to help the successor trustee locate, inventory, and secure all of my and the trust’s assets after I pass away?
3) Will the trust have enough liquidity or cash on hand to enable the successor trustee to manage trust assets and go through the trust administrative process?
4) And most importantly should I sit down with a caring and competent estate planning attorney to walk me through setting up my estate plan?… Please let us answer this one for you, ABSOLUTELY
If you are in need help with an estate plan or trust administration we would love to be part of the solution. Click the contact us button on our website and leave us a message with your contact info!