Trust Administration


We are frequently asked: “What happens to assets held in a living trust when those assets are inherited by the beneficiaries? What procedures are required to terminate the trust and to transfer assets to beneficiaries?” This article will provide an overview of steps required, and things to consider when acting as trustee.

First, a bit of background on how the revocable trust works. If Jane Smith owns assets in her sole name and she becomes incapacitated or passes away, the assets are frozen until someone with legal authority to manage them appears. Unless a beneficiary designation applies to the asset, in most cases solely-owned assets must go through the probate process. If the assets are titled in the name of the trustee of the revocable living trust, the trustee has the right to access assets without court intervention.

During her lifetime, for as long as Jane is able, Jane would manage the trust assets — just as she would if they were in her name. trustWhen she is no longer able, a successor trustee named by Jane in the trust agreement takes over. The court is not involved since the ‘owner’ of the assets has not changed — the trust is still the owner. The manager of the trust has simply changed, according to the provisions outlined in the trust agreement.

When a revocable living trust is used as a tool in estate planning, assets are retitled in the name of the trust, so the successor trustee named in the trust may step in when needed without court intervention. If the asset is titled in the name of the trustee of the revocable living trust, the trustee has the right to access assets without court approval, since the trust agreement itself authorizes the trustee to act. Since the probate process only applies to assets owned by a deceased person, all assets owned by the trust totally avoid the probate process. It is essential, when a trust is signed, that titling of assets is changed to the trustee of the trust. Then, when a death occurs, the bank or other institution looks at the signature card and says, “We don’t freeze this account. It’s held by a trust.”

Upon Jane’s death, the trustee should consider the following steps. The trustee is legally responsible only for management and distribution of trust assets, but if the trustee is also a family member, often the trustee also handles funeral arrangements and other details. The following list includes practical responsibilities that should be considered. Since each situation is somewhat different and since many tax and other legal considerations will affect steps taken by our office, this list is not all inclusive.

  • Locate and review all of the deceased’s important papers. Sometimes directions for funeral and other pertinent information may be located with other papers, so these documents should be reviewed as quickly as possible. If a safe deposit box exists, it should be checked. If the trust was the lessee on the safe deposit box, the successor trustee will now have access to the box. Locate the original of the trust agreement and any other pertinent documents.
  • If the deceased was living alone, change locks and take any steps necessary to close the house. If the house will be vacant, insurance carriers should be notified of this fact.
  • Automobile insurance and any other pertinent insurance policies should be checked to be certain trust assets are insured against potential loss or liability.
  • Make funeral or other formal arrangements for burial, cremation or memorial services. Obtain certified copies of the death certificate from the funeral director or County Health Department in the county where the death occurred.
  • Make a list of all household goods, and, to be absolutely safe if several beneficiaries are involved, photograph personal property and take an unrelated, disinterested witness along when you make your list. The list will be of great help in keeping track of where personal property items are distributed, and to be certain they are distributed as provided in the trust agreement.
  • Create a general list of assets, along with the account number(s), address and phone number of each agent or institution handling assets. Locate the most recent statement for each account and bring them to us along with the general list of assets.
  • If several different accounts exist, it simplifies things greatly if liquid assets that are titled in the name of the trust are consolidated into one account (or one savings and one checking account, if a variance in interest earned is a factor). However, consolidation should not be done prematurely, in case some assets are not held by the trust. Accounting issues can become complicated if nontrust assets are mixed with trust assets. After the inventory is completed, we can be of help in coordinating consolidation of accounts.

By using one account for payment of all bills and to deposit any receipts, the check register for that account can be used to account for trust activity. Be certain that trust2records are kept to describe where money deposited came from, and the purpose of checks that are written. As trustee, you are in the position of safeguarding the funds for beneficiaries, and it is important for you to be able to account for trust activity while the trust is under your control. This information is also very important for tax reporting purposes, since, if records aren’t kept showing where income came from and what expenses were paid, it’s impossible to determine what income is taxable and what expenses are deductible.

  • Determine whether any legitimate outstanding bills or debts exist and pay them. If the trustee does not pay bills, the trustee could be held personally liable for those bills. It is safest to determine outstanding liabilities and to complete the inventory of assets before making distributions to beneficiaries, since it is very awkward for a trustee to go back to beneficiaries and ask for money back with which to pay bills.
  • A tax identification number needs to be obtained for the trust, especially if the trust will generate income from the date of death until all trust assets are distributed (which is generally the case). We can be of help in obtaining the tax identification number. While the person whose assets were placed in the trust has power over the trust property, the settlor’s social security number was the tax identification number, and trust income was simply reported on the annual 1040 tax return. When the settlor no longer has power over the trust (due to death), then the trust is required to report income under its own tax ID number. For the year of death, income earned from January 1 through date of death will be reported on the decedent’s final 1040. Income earned from date of death through date of distribution of all assets will be reported on a form 1041 trust tax return. The assets themselves are NOT subject to income tax. Only the income generated by the assets (interest income, etc.) is subject to tax.
  • We can help in making certain that all required tax returns are filed. Possible state and federal tax returns required would be the deceased’s final 1040 income tax returns, the trust’s 1041 income tax returns, and estate tax returns for estates of more than $5 million, if single and $10 million upon death of surviving spouse. If lifetime gifts were made, even if the estate is valued at less than $5 million or $10 million, estate tax returns may be required. In determining the value for federal estate tax purposes, all assets are included, including death benefits on life insurance.
  • We may file the deceased’s will with the probate court in the county where the decedent resided. Even though a probate will not be required if all assets are in the trust, the will should be filed if there are unknown creditors. Many jurisdictions require filing of the will to prevent people who are aware of a will from destroying it for any reason.
  • If the trust document requires an accounting, we will create an accounting which begins with the inventory listing all assets existing on the date of death, shows all additions of any type, subtracts all disbursements, and shows current assets on hand. This must balance. The accounting may then show how current assets on hand are to be distributed to beneficiaries based on the plan of distribution specified in the trust agreement. When the accounting is near completion, it is easiest if assets are placed in a noninterest-bearing account so values are not constantly changing. Our trust account may be used for this purpose. We do want to be certain that the period of time during which assets are held in noninterest-bearing accounts is short, however.
  • We will prepare a receipt and release form for each beneficiary to sign, stating that they have received their inheritance and that they release the trustee from further responsibility or liability. Funds are distributed to the beneficiaries when they have signed the receipt and release form. (Once distributions are made, it is much more difficult to obtain signatures, since it is no longer a priority for beneficiaries.)

Estate settlement involving a revocable living trust is generally easier than going through the probate process — in part, because it’s faster. Also, the successor trustee can access accounts immediately, which is more convenient than waiting for authorization from the probate court. However, even with a trust, settlement includes many details and completion of all items including taking advantage of all tax benefits and maintaining detailed information to present to beneficiaries. Professional help can expedite the trust termination process, insure that all tax benefits are utilized, minimize potential liability for the acting trustee(s), and help in maintaining records to share with beneficiaries.

QUESTION: If all of these steps are necessary, was it worth it for the settlor to execute the trust? Wasn’t the trust supposed to eliminate paperwork?

It’s true that, even with a revocable trust, paperwork is required. Realistically, none of us would want conveying our assets to someone else or authorizing management to be done with no paperwork or authorization! Even the trust must have some provisions and some paperwork requirements so assets are only managed by those who are authorized by the owners of the assets. Tax filing requirements and tax planning techniques would trust3be required whether probate was utilized or not. Those can’t be avoided, although the shorter length of a trust termination may eliminate tax filings in more than one year. Other requirements are as specified in the trust agreement, for the purpose of keeping beneficiaries informed. Assets aren’t frozen, so the trust makes it easier to begin transactions such as sale of assets and payment of bills, and probate notices to interested persons who could inherit due to state law are not required. Avoiding court paperwork and expense of complying with the requirements can be quite beneficial. The trust termination is typically shorter than a probate, and is private except for tax filings and accountings to those designated by the settlor. Additionally, analysis and steps taken at the time the trust was put into effect typically coordinate titling and beneficiary designations with the overall estate plan. This planning is to make certain that the estate plan results in distribution of assets to the beneficiaries of the settlor’s choice, while utilizing all possible tax planning opportunities appropriate for the settlor.

Contact us to assist you in the trust administration process. Call (818) 292-8160 to schedule your complimentary consultation with estate planning attorney Richard M. Seff. Weeknight and weekend appointments are available.

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