Dear Clients and Friends,
As a former IRS attorney I was specially assigned to the Estate and Gift Tax division and in my 4+ decades of private practice thereafter we routinely work with clients on implementing their personal Estate Planning documentation as well as representing them with their loved ones post-death estate administration – be it a court monitored probate proceeding or on behalf of managing a deceased’s Living Trust.
Below are the guidelines on dealing with a deceased’s Living Trust:
The main reason your parents established a living trust is so you would not have to take their estate through the costs and hassles of probate.
If your mom or dad had a funded living trust, you won’t have to go through probate, but you will have to do a trust administration. Most people use an attorney to help with the trust administration. While trust administration is less complicated and less expensive than probate, it can be more complicated than most people believe it to be.
The person in charge of the trust administration is the successor trustee. The successor trustee is the person listed in the trust as next in line to manage the trust when your mom or dad passes away.
Below is an outline of the primary tasks the successor trustee will have to do (or coordinate with the estate planning attorney to do) for a typical trust administration.
You don’t need to start the trust administration right away. We tell our clients to take care of the funeral or other arrangements first. The trust administration can wait a few weeks while you give yourself and your family time to grieve.
Death Certificates. Order five to ten original Death Certificates from the funeral home.
Locate Trust and Will. Find the living trust and the original will. It’s not critical to have the original trust, but it is important to have the original will (more on that later).
Assets and Liabilities. Make a list of your parent’s assets, debts, expenses and ongoing bills.
Accounting. You will need to make records of all of your expenses as trustee. This is a very important task that can’t be taken lightly. As trustee, you have a fiduciary responsibility to the trust beneficiaries, and they have a legal right to look over your shoulder, and if they ask, you will need to give them a written accounting of all the trust receipts and expenses.
Contact an Estate Planning Attorney. Most people contact an estate planning attorney so the attorney can explain and coordinate the trust administration. The attorney will need to see the trust, will and list of assets, debts, expenses and bills. If you hire an attorney, the attorney will do most of the work.
Get Trust Tax Identification Number. You will need to get a tax identification number for the trust from the IRS. Once your parent dies, his or her social security number can no longer be used on the accounts. The bank or financial institution will want you to give them a trust tax identification number.
Send out Statutory Notice to Beneficiaries. The California Probate Code requires the trustee to send a notice to all trust beneficiaries and heirs. The notice must comply with Probate Code section 16061.7 and must be sent within 60 days of the date of death.
Lodge the Original Will. Probate Code section 8200(a) requires the custodian of the original will to “lodge” it with the probate court within 30 days of death. “Lodge” is an old fashioned legal term for “file.” The court filing fee is $50. You will need to attach an original Death Certificate to the will.
Notice to DHCS. Mail a notice to the California Department of Health Care Services of your parent’s passing. You will need to include an original Death Certificate.
Affidavit Death of Trustee. If your mom or dad owned real property, you will need to record an Affidavit of Death of Trustee with an original Death Certificate with the county recorder. This provides notice that you, as successor trustee, now have authority to sell the property.
File Claim for Reassessment Exclusion for Transfer Between Parent and Child. The county assessor will attempt to reassess the property value and adjust the property tax whenever there is a change in ownership – such as when a parent dies and the property is transferred to the children, However, a transfer from parent to child will not cause a reassessment if the trustee (or the attorney) submits a Claim for Reassessment Exclusion for Transfer Between Parent and Child to the county assessor.
File Estate Tax Return – Portability. The American Taxpayer Relief Act of 2012 made “permanent” the estate tax exclusion amount of $5,000,000, indexed for inflation. The indexed exclusion amount for for 2016 is $5,450,000. This is the amount each parent can die with without an estate tax. Under the new law, the surviving spouse can “port over” the deceased spouse’s estate tax exclusion and double up her exclusion amount. For example, if husband dies in 2016, wife can port over his $5,450,000 exclusion and add it to her exclusion. When she dies, her family can exclude husband’s $5,450,000 amount as well as the then indexed exclusion amount for her. However, to port over her husband’s exclusion, she has to file a form 706 estate tax return for her husband and make the portability election. Unless she files form 706 and makes the election, she cannot port over the exclusion. Only spouses can make the portability election. If your surviving parent has a large estate, she should consider filing the estate tax return.
Small Estates Declaration or Affidavit. If there are assets not titled in the trust, such as small bank accounts, those accounts can usually be transferred using a Small Estate Declaration under Probate Code section 13100, so long as the accounts are worth less than $150,000.
Income Tax Return. You will need to file a final income tax return for your deceased parent.
Fiduciary Tax Return. Once your mom or dad dies, his or her social security number can no longer be used to report income. Depending on the type of assets and how soon the assets are distributed to the beneficiaries, you may need to file a Form 1041 fiduciary tax return. The return will report the income earned on the trust assets from the date of death until the date the assets are distributed.
Make Preliminary and Final Distribution to Beneficiaries. After you have paid off the liabilities of the trust estate and liquidated the assets, you may be in a position to make a preliminary distribution to the beneficiaries. We always recommend you hold back enough funds to pay for known and unexpected future bills. If you distribute all the funds right away, it may be difficult to ask the beneficiaries to pay some of the money back when an unexpected bill or expense crops up. We typically recommend our trustee clients hold back a certain amount for six months to a year to cover unexpected expenses. Then when the dust settles and it’s reasonable to believe there won’t be any more expenses, you can make the final distributions.
Get Receipt and Waiver of Further Accounting. We highly recommend you get the beneficiaries to sign a receipt on each distribution. We also recommend you ask them to sign a waiver of further accounting. If the beneficiaries trust you and you have demonstrated honesty and reliability in your handling of the trust, they may not ask you to give them a full accounting. You should be able to give them a spreadsheet of the trust accounting if requested, but by the time you make distributions, you should ask the beneficiaries to sign a waiver of further accounting. You don’t want them to scrutinize your accounting after they receive their distribution. If they want to examine the books, they should do so before the distributions so any issues can be resolved at that time.
This is not a complete list of tasks, but it covers most of the tasks a trustee will have to complete to administer a trust.
Call us for a free phone evaluation of your matter.