Settling a Revocable Trust After the Trustmaker Dies
Most people have little experience being named as the successor trustee in charge of settling their loved one's revocable living trust after the loved one's death. The purpose of this guide is to provide a general overview of the six steps required to settle and then terminate a revocable living trust after the trustmaker dies.
The first step in settling a revocable living trust is to locate all of the decedent's original estate planning documents and other important papers. Aside from locating the original revocable living trust agreement and any trust amendments, you will need to locate the decedent's original pour-over will.
The decedent may have left written funeral, cremation, burial, or memorial instructions, in addition to a personal property memorandum. All original documents should be stored in a safe place until they can be given to the trust attorney.
The decedent's other important papers will include information about the decedent's assets, including bank and brokerage statements, stock and bond certificates, life insurance policies, corporate records, car and boat titles, and deeds for real estate. There will also be ample information about the decedent's debts, including utility bills, credit card bills, mortgages, personal loans, medical bills, and the funeral expenses. Refer to a detailed list of the specific documents that you will need to locate.
Once you have located all of the decedent's important documents, read the revocable living trust to determine its specific provisions. When reviewing the trust, make note of the following:
- Special instructions regarding the decedent's funeral, cremation, or burial
- Beneficiaries of the decedent's personal effects
- Beneficiaries of any specific bequests
- Beneficiaries of the decedent's residuary trust
- The person named as the successor trustee(s) to settle the trust, as well as anyone named trustee(s) of any trusts that need to be created, now that the trustmaker has died
- The date and location where the trust agreement was signed
- The witnesses and notary public who signed the trust
In addition to reading and summarizing the information in the revocable living trust, review the decedent's financial documents, and make a list of what the decedent owned and owed, how each asset is titled (in the name of the trust, in the trustmaker's individual name, as tenants in common, or in joint names with someone else), and, for assets and debts that have a statement, the value of the asset or debt as listed on the statement and the date of the statement. In addition, the decedent's prior three years of income tax returns should be located and set aside.
Meet With a Trust Attorney
Once you have reviewed the decedent's legal documents and other important papers, the next step in settling a revocable living trust is to meet with a trust attorney to determine whether probate will be required, and whether the attorney's assistance will be needed to help with settling and then terminating the trust.
If probate will be required, take the time to understand the steps needed to open a probate estate.
Value the Decedent's Assets
Once you've met with a trust attorney, the next step in settling a trust is to establish date-of-death values for all of the decedent's assets.
All financial institutions where the decedent's assets are located must be contacted to obtain the date-of-death values. Some assets, including real estate; personal effects such as jewelry, artwork, and collectibles; and closely held businesses, will need to be appraised by a professional appraiser.
Note that the value of all of the decedent's assets will need to be established, including those passing outside of the trust, in order to determine whether any estate taxes and/or inheritance taxes will be owed. Assets that can pass outside of the trust may include those that were owned as tenants by the entirety or joint tenants with right of survivorship; payable-on-death or transfer-on-death accounts; and life insurance, IRAs, 401(k)s, and annuities with named beneficiaries. Take the time to understand what the non-probate assets are, too.
Pay Bills and Expenses
Once the date-of-death values have been determined for all the decedent's assets, the next step in settling the revocable living trust is to pay the decedent's final bills and ongoing expenses related to administering the trust. This is also the time that the successor trustee will need to evaluate whether trust assets, such as real estate or a business, should be sold to raise cash to pay expenses and taxes.
It is the successor trustee's job to determine which bills the decedent owed at the time of death, decide whether they are legitimate, and then pay them accordingly. The successor trustee will also be responsible for paying the ongoing expenses of administering the trust, such as legal fees, accounting fees, utilities, insurance premiums, mortgage payments, and homeowner or condominium association fees.
Once the successor trustee has paid the final bills and has the ongoing trust expenses under control, the next step in settling the trust is to pay any income taxes and death taxes that might be due.
The successor trustee will have to prepare and file the decedent's final federal and, if any, state income tax returns and timely pay any taxes that may be due. The final federal income tax return will be due on April 15 of the year after the decedent's year of death. For tax year 2020, that deadline has been extended to May 17, 2021.
The IRS has further extended the April 15 date to June 15 in 2021 for estates in Texas, Louisiana, and Oklahoma in response to the 2021 severe winter storms. This provision covers both the estate tax return and the decedent's final income tax return.
Aside from filing the decedent's final income tax return, if the estate earns income during the course of administration, then the successor trustee must prepare and file all required federal estate income tax returns (IRS Form 1041) as well as any required state estate income tax returns.
If the decedent's estate is taxable for federal and/or state estate tax purposes, the successor trustee will be responsible for preparing and filing the federal estate tax return (IRS Form 706) and/or a state estate tax and/or a state inheritance tax return, and then paying the tax bill(s).
Note that some trusts may be required to file a federal estate tax return even though no estate tax will be due.
Distribute and Terminate
Usually, the first question that the trust beneficiaries will ask the successor trustee is "When will I get my inheritance check?" Unfortunately for the beneficiaries, making distributions of the remaining trust assets to the beneficiaries is the very last step in settling a revocable living trust.
Prior to making any distributions to the trust beneficiaries, the successor trustee must be certain 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.
Otherwise, if the successor trustee chooses to make distributions to the beneficiaries, but expenses come up later, he or she will have to pay these expenses out of his or her own pocket.
In addition, if probate of some of the decedent's assets were necessary, then the beneficiaries would need to wait until the probate estate is closed and the probate assets have been transferred over to the successor trustee 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, the successor trustee should work closely with the trust attorney and accountant 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.