How to Settle a Revocable Trust After the Trustmaker Dies

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Step 1 of Trust Settlement - Inventory

Most people have little experience dealing with what happens after their loved one dies and they have been named as the successor Trustee who will be in charge of settling their loved one's Revocable Living Trust. 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'll also need to locate the decedent's original Pour-Over Will. In addition, the decedent may have left written funeral, cremation, burial or memorial instructions and 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; and information about the decedent's debts, including utility bills, credit card bills, mortgages, personal loans, medical bills and the funeral bill. Refer to What Documents Are Needed After Someone Dies? for a detailed list of the specific documents that will need to be located.

Once all of the important documents have been located, read the Revocable Living Trust to determine its specific provisions. When reviewing the trust, make notes about the following - special instructions regarding the decedent's funeral, cremation or burial; who gets the decedent's personal effects; who gets any specific bequests; who gets the decedent's residuary trust; who is named as the successor Trustee(s) to settle the trust as well as who is named as 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; and who signed the trust as witnesses and Notary Public.

In addition to reading the Revocable Living Trust and summarizing what it says, 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.

Once the decedent's important documents have been sorted through, the next is to meet with an trust attorney to determine if probate will be required and if the attorney's assistance will be needed to settle the trust.

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Step 2 of Trust Settlement - Meet With a Trust Attorney

Once the decedent's legal documents and other important papers have been sorted through, the next step in settling a Revocable 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.

If probate will be required, then refer to the Step by Step Guide to Opening a Probate Estate and the Step by Step Guide to Probating an Estate for detailed information about the probate process.

Refer to Do You Need to Hire an Attorney to Settle a Revocable Living Trust? for a list of reasons why a trust attorney may be needed to help with settling the trust.

After you've determined if probate will be required and, even if not, if you will need the attorney's assistance to settle the trust, the next step is to establish date of death values for all of the decedent's assets.

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Step 3 of Trust Settlement - 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. For assets including real estate, personal effects including jewelry, art work and collectibles, and closely held businesses, they'll 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 if 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. Refer to What Are Non Probate Assets and Are They Included in Your Estate? to determine what, if any, non probate assets the decedent owned.

Once the date of death values have been determined for the decedent's assets, the next step is to pay the decedent's final bills and ongoing expenses of administering the trust.

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Step 4 of Trust Settlement - Pay Bills and Expenses

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Once the date of death values have been determined for all of 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 in order to raise cash to pay expenses and taxes.

It is the successor 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. The successor Trustee 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 homeowner's or condominium association fees.

Once the successor Trustee has paid the decedent's final bills and has the trust expenses under control, the next step is to pay any income taxes and estate taxes that may be due.

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Step 5 of Trust Settlement - Pay Taxes

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 may be due.

The successor Trustee will need to prepare and file the decedent's final federal and/or state income tax returns and pay any taxes that may be due in a timely manner. The final federal income tax return will be due on April 15 of the year after the decedent's year of death.

Aside from filing the decedent's final income tax return, if the estate earns income during the course of administration, then the successor Trustee will need to 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, then 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. Refer to When is a Federal Estate Tax Return Required to Be Filed? to determine if Form 706 will be required to be filed for the decedent's trust.

Refer to What Types of Taxes Are Due After Someone Dies? for a guide to the different kinds of taxes that may be due and the tax returns that will need to be filed.

Once all of the income tax and estate tax issues have been resolved, the final step to settling the estate is to make distributions of what's left to the trust beneficiaries and terminate the trust.

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Step 6 of Trust Settlement - Distribute and Terminate

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 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, then the successor Trustee will have to pay these expenses out of his or her own pocket. In addition, if probate of some of the decedent's assets was necessary, then the beneficiaries will 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, then 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.