A trust is only the beginning…
Many clients have the misconception that once the trust is set up, there is nothing further to be done. This might be true when there is no legislation regarding estate planning changes, no family situations changes, and no asset changes. However, if there is major change in your life, or taxation or estate planning law changes, it is time to review the documents.
Also, in the event the trustor dies, then the trustee must administer the trust in accordance to the terms of the trust. This process is called trust administration. Most of the time, this process needs the assistance of an attorney.
In a typical trust administration process, the following steps are carried out, however, every trust is different, and some trusts may require different procedures not mentioned here.
The successor trustee must send a Probate code notification to current beneficiaries and heirs at law when a revocable trust or any portion of it becomes irrevocable because of the death of one or more of the settlors or because of a contingency as specified in Probate Code §16061, or when there is a change of trustee of an irrevocable trust.
2. Lodging of the Will
Even if there is a fully funded trust, which will not enter probate, the person in possession of the will must lodge the will with the clerk of the superior court in the county in which the decedent resided within 30 days of learning of the death (unless a petition for probate has already been filed).
3. Change Title of Real Estate
If the trust held real property, an affidavit of death of trustee would need to be recorded with the County Recorder’s Office so the successor trustee can acquire title to the property. Also, a Preliminary Change of Ownership Report (PCOR) must be filed within 150 days of death.
The trustee would also need to ascertain the trust’s creditors and pay off any outstanding debts. This might include credit card bills, mortgage payments and various utility bills.
There are two kinds of taxes associated with the trust administration. In terms of income taxes, a separate taxpayer identification number (an EIN number), must be obtained for the trust. IRS Form 56 (Notice Concerning Fiduciary Relationship) must be prepared and filed to notify the IRS that the trust is now irrevocable and has become a separate taxable entity. Also, the IRS requires that the federal estate tax Form 706 be filed within nine months of death even though no estate tax is owed. This is in addition to income tax return Form 1040 for the deceased for the year of his or her death and a Form 1041 tax return for the trust every year of its existence after the death of the original trustor. It is essential to file the 706 tax form and pay the taxes within the allotted nine months to avoid any penalties and interest and preserve the possible portability of the lifetime exclusion to a spouse.
6. Appraisals and Accounting
In order to determine a basis for real property, personal property, intangible personal property for purposes of capital gains, formal written appraisals are needed. In particular, the tax basis of those aforementioned assets is determined by the fair market value on the decedent’s date of death, or within six months if a special election is filed.
A succcessor trustee who is administering an irrevocable trust must also prepare and render an accounting of their actions and administration of the trust. To satisfy that legal requirement, you must keep detailed accounting records of the trust. And even where the trust waives the requirement of a formal accounting, you will still want to keep detailed accounting in case the trust administration goes into litigation.
7. Retirement Benefits
The trustee would need to prepare and mail letters to employers, plan administrators, and IRA sponsors concerning retirement benefits since retirement benefits are often intentionally excluded from being included in a trust.
After all of the assets have been appraised, the debts paid, the tax returns filed and the tax liabilities satisfied, the accounting prepared and rendered (if required), you will be in a position to distribute the remaining trust assets. As with all other aspects of trust administration, the terms of the trust document will dictate how the trust assets are to be distributed among the trust beneficiaries.