Estate planning attorneys and smart financial advisors will tell you that unless you have a living trust, your estate will go through probate. True. And in California, probate is expensive, takes a long time, and is a major hassle. But, if you have a living trust, and you have funded it - which means you have transferred title of your home, other real estate, and bank and investment accounts to your trust, then your family will avoid probate. Ok. Fair Enough. You get it. You know probate is bad. You’ll get a living trust and transfer your assets to your living trust. But then what? What happens when someone dies with a living trust?
When someone dies with a living trust, the person in charge, the successor trustee, has work to do. Not nearly as complicated or expensive as probate, but nonetheless, there is important and necessary work to do. This is called “trust administration.”
There are essentially four stages of trust administration. Below we outline some of the important steps in each stage.
Here are some of the steps in the first stage of trust administration.
Order death certificates. We recommend ten.
File the original will with the local probate court.
Submit a notice of death to the California Dept. of Health Care Services.
Mail a California Probate Code Section 16061.7 Notice to all beneficiaries and heirs within 60 days of death. The Notice must state that they have 120 days to contest the terms of the trust and that they can request a copy of the trust.
Identify the decedent’s assets.
Record an Affidavit Death of Trustee for each real property.
Get an EIN (tax identification number) for the trust.
Prepare a Certification of Trust with the EIN.
Notify the decedent’s banks and financial institution of her death and provide them with a copy of the Certification of Trust to give you access to the accounts.
Sign a Small Estates Declaration to use for any small bank accounts which were titled in the decedent’s name and not in the trust.
Create a spreadsheet to keep track of asset values and expenses.
Create a spreadsheet to keep track of your time and activity as successor trustee.
As you can see, there is a lot to do, and many of these tasks have deadlines. It can be overwhelming. But most successor trustees hire an experienced estate planning attorney to guide them and to do most of these steps.
After the initial steps are completed, you are ready for stage two of the trust administration, here are some of the steps of stage two.
If you intend to sell the decedent’s home, hire a realtor and get the property ready to sell.
Distribute the decedent’s personal property to the trust beneficiaries and sell or dispose of the items no one wants.
Consolidate the bank accounts into one administration account which you will use to pay bills and deposit the liquidated assets and from which you will cut the beneficiary’s distribution checks.
Liquidate the brokerage accounts.
Work with the IRA financial institutions and the IRA beneficiaries to set up an inherited IRA for each IRA beneficiary.
When you have sold the decedent’s home and liquidated the investments and consolidated the bank accounts, it may be time to make distributions to the beneficiaries. Now you are in stage three of the trust administration. The steps in stage three include:
Mail the beneficiaries a trust accounting with each beneficiary’s proposed distribution amount. And if 120 days have not yet passed since the date of the California Probate Code section 16061.7 notice, then include a waiver for each beneficiary to sign to waive the 120-day contest period.
Don’t forget to include your trustee fee in the accounting. You are working hard, and you deserve to be paid for your effort. (Most living trusts allow the trustee to receive a reasonable fee for serving as trustee.)
Set aside a reserve amount in the trust bank account for future expenses and taxes.
Retain an accountant who can file a Form 1041 trust tax return.
If the beneficiaries are behaving themselves, and there are no outstanding disputes, then you are ready for stage four, the final stage. Steps of stage four include:
Mail checks or wire money to each beneficiary.
File the decedent’s final 1040 personal tax return.
File the 1041 trust tax return.
Pay final expenses and taxes from the reserve amount.
Approximately one year later, after all expenses and taxes have been paid, distribute the remaining balance in the reserve amount to the beneficiaries.
Are there any trust administration steps needed when the first spouse dies? Yes.
When the first spouse dies, the surviving spouse is usually the successor trustee. The successor trustee will need to do many of the steps in the initial stage of trust administration listed above. In addition, the following steps may also be necessary.
Determine whether the trust requires that the trust assets be allocated to a marital trust and the survivor’s trust, or whether all the trust assets can be allocated to the survivor’s trust. If a marital trust is required, get valuations for the assets and prepare a trust allocation schedule.
Update the survivor’s pour-over will, durable power of attorney, and advance health care directive and HIPAA if needed.
Transfer the title of trust assets from the joint living trust to the survivor’s trust, if needed.
Rollover the deceased spouse’s IRA and name new primary and contingent beneficiaries.
Update primary and contingent beneficiaries of the surviving spouse’s IRA and life insurance policies.
As stated above, trust administration is a lot of work. But believe it our not, this is way less work than probate (and way less expensive), and trust administration can be done in-house, and by that I mean without a judge and the probate court.
Because trust administration involves a lot of work and because the beneficiaries can sue the successor trustee if she doesn’t know what she is doing, most successor trustees hire an experienced estate planning firm to help them with the trust administration. That’s what we do.
The decedent chose you to be his successor trustee, not because he thought you were an experienced expert in trust administration, but because you knew him and his beneficiaries, he trusted you, and he was confident you would make good choices and complete the work.
Don’t feel like you have to research and figure out on your own how to do the trust administration. We have done hundreds of trust administrations, and we can help you by teaching you what needs to be done and guiding you through the process.