"What does a Trustee do after the Settlor dies?"
What happens when it is time to settle the trust after a death? The “Successor Trustee” is the person who is named in the trust document as the successor to the Initial Trustee (Settlor). The Successor Trustee assumes control of the trust when the Initial Trustee passes away.
Since every trust estate is unique and there are literally hundreds of potential issues in settling any trust estate, it is impossible to determine in advance exactly what will need to be done when an Initial Trustee passes away. To keep this article brief, interesting and practical, we limited the scope to only the most common trust settlement issues. Please note that there are many issues that we could not discuss at all and some of the ones we chose to discuss are not necessarily discussed in depth. Therefore, this material should not be used without also consulting a qualified trust settlement attorney.
It is crucial that all requirements of a Trust Settlement be completed properly. The ramifications of an incomplete or improper settlement can be staggering and may not be discovered for many years.
A complete trust settlement can be divided into these general phases (note: this list is a broad overview, so consult with your attorney about what to do specifically for your situation):
Consult with an Attorney
Generally, the estate planning attorney will need the following documents. If you cannot locate any of the below documents, they probably do not exist. If, however, you believe they exist, mention this to the attorney, because there may be alternative ways of obtaining the necessary information.
- Certified copies of Certificate of Death
- Original Will, Trust, any amendments, and/or Estate Organizer
- Promissory Notes and Deeds of Trust
- Property tax bill for each parcel of real property (any year)
- Mortgage statements, credit card bills, utilities, and any other debt due
- Bank book or most recent statement for each bank account
- Stock certificates and bonds or the most recent statement of each brokerage account
- Life insurance policy
- Automobile, boat, motorhome, mobile home, and/or airplane registrations
- Any document that proves ownership and beneficiary of an IRA, pension, or annuity
- Income tax returns for the past three (3) years
- Gift tax returns
- A list of heirs and beneficiaries, including the name, age, relationship, address, telephone number, and social security number of each
- Name, address, and telephone number for each bank, stockbroker, accountant, life insurance company, and creditor, if not already provided above
Wrapping up the Decedent’s Financial Affairs
Understanding Grief - Usually, the Successor Trustee is a family member or close friend of the decedent and therefore will be experiencing grief. Grief is a very powerful and unpredictable emotion. Meanwhile, the Successor Trustee needs to meet with attorneys, accountants, appraisers and other family members. And he or she will need to follow instructions, learn new procedures, and make major decisions. A good professional settlement team will guide you through the trust settlement process, alleviate your fears, listen to you patiently, gently remind you, and otherwise understand that you are grieving. Here are some of the items to attend to:
- Funeral Arrangements
- Death Certificates
- Closing Safe Deposit Box
- Creditors, Bills and Expenses
- Canceling Monthly Benefits
Filing Legal Notices and Other Documents
The Successor Trustee is responsible for filing and distributing several notices and documents, including:
- Providing all trust documentation to all beneficiaries
- Notifying the Director of Health Services
- Filing the Will with the County Clerk
Compiling the Inventory and Appraisement
A formal Inventory and Appraisement is required by law for probate estates, but it is not required for trust settlements. Nevertheless, it should be done for trust settlements, and, in fact, is probably the most important step in the trust settlement process.
The Inventory and Appraisement is a single document that lists every single asset with the decedent’s name on it, whether or not it is in the trust. Invariably, decedents with revocable living trusts also have assets that they did not transfer to the trust, intentionally or unintentionally; these must be included in the Inventory as well.
Managing the Estate
Until all assets are sold and dispersed, the Successor Trustee has several important responsibilities, including:
- Preserving Assets - You have a duty to preserve all of the assets of the estate. This means that you must keep all of the assets insured and maintained. Watch to see if any assets are declining in value. If so, consult with your attorney regarding selling or distributing them immediately.
- Record Keeping - It is imperative that you keep track of every single transaction you make, because you may need to provide a formal, written accounting. Your attorney or accountant will prepare the accounting for you if one is required, but they must be given adequate records. We suggest that you keep four separate logs: one for income (rent, dividends, interest, refunds, etc.), one for expenses, one for sales, and one for transfers/distributions.
- Determining Cash Needs -You must determine how much cash you will need and when you will need it. You should do this very early on, because it takes time to sell assets, especially real estate. Keep in mind that it sometimes costs money to sell an asset (real estate agent commission, escrow fees, stockbroker commission, etc.).
- Managing Asset Sales – What you sell and when you sell it can have dramatic results. The decision to sell, when to sell and how to sell should not be taken lightly. You should discuss any sales at length with your attorney. Commonly asked questions regarding sales are:
- Which trust assets must I sell?
- Which trust assets may I sell?
- When do I sell the trust assets?
- How do I sell the trust assets?
- Handling Disputes – If and when disputes occur, it is your job as the Successor Trustee to resolve them, if you can. Keep in mind that the parties involved will be having very strong and negative emotions due to the grief they are experiencing. Be patient. Seek the advice of your attorney regarding possible resolutions. Your power to resolve disputes should be outlined in the trust document. If the trust document is silent on this issue, then the Trust Code (which is part of the Probate Code) applies. In California, co-trustees may only make administration decisions through unanimous consent. According to California.
Distribution is the last step in the trust settlement process. What must be done varies greatly, depending upon what the trust document says. Here are some general guidelines for transferring different types of assets:
- Transferring Assets - When and how assets are transferred is very important. Each asset is transferred individually, and how an asset is transferred depends on the requirements of the institution that holds it (such as a bank, brokerage firm, insurance company, etc.). You need to check with each institution in order to know how an asset should be transferred.
- Real Property - To transfer real property, you need an Affidavit of Death to remove the Decedent’s name from the property; you also need to file a Quitclaim Deed and a Preliminary Change of Ownership Report to transfer the property into the proper legal title. Transfers from parents to children require the filing of a Proposition 58 form to avoid having the property reassessed by the County Assessor. Transfers to a surviving spouse do not result in reassessment.
- Bank Accounts - Bank accounts can normally be changed by a letter outlining the new proper legal title and giving the tax identification number to be used. You may be required to fill out a new signature card and to bring a copy of the Articles of the Trust, naming the Successor Trustee and defining his or her Powers.
- Brokerage Accounts - Again, depending on the requirements of the particular institution, a brokerage firm will most likely require a letter outlining the proper legal title, a copy of the Articles of the Trust, a certification of the Trust by the attorney, and the tax identification number of the Successor Trustee. Also, an Affidavit of Domicile may be required to transfer title.
- Stocks - Stocks that are individually held must be returned to be reissued with the new title. Have your broker handle the transfer or contact the transfer agent for each security you own. It is easier to simply open an account in the name of the Trust at your broker’s office and deposit all of your securities into that account.
- Insurance Policies - Insurance companies have their own Claimant and Change of Beneficiary designation forms. Once you notify the company in writing or by telephone, the claims process will begin. The company will send you a letter outlining their requirements, and the necessary forms to process the claim. This might include providing a certified Certificate of Death and a copy of the Articles of the Trust.
- Retirement Accounts (IRAs, 401Ks, Keoghs, Tax Deferred Annuities) - Transferring title on retirement accounts will have an income tax impact. Check with the individual institution that is the custodian of the account for your options and the amount subject to income tax. Do not order any distribution or transfers until you have met with your attorney and/or accountant for options and analysis.
- U.S. Treasury Securities (Bills, Notes, Bonds, U.S. Savings Bonds) - The Federal Reserve Bank has forms with which to change the name on your securities. Your signature must be certified by an officer in a banking institution.
Filing Tax Returns
You are strongly urged to seek the advice and/or services of a Certified Public Accountant who specializes in the preparation of decedents’ returns. There are many instances where the incorrect preparation of the return cost an estate tens of thousands of dollars in unnecessary taxes, penalties, and interest. If a referral to a qualified CPA is needed, please call our office. Some tax issues to consider:
- Form 1040 - You must file the decedent’s final income tax return (Form 1040) for the period of January 1st to the date of death. You must also file a fiduciary income tax return (Form 1041) for the period of the date of death to the end of the year or the date of distribution, whichever is sooner. Since you cannot use the decedent’s social security number on this return and you should not use your own social security number, you must obtain a taxpayer identification number (TIN), also known as an employer identification number (EIN), for the trust. Your attorney or CPA can do this for you.
- Form 706 - Individuals and married couples must file a federal estate tax return (Form 706) if the decedent’s gross estate exceeded the federal estate tax exemption or if the decedent had an AB, QTIP, or QDOT trust.
- Property Taxes - You must continue to pay the property taxes on any trust real estate until the property is sold or distributed.
Specialized Estate Administration Expertise
Remember that every trust estate is unique, with its own potential issues to be settled. This article is an overview of some of the most common trust settlement issues — it should not be used without consulting an attorney. At the time of the death of a trustor, the Successor Trustee is strongly encouraged to discuss your individual trust settlement issues with the attorneys of Mortensen & Reinheimer, PC. Please contact Mortensen & Reinheimer, PC at (714) 384-6053 to make an appointment, or use our online contact form on our website.