Taking Inventory of Trust Assets

When you take over as the trustee of a trust created by someone who had died, you need to quickly take an inventory of what assets are actually held in the trust; otherwise, you won't know which assets you're in charge of. Your authority as trustee extends only to assets that were legally transferred to the trust before the deceased person's death. Here's what to look for.

Assets Held in the Trustee's Name

Always start by looking at the document that created the trust. This document, often called the "trust instrument, will probably be titled, for example, "the James T. Kahane Revocable Living Trust" or the "Nessler Family Trust." In particular, look for a list of assets at the end of the document. It will likely be labeled "Schedule A" or something similar, and should list the items the person who set up the trust intended to hold in the trust.

Next, you must check to be sure that the assets listed on the property schedule were legally transferred to the trustee before the settlor (the person who created the trust) died. It's not enough just to be listed on the trust's property schedule. There must be a document transferring the property to the trustee.

The document you'll be looking for depends on the kind of property.

Real estate. For real estate be held in the trust, there must be a deed that transferred the property from the settlor to the trustee. For example, look for a deed that transfers the deceased person's house from its owners, Michael Jefferson and Sonia Jefferson, to themselves as trustees, using language like this: "to Michael Jefferson and Sonia Jefferson, Trustees of the Jefferson Family Revocable Living Trust dated February 17, 20xx."

Bank or brokerage accounts. Look on the monthly or quarterly statement to see how the account is registered with the financial institution. It should say something like "LaToya M. Crane, trustee, LaToya M. Crane Revocable Trust UTD 9/05/20xx." (The "UTD" is an abbreviation for "under trust dated.")

Motor vehicles. The title slip issued by the state must show that the trustee is the vehicle's owner.

Miscellaneous personal items. If something doesn't have a title document—for example, clothing, ordinary pieces of furniture, or kitchen items—you probably won't find a document transferring them to the trust, and that's fine. It's usually enough if they were listed in the property schedule of the trust document. However, New York law requires that there be a separate document called an "assignment of property," which states that particular items are being held in trust.

Assets Left to the Trust in a Pour-Over Will

Many people who make a living trust also make what's called a "pour-over" will. This kind of will is designed to take any assets that pass through the will, and pour them into the trust. That way, the terms of the trust govern who inherits all the deceased person's assets, and gives the trustee control over all the assets. With a pour-over will, you can funnel into the trust any assets that the settlor intended to transfer to the trust but didn't, or assets acquired after the trust was created.

If property passes through the pour-over will, it falls to the executor named in the will (and if you're the trustee of the living trust, you may also be the executor of the will) to transfer property into the trustee's name. Depending on state law and the size of the estate, this may or not require a formal probate court proceeding. If not too much valuable property passes under the will, then in most states the executor can use simplified probate procedures or even bypass probate altogether. The rules are different in each state. (For each state's rule, see Probate Shortcuts in Your State.)

Assets That Pass Outside the Trust

Many kinds of assets, including some very valuable ones, typically do not pass under the terms a trust or a will. Instead, they go directly to the person that inherits them. Here are some common examples:

• Jointly owned assets. If the deceased person was married, he or she mostly likely owned valuable assets like a house or bank account with a spouse. And with most kinds of joint ownership (joint tenancy, community property with right of survivorship, or tenancy by the entirety), a surviving co-owner automatically owns the property. A will or trust doesn't change that. (Learn about claiming survivorship assets.)
• Life insurance policy proceeds. The insurance company will pay policy proceeds directly to the beneficiary who was named by the policyholder.
• Retirement plan accounts. Most people name beneficiaries for their retirement plans; these beneficiaries can claim any funds left in the account directly from the plan custodian.
• Payable-on-death bank accounts. The POD beneficiary, who was named (on a form provided by the bank) by the deceased account owner, can go to the bank and claim the money in a POD account.
• Real estate left through a transfer-on-death deed. In more than a dozen states, people can leave their real estate through a TOD deed; the property does not need to go through probate.

Assets Mistakenly Left Out of the Trust

Many people who go to the trouble and expense of creating a living trust don't ever get around to actually transferring valuable assets into the trust. They just forget, or don't realize that the formal transfer of ownership is an essential part of reaping benefits from the trust.

If there's a pour-over will, that should take care of the problem, though the assets may need to go through probate first (which was what the settlor was trying to avoid by making a living trust).

If there is no pour-over will, is there anything you can do? Usually, after the settlor has died, it's too late. The assets can't be transferred into the trust, and instead pass under the terms of the deceased person's will (or state law, if there's no will).

In California, however, you may be able to ask the probate court to approve the transfer of assets to the trust. You'll have to show that the settlor intended the assets to be held in trust, but didn't do it for some reason. (This request is made with a document called a "Heggstad petition," after the case that started the practice.) This process requires hiring a lawyer and isn't worth it unless the property is quite valuable.