After a Grantor Dies

What happens after the grantor of a living trust dies? If you used WillMaker's living trust, the process works differently depending on whether you made an individual living trust or a shared trust with your spouse or partner.

Overview

When the grantor, who is also the trustee, dies, the successor trustee named in the Declaration of Trust takes over as trustee. The new trustee is responsible for distributing the trust property to the beneficiaries named in the trust document.

The trust continues to exist only as long as it takes the successor trustee to distribute trust property to the beneficiaries.

The successor trustee is also in charge of managing any property left to a young beneficiary in a child's subtrust. A subtrust will exist until the beneficiary is old enough to get the property outright (at the age specified in the trust document), so if there's a subtrust, the successor trustee may have years of work ahead.

If trust property inherited by a young beneficiary is to be managed by a custodian under the Uniform Transfers to Minors Act, the person named as custodian will be responsible for that property. That person may or may not be the successor trustee.

Duties of a successor trustee of an individual trust:

• Notify beneficiaries that the trust exists, if necessary.
• Get an appraisal of valuable trust property.
• Prepare an Affidavit of Assumption of Duties.
• Distribute trust property to beneficiaries named in the trust document.
• Manage trust property left in a child's subtrust, if any.
• File the deceased grantor's final income tax returns. (This is the responsibility of the executor of the estate.)

Who Serves as Trustee

When the grantor of an individual trust dies, the successor trustee is in charge.

More Than One Trustee

If more than one person is named in the trust document as successor trustee, they all serve together. The trust document may require them all to agree before taking any action with regard to the living trust property, or it may allow them to act independently.

If one of the trustees cannot serve, the others remain as trustees. The person named as alternate successor trustee does not take over unless all the people named as successor trustees cannot serve.

If a Trustee Resigns

A trustee can resign at any time by preparing and signing a letter of resignation. The ex-trustee should deliver the notice to the person who is next in line to serve as trustee (see table above).

If no one named in the trust document can serve, the last acting trustee can appoint someone else to take over. The appointment must be in writing, signed and notarized.

Removing a Trustee

Very rarely, a beneficiary becomes seriously unhappy with the way a trustee handles trust property. For example, the beneficiary of a child's subtrust might complain that the trustee isn't spending enough of the trust property on the beneficiary's education. If the dispute can't be worked out, the beneficiary can file a lawsuit to try to force the removal of the trustee.

Getting an Appraisal

Whoever serves as trustee when a grantor dies should promptly get written appraisals of the market value of all significant trust assets. This is important for at least two reasons:

• Whoever inherits property gets a new tax basis in that property: the market value at the date of death. The new owner needs to know what that market value is to correctly figure tax liability later, when the property is eventually sold.
• If the executor or trustee needs to file a federal estate tax return, there is a choice of valuing the assets either as of the date of death or six months later. Getting a reliable estimate soon after the death means there will be something to compare it to later.

Preparing an Affidavit of Assumption of Duties

The successor trustee may be asked to show proof that he or she actually has authority to act on behalf of the trust. This is especially likely for transactions involving real estate.

It may be enough for the trustee to show both the trust document and the grantor's death certificate. Another way is to prepare a sworn statement (affidavit) setting out the facts that give the trustee authority, and to record (file in the public records) this document in the county land records office.

In most states, there isn't any set form for this kind of statement, but it should include:

• the name of the trust
• the date the trust was signed, and
• the name of the successor trustee.

The trustee should sign the statement in front of a notary public, and attach a certified copy of the death certificate. Certified copies of the death certificate are available from the county or state vital records office; in many places, you can order them online.

Notifying Beneficiaries

Trustees must always keep trust beneficiaries informed about administration of the trust. This rule is intended to make sure that the beneficiaries have enough information to enforce their legal rights -- for example, to make sure that trust assets aren't being mismanaged.

With a simple probate-avoidance trust, there is usually not much need for communication with beneficiaries. (The successor trustee may be, in fact, the only beneficiary.) The trust exists only long enough for the trustee to gather and distribute the assets.

General Rules

A successor trustee who thinks beneficiaries of the trust don't know about it should promptly notify them when the grantor dies. A simple letter, telling the beneficiary that the trust has become irrevocable because of the grantor's death, and that the successor trustee is now in charge of trust assets and will distribute them as soon as is practical, will do in most states.

Special State Requirements

Some states have very specific rules about how and when the successor trustee must notify beneficiaries about the existence of the trust. The notice must include certain information and be formatted in a certain way. By the time your trust becomes irrevocable, it's likely that more states will have adopted this kind of notice requirement. A successor trustee should always check current state law and may want to consult a lawyer.

Transferring Property to Beneficiaries

After a grantor dies, the trustee must transfer property to beneficiaries.

The procedure for transferring trust property to the beneficiaries who inherit it depends on the kind of property the trustee is dealing with. Generally, a copy of the grantor's death certificate (both grantors', if the trust property was originally co-owned) and a copy of the trust document are necessary. In some cases, the trustee will need to prepare some other paperwork.

Specific requirements for transferring property vary slightly from place to place, and the trustee may have to make inquiries to banks, stock brokerages and other institutions about current procedures, but here are the general rules. A trustee who runs into difficulties has the authority to get help -- from a lawyer, accountant or other expert -- and pay for it from trust assets.

Property Without Title Documents

For trust property that doesn't have a title document -- furniture, for example -- the task of the trustee is quite simple. The trustee must promptly distribute the property to the beneficiaries named in the trust. If the trustee thinks it's a good idea, have the recipient sign a receipt.

Property With Title Documents

If an item of trust property has a title document that shows ownership in the name of the original trustee, the trustee must prepare and sign a new title document transferring ownership to the beneficiary. Usually, the trustee will need a copy of the trust document and of the trust grantor's death certificate if the property is in someone else's possession.

Basically, the process of transferring trust property to beneficiaries is the reverse of transferring it into the trust in the first place. For example, you need a deed to transfer real estate to your trust; to transfer it back out again, your successor trustee will also need a deed. If the trustee is dealing with a third party -- for example, a brokerage company -- it can help with the transaction or at least tell the successor trustee what documents are required.

Preparing and Filing Tax Returns

Final personal tax returns and, if necessary, state or federal estate tax returns must be filed. Doing so is the responsibility of the executor named in the decedent's will. Usually, the same person is both executor and trustee.

A federal estate tax return must be filed if the decedent's gross estate was large enough. (Fewer than one percent of estates are.) It's a complicated document, due nine months after the decedent's death, and will require expert help.

Property Management for Minors' Trust Property

If the trustee provided property management in the living trust – either through a UTMA custodianship or a child's subtrust, it is the successor trustee's duty to manage that property for the young person until the young person reaches the age determined by the terms of the trust.

Administering a Child's Subtrust

If the trustee must manage a child's subtrust, the job will last until the beneficiary is old enough to receive the property outright.

EXAMPLE: Carl sets up a living trust and names his two young children as beneficiaries. He specifies that if the children are younger than 30 when he dies, the property they are to receive from the trust should be kept in a separate child's subtrust for each child.

When Carl dies, one child is 30; the other is 25. The 30-year-old will receive her trust property with no strings attached. But a child's subtrust will be created for the 25-year-old. Carl's successor trustee is responsible for managing the property and turning it over to the child when he turns 30.

The trustee must:

• invest subtrust property prudently
• act honestly and in the best interests of the beneficiary
• keep beneficiaries informed about the administration of the trust
• use the income from subtrust property, or the subtrust property itself, to pay for the beneficiary's health, support, maintenance or education
• file an annual trust income tax return, and
• give the remaining subtrust property to the beneficiary when he or she reaches the age designated in the trust document.

The trustee can use subtrust assets to get professional assistance if necessary. For example, the trustee might want to pay a tax preparer for help with the subtrust's income tax return or consult a financial planner for investment advice.

The trust document also provides that the trustee of a subtrust is entitled to reasonable compensation for acting as trustee. The trustee decides what is a reasonable amount; the compensation is paid from the subtrust assets.

Administering a Custodianship

Someone who is appointed, in the trust document, to be the custodian of trust property inherited by a young beneficiary has about the same management responsibilities as the trustee of a child's subtrust. The specifics are set out in the Uniform Transfers to Minors Act, as adopted by the particular state's legislature.

A custodian, however, does not have to file a separate income tax return. Any income from the property is reported on the beneficiary's own return.