Trusts Administration
What do you do when a loved one with a trust dies?
When a Trustor dies, a portion of the Living Trust (usually consisting of all or part of the deceased Trustor’s separate property and his or her share of the community property) will usually become irrevocable. The duties of the Trustees with respect to the Irrevocable Trust then become more important and the Trustees’ responsibilities become substantially greater.
At the death of a Trustor, trust assets must be valued, death tax returns must be filed, assets must be allocated to the proper accounts or subtrusts, appropriate books (records) must be established so that the income and principal receipts of each Trust that has become irrevocable can be recorded accurately, and investments must be more carefully made because the Trustees are now responsible to all of the Trust’s beneficiaries, even if they are not yet born or identified.
Upon the death of one of the spouse Trustors, the Living Trust is usually divided into two or three separate subtrusts, the “Survivor’s Trust,” the “Family Trust” and, in some cases, the “Marital Trust.” To the Survivor’s Trust is allocated property equal in amount to one-half of the Trustors’ community property, all of the surviving Trustor’s separate property, and, in some instances, a portion or all of the deceased Trustor’s separate and community property. The balance of the trust property, often an amount equal to the amount that may pass free of death taxes, is allocated to the Family Trust.
The discussion of the activities, duties and liabilities, set forth above, also applies to the management and distribution of assets after the death of both Trustors. Often the terms of the Trust will then require specific allocation of certain assets to specified beneficiaries or trusts, as, for example, all of the stock in a family business to those children involved in the business; or will charge a beneficiary’s share with loans previously made to that beneficiary or with prior gifts, etc. Obviously, the terms of the Trust must be examined carefully to see that all of the Trustors’ directions are carried out.
If there are continuing trusts for children or grandchildren, these trusts may be separate trusts (i.e., separate tax entities each requiring its own tax returns) or separate shares (i.e., one trust with varying interests requiring only one tax return). Normally, the trust document will specify that separate trusts are to be used as they are usually most advantageous from an income tax standpoint.
The need to be familiar with and understand the terms of each trust cannot be overemphasized.