Action Upon Death of Settlors. When the Settlor of a revocable trust dies, there are a number of things that need to be done by the Successor Trustee (or Personal Representative if there are probate assets). For convenience, the person taking the action will be referred to a Successor Trustee, although some of these actions will need to be done by a Personal Representative if a probate must be done.
1. Recordkeeping. The Successor Trustee must keep accurate records showing all funds received and disbursed for the entire period that the Successor Trustee serves. These records will be important in preparing income tax and estate tax returns. The Successor Trustee is responsible under trust law to account for everything done by the Successor Trustee and not being able to do so because of inadequate records will be heard as a violation of the Trustee's responsibilities.
The Successor Trustee should find out what debts are owed by the decedent and what funds were owed to the decedent and maintain those records.
The Successor Trustee should obtain the bills showing final illness expenses, records of payment receipts or cancelled checks showing payments of those bills. The Successor Trustee should check to see that all bills have been paid.
The Trustee should keep financial records for each of the trusts which will be treated as separate trusts for income tax purposes. The records should be sufficient to show income and expenses and the assets and liabilities of each trust. The supporting documents for these financial records should also be kept by the Successor Trustee.
The Trustee should also maintain records showing ownership of trust assets.
2. Tax Returns. On the death of the Settlor, the Successor Trustee should consult with a tax professional (usually a CPA) or with the trust's attorney to prepare or appropriate tax return filing. In most cases, income tax returns will need to be filed. In some cases estate tax returns and general excise tax returns will also be needed.
An initial step is to apply for tax identification numbers. The trust will need at least one federal identification number. If there will be a marital trust or if the family trust will have two or more separate trusts, additional federal identification numbers will be needed. If the trust has rental property or operates a business, a general excise tax license will be required. If the trust will have employees, employer identification numbers are needed.
In addition to the trust's federal and state income tax returns, a final tax return for the deceased Settlor will generally be needed. If there is no probate and no surviving spouse, the Successor Trustee will probably need to arrange for the deceased Settlor's final income tax return.
There are a number of expense items for final illness and administration of the estate that can be deducted from either the final income tax return or the estate tax return. The Successor Trustee should consult with the tax professional who will be preparing the income tax return and the estate tax return on how to best use the deductions.
If there is a probate, the personal representative will be responsible for the federal and state estate tax returns. However, if there is no probate, the Successor Trustee will be responsible to file these tax returns.
The estate tax returns (federal and state), if applicable, are generally due within nine months of the Settlor's death. Many estates are not large enough to require an estate tax return, but since the taxable estate may involve assets that are not owned by the trust, the Successor Trustee cannot assume that no estate tax return is due simply because of the value of trust assets. Jointly owned assets, death benefits paid in life insurance policies, death benefits on pension plans or IRAs are the type of assets which are within the taxable estate of a decedent.
There are a number of elections that can be made on the estate tax returnsSince the Successor Trustee will be responsible for administering the trust assets, the Successor Trustee should understand the applicable elections. Even if the Successor Trustee is not responsible for filing the estate tax return, the Trustee will need to administer the trust consistently with those elections.
Early consultation with the estate planning attorney and the tax professionals handling the income tax returns and the estate tax returns is important. Appraisal of assets is often a critical part of the process and may take several months to complete.
3. Protecting Tangible Trust Property. The Successor Trustee is responsible to protect trust property. In the case of tangible property or improved real property, this will involve physically securing the property to minimize the risk of theft or damage from vandalism. The Trustee should also consider insuring such property against loss by damages or destruction. In doing so, the Trustee should consider consulting with insurance brokers to see what insurance coverage is available, applicable coverage and exclusions and the financial strength of the insures.
Certain personal property, such as artwork, antique furniture, or special collections may require special care and the Trustee should consult persons who know how such property should be maintained.
4. Protecting Against Financial Loss and Investment Risks. The Trustee must be prudent in managing the financial assets of the trust. In general cash should be maintained in insured accounts at financial institutions.
Unless the trust will be distributing its assets in a short period of time, the Trustee must make basic investment decisions. The decisions are often limited by the terms of the trust. For example, a trust may require that stock in a family owned corporation or the family residence be kept in trust. In the absence of such trust provisions, the Trustee must decide on how the trust assets are to be invested in light of the trust's provisions.
Trust provisions often direct that the trust is to be administered so as to produce income for the benefit of income beneficiaries. In that case, the Trustee must consider converting nonincome producing assets into income producing assets as one of the more important objectives.
A Trustee must be prudent in making investment decisions. However, prudence in modern trust administration does not mean that each and every trust asset must be invested so that the risk of investment loss is virtually impossible. Modern trust law recognizes that an economic loss can occur by not allowing trustees to consider an investment strategy that allows diversifying trust assets among fundamentally sound investments so that the gains in some of the investments can, over an appropriate investment period, affect losses sustained in other investments. The basic concept allows the trustee to invest so that the economic value of trust assets is not eroded over time because of factors such as inflation.
However, unless the Trustee has extensive experience in investment, the Trustee should consult with appropriate financial advisors in making investment decisions.
Since a Trustee must act prudently, a Trustee may often have to decline investments which, while potentially very profitable, requires assuming a high level of risk, or would commit a substantial portion of the trust's assets. A trust therefore will seldom be in a position to realize extraordinary gains even if the trust assets are substantial.
5. Fiduciary Duties of Trustees. Trustees are held to high legal standards in carrying out their responsibilities. (fiduciary duties) In serving as Trustee, a person must act as authorized under the trust agreement, in the best interest of the trust and its beneficiaries, and must act with reasonable diligence and prudence.
A Trustee therefore should not engage in self dealing and place the Trustee's personal interest above that of the trust or its beneficiaries.
A Trustee should take steps to obtain all information required to administer the trust and to take timely action. The Trustee can become liable to the trust for penalties or added costs incurred because the Trustee does not act promptly.
A Trustee must also act prudently. In some cases, this may prevent a Successor Trustee from continuing practices which the Settlor started. When the Trustee's knowledge or experience is limited, the duty to act prudently may require that the Trustee consult or hire someone with the necessary knowledge or experience.
6. Trustee Liability. A Trustee may become liable to the trust or its beneficiaries by failing to carry out the Trustee's duties properly.
If the trust continues to own or manage real property or to run an operating business, the Trustee may also be liable to other persons. The extent of that liability will vary depending on the activity and the form of business organization use. In general, an unincorporated operating business owned and run by a Trustee, exposes the Trustee to the greatest load of risks.
A Trustee who has liability expenses because of trust assets or trust businesses should consider obtaining adequate levels of liability insurance. Since the potential liability can jeopardize trust assets, such insurance fulfills the dual function of protecting the trust assets as well as protecting the Trustee.
For situations in which the Trustee may be held negligent in causing a personal injury or property damage, liability insurance will protect the Trustee even if that Trustee would not be entitled to indemnity from the trust because of the Trustee's negligence.
7. Termination of the Trust. The trust agreement usually states when a trust will terminate. The Trustee should be prepared to give an accounting (or equivalent if a formal accounting is not required) to show what the Trustee collected and paid out over the term of the trust.
The Trustee must also file final trust income tax returns (federal and state) to terminate the trusts for tax purposes. The Trustee should be able to provide the beneficiaries receiving assets with title and tax documents related to the assets being distributed, including those showing the income tax basis of the assets.
The Trustee should receive receipts or equivalents from beneficiaries for property or documents distributed. The Trustee should also seek written confirmation from all beneficiaries that the final accounting (or equivalent if a formal accounting s not required) is acceptable and that the beneficiaries discharge the Trustee.