Revocable trusts are often promoted with an “Avoid Probate” slogan. They are supposed to make things easier for your descendants to manage after your death. This is certainly true most of the time, but what really happens after you die? And how can you make it even easier for your loved ones after you’re gone? Read about what happens in Probate and why people want to avoid it here.
All trusts are NOT created equal, and what happens can vary based on the assets involved, the family dynamics, the complexity of the distribution plan, the laws involved for the trust, and multiple other factors. On the positive side, a Court is not likely to get involved in the process. While this might save time and stress, it doesn’t necessarily make things simple. A Trustee (the person or company in charge of the trust) has important duties to beneficiaries, creditors, and others. Most states will have a Uniform Trust Code (UTC) to provide statutory guidance, but the UTC is not always clear.
Even with all these variables, there are a few key steps involved in the general process known as trust administration. The list below will give you a good idea of what to expect from this process, and many of these steps can happen simultaneously and not necessarily in this order.
What to Expect During the Trust Administration Process
1. Secure the Assets Owned by the Trust — It is not always clear what is owned by the Trust, especially at first, but the Trustee does have a duty to secure the assets owned by the Trust as quickly as possible. For instance, if a house is in the Trust, does it need new locks? If valuable personal property is in the Trust, has it been secured? This practical step can be very sensitive depending on the assets involved and the family dynamics.
2. Create a New Certificate of Trust — How does the Trustee show the external world they are the new Trustee for this Trust? A common step would be to create a new Certificate of Trust outlining the facts of the situation and who is now Trustee for the Trust.
3. Determine What the Trust Owns and the Value of Those Assets – Determining the Inventory of the Trust can be the most difficult part of the Trustee role. The more informed the Trustee is before the death of the Trustmaker, the easier it is to complete this step. For instance, IRAs are not owned by a Trust, but the IRA may have the Trust listed as a beneficiary of the IRA. Depending on the assets involved, the value of these assets at the date of death will also be needed.
4. Manage Creditors – Many states will have publication statutes outlining steps to publish when someone has died to notify creditors of their death. If a Trustee properly follows these steps, then usually the statutes will protect the trust against unknown creditors after a certain date. So identifying these creditors, paying the appropriate creditors and getting protection from other creditors can be very important in the trust administration process.
5. Manage Beneficiaries – Beneficiaries have rights too, and the Trustee is responsible for informing these beneficiaries of the Trust and providing timely information to them. A Trustee cannot assume all beneficiaries will be friendly in the process, but it is often the hope. Additionally, spouses will have certain rights that the Trustee will need to be sure are being met for the long-term protection of the Trust.
6. Decide If a Probate Case Is Needed – As part of identifying the assets, it may become clear that certain assets will require a probate estate to be created. If a probate estate is needed, then the Will should be filed with the Court within specific time periods.
7. Decide If Disclaimer / Waivers Are Needed – Do any of the beneficiaries need to disclaim any assets or process a waiver around the distribution plan of the Trust? The Trustee will generally need assistance from an attorney to answer these questions for the Trust.
8. Determine Taxes – The income taxes of the decedent, the income taxes of the Trust, the estate taxes (if any) of the Trust, property taxes on real estate and whether there should be a filing with the IRS around portability of an unused spousal exemption amount must be determined. This can be very complicated, especially if back taxes are involved.
9. Create New Beneficiary Trusts – Do any of the beneficiaries receive their distribution in Trust for a period of time? If so, these beneficiary trusts will need to be created for the trust administration.
10. Distribute to Beneficiaries – This dangerous topic can take on a life of its own when money is involved for a beneficiary. Most of the time, creditors will have rights before a beneficiary, so Trust assets can’t be distributed too early.
11. Convert Assets to Distributable Assets – Does a house need to be sold? Does a business need to pass to a successor? Did the business have a buy-sell agreement with any life insurance payments to the Trust?
The above list is not intended to be an exhaustive checklist of every step involved with a trust administration. Every client situation can be different, so a customized plan is created to actually work through the administration of the Trust.
In many cases, clients ask for our assistance with the trust administration process. Many just want our help in specific areas where they need our advice. Other clients prefer us to essentially take over the process for them. We always offer our clients a no-cost consultation to review the situation, outline at a high level what would be involved with the trust administration, as well as offer our services to assist in the overall distribution of assets. It is a necessary part of the transition to the next generation.
What Contributes to a Successful Trust Administration?
As we’ve worked through trust administrations over the years, it is very clear that the most successful clients are:
- Those who keep their Trust updated when it comes to changes in key people and the law,
- Those who make sure their assets are properly aligned with the Trust and clearly identified for the successor Trustee, and
- Those who use a team approach for their trust administration.
These things can be easily overlooked in the lifetime of a client, but they can have significant positive impact after someone passes away.
If you have been asked to be a trustee and need guidance, give us a call to review your situation at a no-cost consultation. You can reach us at 913-345-2323, and we will be happy to help.