Most people have little experience being appointed as a secondary beneficiary of the revocable trust responsible for settling the revocable living trust after the death of a loved one. The purpose of this guide is to provide an overview of the six steps required to settle and terminate the revocable trust after the trust maker’s death.
Part One: Identify Important Documents
The first step in settling the revocable trust is to identify all original estate planning documents and other important documents of the deceased. In addition to identifying the original revocable trust agreement and any amendments to the trust, you will also need to locate the original will of the deceased.
The deceased may have left written instructions regarding the funeral, cremation, burial, or memorial, as well as a memorandum for personal property. All original documents should be stored in a safe place until they can be delivered to the trust attorney.
Other important documents of the deceased will include information about the deceased’s assets, including bank and brokerage statements, stock and bond certificates, life insurance policies, business records, vehicle and boat titles, and property deeds. It will also contain extensive information about the deceased’s debts, including utility bills, credit card bills, mortgages, personal loans, medical bills, and funeral expenses. Please refer to a detailed list of specific documents that you will need to identify.
Part Two: Meeting with the Trust Attorney
Once you review the legal documents and other important documents of the deceased, the next step in settling the revocable trust is to meet with a trust attorney to determine whether court action will be necessary, and whether assistance from the attorney will be needed to settle and terminate the trust.
If court action will be needed, you need to understand the steps necessary to open the estate.
Part Three: Determine the Value of the Deceased’s Assets
Once you meet with the trust attorney, the next step in settling the trust is to determine the value of the deceased’s assets as of the date of death.
You should contact all financial institutions that hold the deceased’s assets to obtain the date of death values. Some assets, including real estate and personal property such as jewelry, artwork, antiques, and closely-held businesses, may require an appraisal by a professional appraisal expert.
Please note that the value of all of the deceased’s assets must be determined, including those that will pass outside the trust, to ascertain whether any estate taxes and/or inheritance taxes will be due. Assets that may pass outside the trust include those that were owned as joint tenants with rights of survivorship; accounts that are payable on death or transfer on death; and life insurance, retirement accounts, and 401(k) plans, bonds, or anything with named beneficiaries. Take the time to understand which assets are also not subject to probate.
Part Four: Pay Bills and Expenses
Once the date of death value of all the deceased’s assets is determined, the next step in settling the revocable trust is to pay the deceased’s final bills and ongoing expenses related to the administration of the trust. At this time, the alternate beneficiary will also need to evaluate whether to sell trust assets, such as real estate or businesses, to raise cash to pay expenses and taxes.
It is the responsibility of the alternate beneficiary to identify the bills that the deceased owed at the time of death, determine whether they are legitimate, and then pay them accordingly. The alternate beneficiary will also be responsible for paying the ongoing expenses related to the administration of the trust, such as attorney fees, accounting fees, utility bills, insurance premiums, mortgage payments, and homeowners’ association or condo association dues.
Part Five: Pay Taxes
Once the alternate beneficiary has paid the final bills and managed the ongoing expenses of the trust, the next step in settling the trust is to pay any income taxes and estate taxes that may be due.
It is necessary to
The alternate beneficiary is responsible for preparing and submitting the decedent’s final federal and state tax return, if applicable, and paying any taxes that may be owed. The final federal tax return is due on April 15 of the year following the decedent’s year of death. For 2020, this deadline was extended to May 17, 2021.
Please note that the federal tax agency extended the April 15 deadline to June 15 in 2021 for properties in Texas, Louisiana, and Oklahoma in response to the severe winter storms in 2021. These exceptions cover both the estate tax return and the decedent’s final income tax return.
In addition to submitting the decedent’s final income tax return, if the estate generates income during the administration period, the alternate beneficiary must prepare and submit all required federal income tax returns for the estate (IRS Form 1041) as well as any required state estate income tax returns.
If the decedent’s estate is subject to federal and/or state estate taxes, the alternate beneficiary will need to prepare and submit the federal estate tax return (IRS Form 706) and/or the state estate tax return and/or the state inheritance tax return, then pay the tax bill.
Please note that there may be some estates that may need to file a federal estate tax return even if no estate tax is owed.
Part Six: Distribution of Assets and Trust Termination
Typically, the first question beneficiaries ask the alternate beneficiary is, “When will I receive my inheritance check?” Unfortunately for beneficiaries, the distribution of remaining assets in the trust to the beneficiaries is the last step in settling the revocable trust.
Before distributing any assets to the beneficiaries, the alternate beneficiary must ensure that all trust administration expenses (and probate expenses, if any) and all taxes have been paid or that enough assets have been set aside to cover the final bills and taxes.
If the alternate beneficiary chooses to distribute the assets to the beneficiaries, but subsequent expenses arise, they will have to pay those expenses out of pocket.
Additionally, if there is a need for judicial action regarding any of the decedent’s assets, the beneficiaries will need to wait until the probate is closed and the probate assets have been transferred to the alternate beneficiary before the trust can be terminated and the beneficiaries can receive their inheritance.
If it is expected that managing the trust will take more than a year, the alternate beneficiary should work closely with the trust attorney and accountant to plan for setting aside enough assets to cover ongoing trust expenses and then distribute the assets to the beneficiaries in multiple stages rather than in a single sum.
Frequently Asked Questions
How long does it take to settle a revocable trust?
The time it takes to settle a trust depends on the complexity of the trust involved. Simple trusts may take only a few months to settle, while more complex trusts (or those involving complicated relationships) may take 18 months or longer.
Does a will revoke a trust?
Because it takes effect before the decedent’s death, a trust will revoke a will if there are any discrepancies between them.
When does a revocable trust become irrevocable?
A revocable trust becomes irrevocable upon the death of the person who created it. At that point, the terms of the trust cannot be altered.
Source: https://www.thebalancemoney.com/trust-settlement-inventory-3505402
Leave a Reply