Most people don’t have a lot of experience handling what happens after their loved one dies and they have been named as the Successor Trustee - in charge of settling their loved one's Revocable Living Trust. The purpose of this guide is to offer a very general idea of the six steps necessary to settle and then terminate a Revocable Living Trust after the Trustor dies.
Step 1 - Inventory
The first step in settling a Revocable Living Trust is to find all of the decedent's original estate planning documents and other essential papers. You will also need to locate the decedent's original Pour-Over Will. The decedent may have left written funeral, cremation, burial or memorial orders and a private property memorandum. All original documents should be kept in a safe place until they can be given to the estate planning attorney.
The decedent's other important papers will include information about their assets, including bank and brokerage statements, stock and bond certificates, life insurance policies, corporate records, car and boat titles, and deeds for real estate; and information about the decedent's debts, including utility bills, credit card bills, mortgages, personal loans, medical bills and the funeral statement, etc.
Once all of the important documents have been located, read the Revocable Living Trust to determine its specific arrangements. When examining the trust, make observations on the following - who gets the decedent's personal effects; who gets any special bequests; who gets the decedent's residuary trust; who is named as the Successor Trustee(s) to settle the trust and who is named as Trustee(s) of any trusts that need to be created now that the Trustor has died; the location and date when the trust agreement was signed; and who authenticated the trust as witnesses and Notary Public.
Summarize the Revocable Living Trust, and review the decedent's financial paperwork and make a list of what the decedent owned and owed, how each asset is titled, and, for assets and debts that have a statement, the value of the asset or debt as listed on the statement and the date of the statement. In addition, the decedent's past three years of income tax returns should be found and put aside for later use.
Once the decedent's important documents have been sifted through, the next thing to do is meet with an estate planning and trust attorney to determine if probate will be necessary and if the attorney's help will be needed to settle the trust.
Step 2 – Meeting With an Estate Planning and Trust Attorney
Once the decedent's legal documents and other important papers have been located and sorted through, the next step in settling their Revocable Living Trust is to convene with a trust attorney to decide if probate will be necessary and if the attorney's assistance will be required to help with settling and then closing the trust.
Step 3 - Valuing the Assets of the Decedent
Once you have met with an attorney, the next step in settling a trust is to establish the date of death values for all of the decedent's assets.
All financial institutions where the decedent's assets are situated must be contacted to get hold of the date of death values. For assets including real estate, personal effects such as jewelry, art work and collectibles, and closely held businesses, they'll need to be assessed by a qualified appraiser.
The value of all of the decedent's assets will need to be established, including those passing outside of the trust, in order to determine if any estate taxes and/or inheritance taxes will be due. Assets that may pass outside of the trust can include those that were owned as tenants by the entirety or joint tenants with right of survivorship, payable on death or transfer on death accounts, and life insurance, IRAs, 401(k)s and annuities with named beneficiaries. Once the date of death values for the decedent’s assets have been figured out, the next step is to pay the decedent's final bills and continuing expenses of managing the trust.
Step 4 - Paying Bills and Expenses
Once the date of death values have been determined for all of the decedent's assets, the next step in settling the Revocable Living Trust is to pay the decedent's final bills and continuing expenses related to managing the trust. At this time, the Successor Trustee will need to assess whether trust assets, such as real estate or a business, should be sold in order to raise extra money to pay expenses and taxes.
It is the Successor Trustee's responsibility to figure out what bills the decedent owed at the time of death, determine if the bills are correct, and then pay the bills. The Successor Trustee will also be in charge of paying the ongoing expenses of managing the trust, such as attorney fees, any accounting fees, utilities, insurance premiums, mortgage payments and homeowner's association fees.
Once the Successor Trustee has paid all of the decedent’s final bills and has the trust expenses under control, the next step is to pay any income taxes and estate taxes that may be owed.
Step 5 - Paying of Taxes
The Successor Trustee will need to prepare and file the decedent's final federal and/or state income tax returns and pay any taxes that may be owed in a timely manner. The final federal income tax return will be due on April 15 of the year after the decedent's year of death.
In addition to filing the decedent's final income tax return, if the estate earns income during the course of administration, then the successor Trustee will need to prepare and file all required federal estate income tax returns (IRS Form 1041) along with any necessary state estate income tax returns.
If the decedent's estate is taxable for federal and/or state estate tax purposes, then the successor Trustee will be in charge of preparing and filing the federal estate tax return (IRS Form 706) and/or a state estate tax and/or a state inheritance tax return, and then paying the tax bills. Some trusts may be obligated to file a federal estate tax return even though no estate tax will be due.
Once all of the income tax and estate tax issues have been settled, the final step to settling the estate is to make allocations of what's left to the trust beneficiaries and then close out the trust.
Step 6 - Distribution and Termination of the Trust
Making distributions of the residual trust assets to the beneficiaries is the very last step in settling a Revocable Living Trust.
Before making any disbursements to the trust beneficiaries, the Successor Trustee must be positive that every single cost and expenditure of managing the trust, and all taxes have been paid or that sufficient funds have been set to the side to pay the final bills and taxes. If the Successor Trustee chooses to make distributions to the beneficiaries but costs come up later on, then the Successor Trustee will have to pay these expenses with their own money. Furthermore, if probate of some of the decedent's assets was required, then the beneficiaries will need to wait until the probate estate is closed and the probate assets have been transferred over to the Successor Trustee before the trust can be terminated and the beneficiaries can be given their inheritance.
Note: If managing the trust is likely to take more than a year, then the Successor Trustee should work directly with the estate planning and trust attorney and accountant to plan for setting aside enough assets to pay the ongoing expenses and then making allocations to the trust beneficiaries in various stages instead of in one lump sum.