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TRUST ADMINISTRATION ATTORNEYS

Trust administration is a necessary process that occurs after the death of either one or both settlors. To protect the successor trustees, there are many things that must be done to ensure proper administration. Fortunately, working with an attorney for trust administration is a straightforward process that will give the successor trustees a great peace of mind throughout the administration.

What to Do If Not All the Assets Are Placed Into the Trust

During the process of collecting all of the decedent’s assets, you may discover that the decedent failed to place all the intended assets into his or her trust prior to death. The result is that these assets remain part of the decedent’s estate and are subject to the probate process. The most common way this situation can be dealt with during Trust Administration is through the use of a Will with a “pour-over” provision. This provision directs that any assets not placed into the trust during the deceased’s lifetime will be put into the trust at death and distributed according to the terms and conditions of the trust. If the proper documents are in place, a simple petition can be filed and a probate can be avoided.

To assist you in collecting the assets and transferring them to your name as successor trustee, your attorney will prepare a document known as a Certification of Trust, which will identify you as successor trustee and set forth the scope and extent of your powers. The Certification will also set forth how title to the assets should now be held and will recite the new tax identification number to be used for all trust accounts. You will want to present this Certification to any financial institution holding trust assets in order to have the assets transferred to your name.

Once you have all of the assets identified and under your control, be sure to prepare an inventory of all trust assets and obtain appraisals for trust assets that do not have a readily ascertained value. Assets such as real property should be appraised immediately from the date of death.

Filing Tax Form 706

The IRS requires that the federal estate tax Form 706 be filed within nine months of death. (This is in addition to income tax return 1040 for the deceased for the year of his or her death and a 1041 tax return for the trust every year of its existence after the death of the original trustor.) Once your attorney or tax professional has calculated any estate taxes owed, it is essential to file the 706 tax form and pay the taxes within the allotted nine months to avoid any penalties and interest. For a married couple, after the first death, there is generally no estate tax payable, due to the unlimited marital deduction.

However, at the death of the surviving spouse or that of a single individual, estate tax becomes a very important issue. Your attorney will work with you to determine which assets are in the trust, which assets are outside of the trust, which assets may need to go through probate and which assets are subject to estate tax. Often, estate assets may need to be sold in order to pay the estate tax liability. Since this may take time, it is essential that you consult with an attorney early on in the administration process regarding any potential estate tax liability, to ensure there is sufficient time to liquidate estate assets in order to pay the estate taxes by the nine month post-death deadline.

Filing Income Tax Returns

As successor trustee, you will be responsible for filing the last income tax returns for the decedent. You may also have to file fiduciary tax returns.

A note on income tax consequences: All assets owned by the deceased must be valued as of the date of death. No matter what the value at the time of purchase, most assets (some assets like IRAs, annuities and retirement plans are excluded) receive a “step-up” in basis for tax purposes. For example, a stock is purchased at a price of $10 but has reached $100 at the time of death. If this stock is sold before death, there will be a capital gains tax on the $90 profit. At death, the stock is revalued so that the beneficiary can sell the stock at $100 without incurring any capital gains tax. While it often appears that this higher value may be detrimental from an asset tax perspective, the income tax consequences may make the higher estate tax valuation a better deal for the beneficiary.

Because a successor trustee may be held personally liable for unpaid taxes, you will want to work with your attorney and accountant to make sure that all tax liabilities are satisfied prior to distributing the trust assets to the beneficiaries of the trust.

ACCOUNTING

A Living Trust is only revocable while the settlor(s), the person(s) who created the Living Trust, are alive and well. Once the settlors lose capacity or pass away, their Living Trust becomes irrevocable. Colorado law requires that a successor trustee who is administering an irrevocable trust prepare and render an accounting of their actions and administration of the trust.

To satisfy that legal requirement, you must keep detailed accounting records of the trust.

You will need to:

  • Keep track of all the trust money you are spending to wind up the decedent’s final affairs

  • Keep track of all deposits and disbursements from the trust

  • Review the trust document to see what method of accounting is required

Some trust documents expressly require an accounting while others have waived accountings. However, even where a trust document waives an accounting, the law may still require it. So, it is recommended that you consult with an attorney early in the administration process to determine the scope of your accounting obligation. And even where the trust waives the requirement of a formal accounting, you will still want to keep detailed accounting in case the trust administration goes into litigation.

Subtrusts

Sub-trusts are especially common in administrations of trusts established by married couples. Married couples who have done proper tax planning through a living trust have what is known as an AB or ABC trust. This ensures that when the first spouse dies, the deceased spouse’s assets remain available for use by the surviving spouse, but in trust. By keeping the assets in trust, the assets remain out of the surviving spouse’s estate, sheltered from future estate taxes.

While the couple is alive, their assets are held in a Joint Trust, owned equally by both parties (except for IRA and retirement funds, which must be in the owner’s name).

After the first death, the trust is split into two or three parts: the Survivor’s Trust, the Family Trust, and, potentially, the Marital Trust. The Survivor’s Trust is generally designed to hold the Surviving Spouse’s assets. The deceased spouse’s assets are generally split between the Family and Marital Trust. The Family Trust, a separate entity, is not counted as part of the surviving spouse’s estate upon death. This trust can pay income to the survivor, and the survivor can also have access to the principal under certain circumstances.

Allocation and Distribution of Trust Assets

Once you have determined whether there are any sub-trusts that need to be funded and you have identified who the beneficiaries are, you can proceed with allocating and distributing the trust assets. If you have not already retained an attorney to help you with trust administration, you might consider retaining an attorney for the purpose of preparing a Trust Distribution and Termination Agreement.

This agreement, when properly prepared, recites key components of the trust administration, including, but not limited to:

  • Identifying the successor trustees

  • Outlining the distribution provisions

  • Reciting distributions of personal property already made

  • Describing the funding and the values used for determining the distributions to sub-trusts and to the beneficiaries

  • Proposing a final distribution plan

  • Obtaining consent from beneficiaries for final distribution and waivers of accounting, if appropriate

The purpose of the Agreement is to protect the successor trustee while obtaining an agreement among the beneficiaries for the final distribution of trust assets. Such agreements can be quite helpful in avoiding the threat of future litigation by trust beneficiaries.