When you die your trust will be settled by a Successor Trustee whom you appointed in your trust. It may be your spouse or an adult child. The instructions on this page are intended to help you understand this process and guide your Successor Trustee.

SETTLOR AND TRUSTEE:

The instructions outlined below are very general in nature and are drafted to assist you with the questions you may have concerning the Trust of which you are the Settlor or Trustee. Should you have any specific questions, we urge you to contact an attorney to discuss any alternative answers that may be available.

TRUST ASSET MANAGEMENT

The Revocable Living Trust contains provisions in outlining the various powers granted to the Trustee. The general rule is, any action a property owner was allowed to take with regard to the property before it went into the Trust, the Trustee may perform in the capacity as Trustee. Thus control of the assets has been transferred from you individually, to you as the trustee, who must now act for the benefit of the beneficiaries, (yourselves). The income beneficiary is you during your lifetime. Simply remember that you are acting as a Trustee and have a fiduciary responsibility to act in a “prudent” manner. Not all trusts allow you as much flexibility and control as this one does, but in the circumstances, it appears best to grant very broad powers to the trustee.

REVOCABILITY

Your Trust is revocable in whole or in part. Thus, you may remove any assets from one Trust without trustee approval. You may dissolve the Trust or you may choose to change or otherwise modify the Trust Agreement. Your agreement was carefully drafted to meet your individual specifications, desires, and needs. It is an instrument with legal consequences and any major alterations of asset structure you desire should be considered by one familiar with Trust Law.

MANNER OF HOLDING TITLE

You hold your assets inside the Trust in a “fiduciary capacity”. This means that as a Trustee you are holding title to the assets for the benefit of someone else. During your life, the income of the assets is generated for your use and benefit. The trustee must turn all income over to you in convenient installments but at least annually. Upon deaths, the assets will be distributed in accordance with the instructions given in the Trust document itself.

Whenever you purchase a significant asset or change the composition of the Trust assets, you should request the escrow agent or other responsible individual to title the new asset properly. This leaves no doubt to a subsequent reviewer that the asset was owned by the Trust. You may thereafter effect transactions concerning the asset with the abbreviated name of the Trustee signer followed by the word “Trustee”. In the case of checking accounts, the term “Trustee” is not necessary. However, some banks may request various compliance methods to satisfy their respective legal departments. Please, contact legal counsel or your estate planner if questions arise as to the manner of holding title.

ACCOUNTING RESPONSIBILITIES

As mentioned earlier, you are acting as a fiduciary for the beneficiaries. Thus, you owe them the fiduciary duties outlined in the Trust instrument. This includes annual accounting duties, distribution responsibilities and income production. The language in the Trust is explicit and designed to require strict compliance with measures deemed necessary by legislation. While you need not burden yourself with unnecessary accounting responsibilities, please be certain that good records of income are kept. The Trust will not have to file an annual tax return. The income will be offset by the distribution to you, and the Trust will never pay income taxes. The strict compliance measures will also be required of any subsequent Trustees acting on behalf of the Trust, in the event of your death and/or incapacity.

Your accountant should indicate on a fiduciary return that all income of the Trust has been given to you and reported under your social security number. This will allow your accountant to report your income and expenses exactly as he or she does now, with the addition of one non-calculating form.

MANAGEMENT AFTER DEATH

The Trust that you have executed offers you many advantages with little or no inconvenience or burdens. It is a creation of the law that allows the orderly disposition of your estate without the cost, delay, and burden often found in the probate courts. You can put your mind at ease that as a result of properly planning your objectives, you have prepared for the future support and well being of your loved ones.

SETTLING THE TRUST ESTATE

The term “settling the trust estate” refers to the period immediately after the death of one or both spouses. Settling an estate in a Revocable Living Trust is actually quite easy. If all of your assets are in your Revocable Living Trust and if the estate has been organized, settling the estate typically takes less than a week.

UPON DEATH

The death of a loved one is always a traumatic time for those left behind, and the death of a spouse is almost always mentally paralyzing to the surviving spouse. Many people get totally confused and literally do not know what to do first. Immediately upon the death of a loved one, the survivor should notify certain people, in order to set in motion the many steps that must be taken.

REVIEW PERSONAL DATA FOR DEATH CERTIFICATE

Have you ever looked at a death certificate? You will find that it is probably one of the worst sources of information available, because the surviving family members often have no idea of the correct information. It is best to be able to determine the correct information now, instead of guessing later, at a time of emotional upset and bereavement.

MILITARY PAPERS

Copies of military discharge papers should be obtained. If an individual who served in the armed forces dies, the Veterans Administration will provide $150 toward funeral expenses, a headstone marker, and an American flag, if desired.

In the process of making funeral arrangements, you will need to take the military separation papers to the funeral home. These papers are needed to show proof that the deceased person was a veteran of military service.

ORDER DEATH CERTIFICATES

Order at least twelve death certificates. A separate death certificate will be needed for each insurance policy and each real asset, (real estate, stocks, bonds, etc.) that you desire to ultimately sell or transfer. A simple copy of the death certificate is not sufficient; it must be a certified copy, obtained from the county recorder’s office. Unfortunately, certified copies of the death certificate are seldom available until about ten days after death. However, you can usually obtain one or two copies of the death certificate for immediate use directly from the funeral home. With a copy of the Revocable Living Trust and a certified copy of the death certificate, the surviving trustee or successor trustee then has exactly the same power to manage the estate as the deceased individual had while living.

CHECK SAFE-DEPOSIT BOX AND CHECKING ACCOUNTS

In the early 1970’s, the death of a spouse could have drastically limited the surviving spouse’s ability to gain access to funds needed for daily subsistence. The primitive practice of immediately locking up the safe-deposit boxes and the checking accounts of deceased individuals no longer exists. Now, upon the death of a spouse or parent, neither the checking account nor the safe-deposit box is inaccessible.

You should look in the safe-deposit box for two reasons. First, the deceased may have left a message or a statement of posthumous desires that should be carried out by the survivors. The second and more important reason to look in the safe-deposit box is to inventory the contents to be sure that all of the valuable assets, (such as real estate deeds, stocks and bonds), are in the name of the Trust.

As good business practice, it is worthwhile to put your safe-deposit box in the name of your Revocable Living Trust. With the Trust document and a death certificate in hand, the bank should readily give the successor trustee access to the safe-deposit box. In your estate planning process, do not forget to let your successor trustee know where your safe-deposit box is located, as well as the location of the key to the safe-deposit box.

For simplicity you may wish to keep a checking account with a balance of no more than is needed to cover day-to-day expenses.

MAKE APPOINTMENT WITH YOUR PRIMARY ADVISOR

We use the term "your primary advisor" in a broad sense, because he or she is the person with whom you may choose to counsel. He or she may be from any of several different backgrounds, be it legal, financial, accounting, or simply a family member or a close friend. It is your choice.

THE SETTLEMENT PROCESS

If you have done your estate planning properly and if you have all of your assets in a good Revocable Living Trust, your survivors have nothing to do from a legal standpoint. They do not have to change your Trust or change title to any of your assets. The one exception would be, upon the death of a single individual or the second spouse (if married), when the estate is large enough to be subject to federal or state taxation.

The surviving spouse or adult children should be able to settle the estate without difficulty, so long as it has been organized. The surviving trustee or successor trustee needs only a copy of the death certificate and a copy of the Revocable Living Trust to allow him or her to take whatever action is necessary on behalf of the Trust.

FURTHER INSTRUCTIONS FOR YOUR PRIMARY ADVISOR

I. Review the Trust Instructions

The importance of organizing your estate is especially apparent during the process of estate settlement. By organizing the estate, the book prevents a guessing game upon the death of a Settlor. Having an organized estate allows the survivor the privilege of settling the estate in minutes (or possibly an hour), rather than trying to piece together the assets in the estate over several months.

You and your primary advisor should specifically look at the following sections of the Revocable Living Trust Agreement.

If the successor trustee is the surviving spouse, the trust provides that he or she has exactly the same power to administer the trust as before the death of the spouse. Now that only one of the original trustees is still living, it is most important to be sure that the trust names competent successor trustees to assume responsibility for the trust upon the eventual death of the second spouse.

II. Notify Life Insurance Companies

Your advisor should check to be sure that each of the life insurance companies has been notified of the death of the insured. Each insurance company will require a certified copy of the death certificate.

III. Ensure That All Assets Are Inside the Trust

Your advisor should help you ensure that all of your assets are within the trust. If any asset is not in the trust and the value of all assets outside the trust exceeds the value established by the particular state for probate, then the assets outside the trust must go through probate. If everything is in the trust, the surviving trustee steps in immediately and with the trust and the death certificate has identically the same power to buy, sell, or transfer any of the assets as did the individual who placed those assets into the trust.

IV. Review Size of Estate

The advisor should check the information in the Revocable Living Trust book to determine whether the estate is subject to federal estate taxes and state inheritance taxes. If so, the advisor should ascertain which forms need to be filed and how much tax needs to be paid.

With proper estate planning, there need not be any estate taxes to pay upon the death of the first spouse, regardless of the size of the estate. However, if estate taxes are due, a Form 706, (Federal Estate Tax form), must be filed, and any taxes due must be paid within nine months of death. There are options available under the tax code for extending estate tax payments over a period of ten years, but for most estates, those who are taxed do not qualify for the extension.

Many states are now conforming to the federal estate tax code to the extent that, if no federal estate tax is due on an estate, then no state inheritance tax is due. Since each state is different, the particular state laws for inheritance taxes needs to be checked at the time of death.

V. File Income Tax Return

Upon the death of a spouse, the adviser should explain that the surviving spouse has a right to file a joint income tax return, (Form 1040, as had been done while the spouse was alive) for the year in which the deceased spouse died. The surviving spouse should keep an accurate record of the decedent’s last medical and funeral expense, because the medical expenses can be deducted from the survivor’s taxable income, and the funeral expenses can be deducted for estate tax purposes.

The surviving spouse should use his or her social security number to identify all of the assets in the Trust. The reason for reporting the assets in this manner is that it enables the trustee to transfer assets back and forth between the A Trust and the B Trust as easily as possible. The IRS Trust identification Number is used to identify the assets upon the death of a single settlor or at the death of the second spouse.

A surviving spouse acting as the surviving trustee will typically pay out all the income from the Trust to himself or herself and continue to report the Trust income on his or her personal Form 1040 income tax return.

V.1 Upon Death of First Spouse

If a couple has an A-B Trust, upon the death of a spouse, one-half of the Trust, the decedent’s B Trust, becomes irrevocable. A Form 1041S (S for simple) tax return should then be filed, but only for the decedent’s irrevocable B Trust. This form must be filed each year until no assets remain in the B Trust.

The IRS Trust identification Number will be used on the Form 1041S tax return. The Form 1041S and the accompanying Schedule K-1 are the only places where the special Trust ID number will be used during the life of the surviving spouse.

All of the income in the Trust B is usually paid to the surviving spouse. However, since the surviving spouse is still a Settlor of the Trust, the net effect is paying all of the income to oneself. Therefore, on Form 1041S, the surviving spouse would subtract from the income of Trust B, an income distribution deduction in the same amount.

Since the amount paid out from the Trust (decedent's share) is the same as the amount received (income), the taxable income is zero! Thus, it is easy to see that the Form 1041S tax return on the decedent's half of an A-B Trust is simply an information return. The surviving trustee would continue to report any income received from the Trust on his or her regular Form 1040 tax return, as was done before the spouse's death.

V.2 Upon Death of Both Spouses or a Single Person

Upon the death of both spouses or a single person, the entire Revocable Living Trust becomes irrevocable. Depending upon the distribution instructions, income may or may not be retained in the Trust. In either case, however, the successor trustees of the Trust must then file a Form 1041S income tax return. For example, if the Trust were providing for minor children, possibly only a portion of the Trust income would be distributed to the children. The children would be responsible for reporting the income they received from the Trust on their own individual income tax returns, and the Trust would be responsible for paying taxes on any income that was retained in the Trust.

Any assets retained in the trust must use the special IRS Trust ID number. The practice of using the Trust ID number after the death of the settlers is logical, because the social security numbers belonging to the settlers cease upon their deaths.

V.3 Payment of Taxes

Needless to say, if the Trust has retained income and is required to pay federal income taxes, then presumably a state income tax return must also be filed, and any taxes due must be paid.

On the other hand, if all of the income is paid out from the Trust, then the recipients of the income will report such income on their own Form 1040 tax returns and pay any taxes due. The Trust must still file a Form 1041S Trust tax return. However, as previously mentioned, if all of the income of the Trust is paid out, then the Trust has no taxable income to report on Form 1041S.

V.4 Income Retained in the Trust

It may be to your tax advantage to retain some income in the Trust. Even though the 1986 tax code eliminated the income tax advantages of retaining income in the decedent's irrevocable half  of the Trust and having it act as a separate tax entity, Congress continues to change the tax laws. Therefore, your CPA should review the pros and cons of whether to use the irrevocable Trust as a separate tax entity.

VI. Obtain Written Valuation of Assets

The advisor should explain that one of the most important functions that must be completed upon the death of an individual who has a Revocable Living Trust is to establish a written valuation of all of the assets in the Trust. It is absolutely necessary to obtain written valuation of all real estate and securities in order to determine a new cost basis for these assets, and to take advantage of stepped valuation, thus minimizing the taxable gain when the assets are eventually sold.

The advisor should describe why and how to get stepped valuation. It is essential to establish a written valuation of each asset upon the death of a settlor. The written valuation provides a valid and documented justification of the asset's current market value for determining stepped valuation.

VI.I Real Estate

The simplest method of establishing current market value for real estate is to telephone two real estate agents from separate firms. Tell the agents that you are interested in the possibility of selling your real estate and that you would appreciate it if they would estimate the value for which you should be able to sell your property, (preferably on the high side when no estate taxes are due). Ask the agents to give these figures to you in writing, as well as back up their valuations with “comparable”, (recent sales of comparable real estate within the neighborhood). On the death of the last Settlor, if the estate is going to be subject to estate taxes, you may want to seek a valuation on the low side. In general, however, you should never ask for either over valuation or under valuation of the real estate.

If the valuations from the two real estate agents are fairly close together, take the average of the two estimates for the value of your real estate. If the two estimates are far apart, ask a third real estate agent for another valuation of your real estate.

It is more important to place these written valuations in your Revocable Living Trust book, (or somewhere safe and accessible), so that you may use the valuations to substantiate your new stepped cost basis to the IRS, possibly years later when you decide to sell your real estate. You must be able to prove your cost basis in writing.

The same principle of establishing written proof of current market valuation at date of death applies to any real estate and to any survivor, whether a surviving spouse or children. Note that your children also get stepped valuation as their cost basis upon the death of the surviving spouse.

VI.2 Securities

Establishing the current market value of stocks and bonds is very simple, just look in the newspaper. The stock and bond quotations in the newspaper on or near the date of death are sufficient. Simply put the stock quotation page from the newspaper in your Revocable Living Trust book, but be sure that the entire page with the newspaper's dateline is included, so that the date of the quotation is recorded for future use.

Alternatively, your stockbroker can give you the actual stock and bond prices on the date of death. Most brokers will provide these figures to you in writing if you ask them. In many cases, a monthly statement of account from a brokerage firm will include the value as of the date of the statement. Remember, the market value of the stocks and bonds at date of death becomes the new cost basis, which will be used to compute any taxable gain when the assets are eventually sold.

VII. Review Business Agreements

Your advisor should review business agreements for action, dispositions, and benefits. Any businesses must be valued very carefully and wisely. You should hire at least two, and possibly three, certified public accounting firms to value your business. Since most privately held businesses have a minimal cost basis, stepped valuation can become extremely important. However, you must establish a sound and justifiable basis to satisfy the Internal Revenue Service!

When you have an interest in a business of substantial value, you should be aware that a number of estate planning tools can be used to freeze or establish the value of the business and, if desirable, to shift the gain to your children. The various alternatives should be pursued with a knowledgeable estate-planning attorney.

The IRS has some fourteen different methods by which to compute corporate valuation, and, upon your death, the IRS will always strive to come up with the highest valuation for your business. For valuation purposes, the IRS looks at a business the day before an individual dies, not the day after. Thus, where there is an interest in a privately held business, a proper estate plan is essential. While you are living, you can usually do something about determining a proper valuation for your business. Failure to do so, however, may have a tragic result.

VIII. Review Credit Cards

The next step to take in settling an estate is to review the credit cards that were issued to the deceased individual, and to determine whether they should be destroyed. Cards that should definitely be destroyed are those issued only in the name of the deceased or for business use only.

IX. Distribute Personal Effects

At this time, it is appropriate to distribute personal effects as specified in the Revocable Living Trust Article VI; Schedules and Disposition of Personal Effects Instructions. All special estate distributions should also be made at this time. Your advisor should help in this distribution process.

X. Review Allocation and Distribution Assets.

If assets are to be distributed or retained in the trust for the heirs, your adviser should help you determine which assets and real estate should be distributed, sold, or converted to income. Remember, though, to first determine any outstanding debts or taxes that must be paid before the estate is distributed.

The importance of the allocation and distribution aspects of settling an estate cannot be overemphasized. The Dispositive Provisions Sections(s) of the Revocable Living Trust should be reviewed carefully. Even if only one spouse has died, the decedent may have left specific instructions as to certain assets that are to be distributed outright upon his or her death. Since the trustee should be given the choice of distributing in cash or in kind, (by the language in the Trust), the trustee preferably should distribute the assets outright, rather than selling them and then distributing cash.

X.1 Final Issue

After the survivor has met with the primary advisor, he or she still has several months within which to take care of some important issues: making sure assets are most advantageously placed into the various Trusts, reviewing the way these assets are invested, and filing Form 706 for estate taxes, if required.

X.2 Asset Placement Into A Trust. B Trust. And C Trust.

People who have only an A Trust do not need to worry about allocating their assets, because the assets will continue to remain in the A Trust. However, people who have an A-B Trust or an A-B-C Trust need to be concerned about allocating assets among the A Trust, the B Trust, and where applicable, the C Trust.

The decedent's share of severely held and separate property should be identified and placed in the decedent's B Trust, with any excess over $3.5 million placed in the C Trust, if available. The surviving spouse's share of severely held property and separate property should then be identified and placed in the survivor's A Trust.

The decedent's assets consist of the decedent's separate property and the value of the decedent's share of the jointly held or common property. One-half of the asset value of the jointly held or common property must flow into Trust B, (and Trust C, if applicable). Most people think that, if they own a home, the decedent owns half of the house and the surviving spouse owns the other half of the house and, therefore, they need to put one-half of the house into Trust A and the other half into Trust B. However, this belief is not true. You may put the entire house into either Trust A or Trust B, as long as you put an equal value of assets into the other Trust. If you think of the dollar value of the house, instead of the house itself, as what is being placed in the decedent's Trust B, then apportionment of assets into the A and B Trusts is much easier to understand.

The procedure for placing assets in the A, B and C Trusts is really very simple. To place an asset in an A, B, or C Trust, the trustee merely needs to describe the asset, the valuation amount, the date on which the valuation was made, and the source of valuation. This description can be made on a form that lists the assets placed in the A Trust. The forms for Trusts B and C are the same except for their titles. The trustee should date and sign these forms.

Thereafter, the trustee may totally ignore this distribution of assets among the A, B, and C Trusts, other than to annually report the income on the Form 1041S Trust tax return, as mentioned before. The Trustee must also abide by rules for use of those assets, as described in the Trust under the provisions of the B and C Trusts.

Growth assets should be placed in the decedent's B Trust, since these assets will henceforth be insulated from further estate taxes. Nevertheless, each surviving spouse has his or her own set of objectives.

An example of somewhat unusual placement of assets in the B Trust involved a widow who was quite angry at the daughter of her deceased husband. The daughter, who was from a former marriage of her father, had apparently been extremely unkind to her father, right up to and including the last days of his life. The father had left 20 percent of his share of the assets in his decedents Trust B to his daughter, upon the eventual death of his spouse. The widow felt that even 20 percent was too much of an inheritance for the daughter. The widow made it very clear that the assets placed in Trust B were to have no growth. Further, the widow would annually take all the income from the B Trust and would also exercise her frivolous right to $5,000 or 5% percent, (whichever greater), once a year. The widow intended to see that the daughter got no more than was absolutely essential under the terms of the Trust.

One of the most important features of the Revocable Living Trust is the right of the trustee to transfer assets between the survivor's portion of the Trust and the decedent's part of the Trust (that is, from the  A Trust to the B Trust, or from the B Trust to the A Trust, and to the C Trust, if included). This process is actually quite easy. You need only describe the asset, the amount of valuation, the date of valuation, and the source of valuation. Then you show from which Trust the asset is being taken and to which Trust the asset is being transferred. The transfers would then be signed and dated by the trustee.

Assume an estate of $800,000, an A-B Trust, and the death of a husband. Assume also that the estate consists of $400,000 in real estate and $400,000 in stock. If the stock market is expected to rise substantially in the next year, and real estate is expected to remain relatively static, the stock should be placed in the decedent' B Trust, and the real estate should be placed in the survivor's A Trust.

Assume that after a year has passed, the stock is worth $600,000 and the real estate is still worth $400,000. Now you believe that the stock market has reached its high and the real estate will begin to grow. Since it is quite permissible to transfer dollar for dollar between the decedent's and the survivor's Trusts, $400,000 of the stock would be transferred into the A Trust. In exchange, the $400,000 of real estate would be transferred into the B Trust. The B Trust would then have $400,000 of real estate plus $200,000 in stock and the A Trust would have $400,000 of stock.

After another year has passed, the real estate has grown from $400,000 to $600,000. As a result, there is $800,000 in the B Trust, ($600,000 of real estate and $200,000 of stock), and there is still $400,000 in the survivor's A Trust. Remember, whatever is in the B Trust is insulated from further estate taxes. If the surviving spouse were now to die, the estate tax would be zero.

All of the transfers in this example could be made with an asset transfer form. Since there are many different approaches to placing assets in the various Trusts, you have a most versatile vehicle in your Revocable Living Trust. More importantly, however, the Revocable Living Trust is an outstanding estate-planning tool upon the death of a spouse.

X.3 Review Investments and Investment Objectives

Review the investments in the Trust to see whether they meet the objectives of income, growth, and security.  Determine whether some assets should be reinvested to provide adequate income as well as appropriate growth for a hedge against inflation.  The assets should be reviewed at least annually to determine whether they should be reinvested for the best balance between growth and income and whether assets should be shifted among the A, B, and C Trusts to preserve anticipated appreciation.

Upon the death of an individual, it makes sense to review the types of investments in the estate to see whether they still correspond with the objectives of the survivors.  This review is particularly necessary when the survivor is a spouse, a minor child, or a handicapped individual of any age.  Typically, upon the death of a spouse of parent, the family income is reduced substantially.  It may be far more appropriate to sell assets that were invested for growth and to replace them with income producing assets.

On the other hand, if both parents are deceased, the beneficiaries of the trust are the children, and the children are to receive the assets with an outright distribution, then the simplest way to distribute the assets is just to change title to the assets.  However, if the assets are to be retained in trust for a period of time, it may be more appropriate to leave the assets invested for growth.

It also may be appropriate to change the identification number on your Trust assets.  The surviving spouse's social security number should be used. If there is no surviving spouse then the IRS Trust ID Number, (Employee Identification Number), should be used.  This number should have been recorded in the Revocable Living Trust Book.  IRS Form W-9, or its appropriate alternate form as specified by IRS regulations, should be used to change the tax number for each asset.  This form may be obtained from any financial institution.

As mentioned earlier, if part of all of the Revocable Living Trust become irrevocable and assets are retained in the Trust, it will be necessary to annually file a Form 1041S Trust tax return for the irrevocable part of the Trust.

X.4 File Federal Estate Tax Form 706

The Federal Estate Tax Form 706 is one of the more complicated tax forms and should be avoided if at all possible.  This form consists of eighteen pages of various forms, schedules, and instructions!  The basic Form 706 consists of three very complex pages of information needed by the IRS; it is followed by schedules A through P.

A Federal Estate Tax return, (Form 706), must be filed if the decedent’s estate exceeds $3.5 million in value, whether or not any tax is actually due.

If any federal estate taxes are due, the Form 706 must be filed within six months, and any taxes due must be paid within nine months.  With proper estate planning, Form 706 need not be filed for a single person's estate of less than $3.5 million or for a married couple's estate of less than $7 million. 

NOTHING ELSE TO DO!

If you have done your homework, you have a Revocable Living Trust and an organized estate; so settling the estate should take only a matter of days and not drag on for months or years.  If any cost is involved, it should be minimal and not consume 6 percent to 10 percent of the gross estate.  Much of the time spent settling the estate is devoted to convincing the survivor that there really is nothing else to do. There is no reason to fear the unknown.  As you will see, settling an estate in a Revocable Living Trust really is easy.