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Trust Administration by the Successor Trustee
California Living Trust Administration
by the Successor Trustee
Administration of Trust A by the Successor
Trustee
Certification of the Trust
Asset Re-Registration
Obtain a Tax Identification
Number for Trust A
Real Property
File the Original Will
Notify Trust Beneficiaries and Heirs
Creditor Notification
Asset Valuation
File a Federal Estate Tax Return
Probate
California Living Trust Administration by the Successor Trustee
The most common revocable living trust is one established
by a couple that continues until both have died. Thereafter,
one of their children becomes the trustee and distributes
the trust's assets. To illustrate that process, we will
follow a hypothetical trust through its life and the steps involved
in its termination.
A revocable living trust
is created by a husband and wife, and they transfer their assets
into it by registering the assets in their names as trustees
of the trust. When the first spouse dies, the assets in the
trust are split into two or three subtrusts. The first of these
is Trust A, commonly called the survivor's trust or marital
trust, and is a revocable trust created for the surviving spouse.
This trust will contain the surviving spouse's assets.
The second trust created when the first spouse dies, Trust
B, is established as provided for in the original trust
and is sometimes called the family trust or the residual trust.
It will contain either the maximum amount of assets that are
exempt from estate tax applicable in the year of death, or the
total of the assets owned solely by the first spouse at the
time of his or her death. This trust then becomes an irrevocable
trust, and the surviving spouse is usually the sole trustee.
While most living trusts divide into these two subtrusts, some
create a third trust. Trust
C, or a "qualified
terminable interest trust" is an irrevocable trust
that contains the assets owned by the first spouse that exceeded
the amount exemptible under federal estate tax law at the time
of his or her death. Like Trust A and Trust B, this trust is
also for the benefit of the surviving spouse who is usually
its sole trustee.
These two or three subtrusts will continue until the
surviving spouse dies, at which time a number of events
are triggered and action must be taken by the trustee.
The original trust named a successor trustee, who is
now legally required by the trust's provisions, by federal
tax law, and California law, to act.
The original trust will contain a provision that specifies who
will be the successor trustee. This person, who takes over management
of all the trusts upon the death of the surviving spouse, is
often one of the couple's children, but it may be any number
of the children, or sometimes a bank or trust company. If there
is more than one trustee, they must act in concert when managing
the trust. In any case, whoever is named as the successor trustee
now has the legal obligation to undertake a number of different
actions. If those required actions are skipped or done incorrectly,
then the successor trustee may be liable for any additional
taxes and may need to answer to the trust beneficiaries in court
for any mistakes made -- even if the mistakes resulted from
actions taken in good faith.
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Administration of Trust A by the Successor Trustee
On the death of the first spouse, Trust A was formed as the
survivor's revocable trust, who was also its trustee until he
or she died. Upon the death of the surviving spouse, the successor
trustee assumes control of this and any additional subtrusts.
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Certification of the Trust
A certification of the trust, a typed statement that lists the
current trustee(s), the tax identification number of the trust,
the powers of the trustee(s), and other pertinent provisions
of the trust that have been signed by the trustee(s) and notarized,
is allowed for by California law. Every institution that is
contacted to re-register the assets in the name of the successor
trustee(s) needs to be provided with this certification as well
as a certified copy of the grantor's death certificate.
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Asset Re-Registration
The assets in Trust A need to be re-registered in the name of
the successor trustee or trustees, and this is one of the first
duties the successor trustee needs to accomplish. John and Ann
Smith, the couple who established the trust, designated their
daughter Barbara as successor trustee. When John and Ann both
die, Barbara needs to re-register the trust's assets in the
name of "Barbara M. Smith, Trustee of the John and Ann
Smith Living Trust, dated September 1, 2003 - Trust A."
To accomplish this, Barbara must provide the titleholders of
every asset in the trust, every institution or party whose assets
are included in the trust, with a certified copy of the death
certificates and a certification of the trust showing her as
trustee. This notification would need to be made to every stock
broker, bank, credit union, general partner of a limited trust,
issuer of mutual funds, life insurance issuer, and others.
The assets in the trust should be retained in the trust following
the re-registration of the assets until all debts, taxes, and
other expenses are resolved and paid. No distributions should
be made until those liabilities are all resolved.
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Obtain a Tax Identification Number for Trust A
Prior to the death of the surviving spouse, the assets in Trust
A were held under his or her Social Security Number. When the
successor trustee assumes management of the trust, a Federal
Tax Identification Number (EIN) needs to be obtained from the
Internal Revenue Service. Approximately four weeks later, the
IRS will issue the Tax Identification Number and mail it to
the trustee or trustees.
This number needs to replace the Social Security Number of the
surviving spouse on all assets held in Trust A and needs to
be used on all the year-ending trust income tax returns until
the trust ends and its assets are fully distributed.
The income earned by the trust from January 1 through the date
of death of the surviving spouse is that person's personal income
and is taxed to his or her Social Security Number. Any income
the trust receives following the date of death is taxed to the
parties who receive that income if it is distributed, or to
the trust itself if the income is added to the trust and it
continues through the end of the year.
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Real Property
The County Assessor of each county where real estate that is
part of the trust is located needs to complete a "Change
of Ownership - Death of Real Property Owner" statement.
This statement, required for every parcel of real estate within
Trust A, needs to be filed shortly after the surviving spouse's
date of death and is used by the assessor to determine whether
the property needs to be reassessed for property tax purposes.
To change the title on every parcel of real estate in the trust,
an "Affidavit-Death of Trustee" form is required.
This form, along with a certified copy of the death certificate,
is required to change the title of the real property to the
names of the new trustee or trustees.
This change of ownership triggers the necessity to file a "preliminary
change of ownership report" to the county assessor, which
notifies the assessor whether or not the property is subject
to reassessment. This document is normally filed whenever any
document is filed that changes title to real property, such
as the "Affidavit - Death of Trustee" real estate
form.
If the real property is inherited by the deceased's children
or those children's spouses, it is exempt from reassessment.
This exemption also holds if the property passes to the grandchildren
if the child of the couple who established the trust is deceased.
If the inheritor of the property is not one of those listed
above, a reassessment is required, using the fair market value
of the property as of the date of death. The real estate taxes
may be raised to 1 to 1.2% of the reassessed value, and a supplemental
real estate tax bill will be mailed later if additional tax
is due.
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File the
Original Will
Within thirty days of the date of death, California law requires
the original will, including codicils, to be filed with the
county clerk who covers the county where the deceased resided.
This filing will include all original wills and codicils, even
ones that have been revoked or supplanted. If no probate is
required, there will not be any filing fee when these documents
are filed with the clerk. Whether or not probate is required,
a copy of the will must be mailed to the person specified in
the will as its executor.
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Notify Trust Beneficiaries and Heirs
Within sixty days of the date of death, all trust beneficiaries
and heirs at law of the deceased's living
trust must be notified in writing. This requirement, in
effect since 1998, requires a specifically worded notice of
the living trust be sent, and if any beneficiary of the trust
or heir at law of the living trust requests it, a copy of the
trust and all amendments to it must be provided.
A party receiving the notice has 120 days from the date the
notice was mailed to contest Trust A, and must be notified of
his or her right to do so. If the notice is not mailed and all
the legal requirements of the trust are not met, the trustee
is subject potential damages, including court costs and attorney's
fees, and any beneficiaries may have up to four years or more
to contest the trust
Every beneficiary of Trust B is required to receive a specifically
worded notice regarding the change of trustee of that trust.
This requirement holds for Trust C as well, if its trustee is
changed. These notices do not allow the provisions of the trust
to be contested by the beneficiaries, it only advises them of
the change of trustee.
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Creditor Notification
Similar to that used in probate
proceedings, California law allows a notice to creditors
to be filed in a living trust. In addition to filing the notice
with the county clerk, a publication of the notice must appear
three times in a local newspaper. The cost of this notification,
excluding attorney fees, may run $500. Any known creditors of
the deceased must also receive a special notice. These creditors
then have, with some exceptions, up to four months to file a
claim against the trust. If all these procedures have been followed
and no claim is filed, the creditors lose their right to any
payment.
A creditor may have up to four years to seek payment if these
procedures are not followed, even though following them is not
legally required. If the trustee fails to follow them, however,
and a creditor later appears, the trustee may be personally
held liable for the debt.
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Asset Valuation
Following the death of the surviving spouse, all the assets
in Trust A and Trust C (if there is one), need to have their
fair market value determined, as do all assets previously held
outside of the trust. The date used for this purpose is the
date of death of the surviving spouse. For stocks and bonds,
the average of that day's high and low values is used, but if
the date of death is a weekend, both Friday's and Monday's averages
need to be re-averaged.
The value of a Mutual Fund is the closing price as of the date
of death. Real property, motor vehicles, partnerships and other
specific assets need to have their values determined by a competent
appraiser. For real property, this could be a real estate agent
or broker. This asset valuation includes life insurance policies,
retirement and IRA accounts, and 401k plans. Unless they are
of high value, such as certain antiques, furniture and household
furnishings generally receive a value of $2,000 - $5,000 and
are not appraised.
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File a Federal Estate Tax
Return
If the total gross value of all the assets owned by the deceased
both inside and out of the living trust exceed a specified amount,
a federal estate tax return must be filed. If there is a Trust
C, its total assets must be included as well when determining
the total since these assets are also subject to the estate
tax.
A federal estate tax return must be filed within nine months
of the date of death if this total, before any costs or expenses
are subtracted, exceeds $2,000,000 prior to December 31, 2008,
or $3,500,000 for the year 2009. In 2010, there is no federal
estate tax. However, in 2011, this amount will be reduced to
$1,000,000. If extra time is needed to prepare and file the
return, an extension of up to six months can be obtained.
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Probate
While a living trust allows probate hearings to be avoided,
probate may still be required
if there are too many assets held outside of the trust. If the
assets outside the living trust are over $100,000, California
law requires a probate hearing, although that amount does not
include any assets held in joint tenancy, any vehicles, or any
assets such as life insurance policies or IRA accounts where
a specific beneficiary is given.
If no probate hearing is required, the successor trustee or
trustees, who now administer the living trust, must wait forty
days from the date of death before they can sign a special certification
and transfer the assets into Trust A, or to anyone else legally
entitled to them.
If the total assets over and above those already listed as exclusions
and outside the living trust exceed $100,000 as of the date
of death, those assets will need to go through probate before
they can be placed into Trust A.
The advice of an estate planning attorney and qualified accountant
are imperative to assist the trustee with the administration
and final distribution of a living trust. For additional information, please contact THE MAMOLA LAW FIRM at (800) 440-5294.
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