by Richard Keyt, Arizona estate planning attorney
Here is my checklist of typical tasks that should be considered and actions that might be taken after the death of a loved one who had a trust.
A. What to do after the Trustmaker dies
1. Location and Verification of Trust Documents:
a. The trustee must first obtain the decedent’s original trust and will, and determine if there have been any amendments.
b. The pour-over will is filed with the probate court if required by state statute.
c. If there are non-trust assets a probate may be required and a personal representative will be appointed.
d. Order the appropriate number of death certificates to assist in the reregistration of assets and collection of benefits.
2. Inventory of Assets: All assets must be located, valued and preserved. A complete and accurate inventory must then be prepared for the following reasons:
a. To determine if a probate is required for non-trust assets.
b. To determine whether federal estate tax is due.
c. To identify possible sources of cash.
d. To do an asset split into Marital and Family trusts if required.
e. As a starting point for the required appraisal.
f. To determine which assets are encumbered with debt.
g. To assist the surviving spouse, heirs and successor trustee.
3. The surviving spouse or successor trustee should collect benefits owed to decedent and the decedent’s survivors. These benefits may include:
a. Final wages, accrued vacation or sick pay, state disability pay-ments (SDI); retirement or disability income, either from federal social security or as a fringe benefit from an employer.
b. Funeral and death benefits from social security, Veteran’s administration, or employment agreements.
c. Medical expenses from health or medicare supplemental insurance; group or association life and disability income benefits; and worker’s compensation claims.
d. Paid up life insurance policies for which premiums are not currently being paid; fraternal association or financial institution policies, credit life policies on home, autos and credit cards; term riders on regular policies; accidental death riders on regular life or disability policies; and accidental death policies like travel insurance, or those provided when travel tickets are purchased by credit cards.
e. Death benefits due from policies owned by irrevocable trusts, or from business insurance such as buy-sell agreements.
f. If the decedent leaves a surviving spouse or minor children, they are also eligible for a $250 death benefit from social security.
4. Probate may occasionally be desired even if not required.
a. Allows the estate to take advantage of the state creditor notice statutes and shorter statute of limitations on creditor claims.
(1) Assets in probate estate will be primarily liable for decedent’s debts.
(2) Trust assets may be used to pay creditors if probate assets are insufficient.
b. Creates a separate tax entity for tax planning purposes.
c. Allows for trapping distributions.
d. May be necessary under state law if disclaimers are used.
5. An appraisal is necessary for the following reasons:
a. For the accounting/appraisal of the probate estate.
b. To value assets for estate tax purposes and to determine whether estate taxes are due.
c. To determine the amount of the stepped-up basis beneficiaries will obtain under Code §1014.
d. For asset splitting among beneficiaries and trusts.
6. Treasury Regulations provide detailed instructions for the appraisal of various estate assets. See Treas. Reg. §20.2031. For example:
a. Personal property such as jewelry, silverware, art, or similar items valued in excess of $3,000 requires a professional appraisal. Treas. Reg. §20.2031-6.
b. Professional appraisals are always needed for real estate.
c. Publicly traded stocks, bonds or mutual funds are valued based upon the mean between the highest and lowest quoted selling prices on the valuation date. Treas. Reg. §20.2031-2.
d. A formal appraisal is required for closely held stock and unincor¬porated business interests. Treas. Reg. §§20.2031-2 and 20.2031-3.
7. If a business or partnership is an asset of the trust immediate steps must be taken to preserve and protect the enterprise. The trustee should do the following:
a. Determine whether to continue or liquidate the enterprise; take the appropriate steps after this determination is made.
b. Review corporate or partnership documents and interview part-ners/shareholders to determine the existence of buy-sell obligations or if business insurance exists.
c. Contact the accountant for the enterprise for accounting and tax planning advice.
8. Changing title to trust assets and probate assets.
a. A death certificate should be recorded in any county where real estate was owned if there is a successor trustee and the title will not be transferred to another trust or heir.
b. The decedent’s name should be removed from all assets either as an individual (through probate) or as trustee, unless a surviving trustee remains on title.
(1) This is accomplished by contacting the holder of each asset and requesting the change.
(2) Documentation will be required by each asset holder for distribution instructions and proof of death.
c. The trust’s distribution provisions should be followed, which may require preparation of a deed to a beneficiary of the trust if an outright distribution.
(1) Any deed distributing property from the trust should be recorded.
(2) The trustee should confirm that all non real-property assets are reregistered into the beneficiaries’ name as instructed by the trust.
d. Copies of a Memorandum of Trust along with a certified copy of the death certificate are normally required before changing title or paying death benefits by:
(1) Title insurance companies,
(2) Financial institutions,
(3) Life insurance companies,
(4) Securities firms and other asset holders.
e. If there is a surviving spouse/trustee, all asset titles may remain unchanged. However title may be changed:
(1) For emotional reasons the decedent’s name is often removed as trustee.
(2) If the trust provides, the assets may be split into two or more trusts at death, either for tax or family planning.
B. Estate and Income Tax Issues
1. A revocable trust becomes irrevocable upon death of the trustmaker. Its grantor trust status ends.
a. An irrevocable trust needs a federal ID number.
b. It is a calendar year taxpayer and files a 1041 tax return.
2. Living trusts often dictate a division of assets upon the first spouse’s death to minimize the estate tax due on the total estate. This is generally accomplished by using a Marital Trust and a Family Trust.
a. The Marital Trust is irrevocable and assets are generally retitled in its name on funding.
b. The Family Trust is irrevocable and is comprised of the remaining assets.
3. Funding the Marital and Family trusts are usually accomplished using a pecuniary or fractional share formula.
a. Pecuniary Formula.
(1) Triggers capital gain. Treas. Reg. §1.1014-4(a)(3).
(2) Capital losses not allowed. Code §267.
(3) Accelerates taxation of IRD. Code §691.
b. Fractional Share Formula.
(1) Does not trigger capital gain or accelerate IRD.
(2) Can be difficult to administer.
c. How long after the death of the trustmaker are the Marital and Family trusts funded?
(1) Funding is not completely finalized until valuation of all assets is fixed.
(2) Valuation isn’t fixed until its final for estate tax purposes. This process includes:
(a) Selecting the valuation date as either date of death, or date six months after date of death (alternate valuation date).
(b) Alternate valuation date is only available if it will decrease the value of the gross estate and decrease the estate tax.
(3) The federal estate tax return is due 9 months from the date of death unless an extension is received.
(4) Value of assets generally fixed upon receipt of estate tax closing letter. Finally fixed upon expiration of statute of limitations which is generally three years after the 706 return is due and filed.
(5) What happens during the hiatus between the death of the trustmaker and the fixed value of trust assets?
4. Estate Tax Payment Options.
a. Flower bonds.
b. If the estate is comprised of stock of a corporation with a value of at least 35% of the estate the stock can be redeemed to pay estate taxes without adverse dividend treatment. Code §303.
c. If the estate owns less than 35% of a corporation’s stock Code §302 may prevent dividend treatment upon redemption.
d. If the value of a closely held business exceeds 35% of the adjusted gross estate the trustee may elect to pay that portion of the estate tax represented by the value of the business in up to 10 annual installments commencing 5 years after estate tax is due. Code §6166. Interest rate is 4% so long as timely payments are made.
e. Payment of estate tax may be extended for up to 10 years upon a showing of reasonable cause under Code §6161. Current market interest rates apply but the interest is deductible.
5. It is advisable to retain an accountant experienced in preparing estate tax returns to do the 706 return.
6. Miscellaneous tax matters for you and/or the accountant.
a. Preparation of the decedent’s final income tax return. The decedent’s final income tax return is due on April 15th of the year after the death.
b. Determine whether the decedent made estimated income tax payments. If so, make the estimated payments when due.
c. Pay the real property taxes on any property owned by the trust or by the decedent before the due dates.
d. Apply for tax identification numbers for all trusts which become irrevocable, or are established, i.e. the Marital and Family trusts.
e. Determine the amount of cash that will be needed to pay all liabilities, including estate taxes.
f. Make any necessary tax elections available to the trustee.
g. Determine if the decedent had established any charitable or other trusts that may have an impact on the tax liability of the decedent or the estate.
h. Determine if the decedent had any unused capital losses, bank-ruptcy losses, or other issues that could reduce income or estate taxes.
C. Miscellaneous Matters
1. To ensure all of the decedent’s mail is received, if there is no surviving spouse, the trustee should ask the Post office to forward all mail to the trustee’s address.
2. The trustee is responsible for the maintenance of all trust assets.
a. Review the decedent’s automobile, homeowner, rental, liability, business and other insurance to assure coverage is adequate and continues until assets are distributed.
b. Ensure the health insurance premiums are adjusted and continued if there are survivors under the policy.
c. Notify the insurance companies if titles are changed to an irrevo¬cable trust.
3. Determine if any actions are pending on behalf of or against the decedent, or businesses or properties owned by the decedent. Also, determine if the decedent’s estate has an action for the wrongful death of the decedent.
4. The trustee should obtain receipts from beneficiaries who receive assets from the trust.
5. The trustee may be required to provide all beneficiaries with interim reports during the term of the trust, and a final report if assets are distributed and the trust is terminated after the death of the decedent. The trust agreement may also require regular reports to the beneficiaries by the trustee if irrevocable trusts are established after the death.