Settling an estate when there is a Revocable Living Trust can prove to be quite easy.
If all of the Trustors’ assets are in the Revocable Living Trust, settling the estate can usually be done in less than two weeks. “Settle” is used rather loosely, because there is not really anything to settle. However, a number of steps must be taken to ensure that the beneficiaries will enjoy the appropriate benefits that the Revocable Living Trust can provide.
The steps that the Successor Trustee should take upon the death of the Trustor are as follows:
- Make initial phone calls.
- Review personal data for information needed by the funeral home to prepare the death certificates.
- Make funeral arrangements, including memorial or flowers and funeral notice for newspapers.
- Order death certificates.
- Check safe-deposit box and any checking, accounts.
- Notify other people.
- File Federal Income Tax Form, and a Federal Estate Tax Form, if necessary.
- Initiate the settlement process per the instructions in the Termination Section of the Trust.
1. MAKE INITIAL PHONE CALLS
Immediately upon the death of a Trustor, the Successor Trustee should notify those individuals and organizations listed on the People to Contact section of the Final Instructions form in the Personal Data section. These calls are necessary to set in motion the many steps that must be taken to settle the deceased Trustor’s estate.
2. REVIEW PERSONAL DATA
This information is required on most death certificates and is much easier to gather and record while the Trustor or Trustors are both still living.
3. MAKE FUNERAL ARRANGEMENTS
The Successor Trustee should have someone contact the Funeral Home to make any funeral arrangements necessary, including a memorial or flowers and any funeral notices to the local newspapers. This information is contained in the Essential Facts and Obituary forms found in the Personal Data section.
IF THE DECEASED WAS A VETERAN
The person making the arrangements will need to take copies of any military separation papers to the funeral home.
These papers are needed to show proof that the deceased person was a veteran of military service. When an individual who served in the armed forced dies, the Veterans Administration will provide a small amount toward funeral expenses, a headstone marker, and an American flag if desired.
NOTE: Copies of any military discharge papers should be placed in the trust safe-deposit box and duplicates placed in the Trust Transfer Documents section of the Family Estate Plan.
4. ORDER DEATH CERTIFICATES
The Successor Trustee should order as many death certificates as needed. A separate death certificate will be needed for each insurance policy and each asset (real estate deeds, stock certificates, bonds and so on) that is to be ultimately sold or transferred. A simple copy of the death certificate is not sufficient; it must be a certified copy, obtained from the county recorders office.
Unfortunately, certified copies of the death certificates are seldom available until about ten days after the death of an individual. However, one or two copies of the death certificate for immediate use can usually be obtained directly from the funeral home.
With a copy of the Revocable Living Trust and a certified copy of the death certificate, the Successor Trustee then has exactly the same power to manage the estate as the deceased individual had while living.
NOTE: Even if a surviving spouse does not need to change the title of the assets upon the death of the first spouse, that surviving spouse should order enough death certificates so that upon the death of the surviving spouse, the Successor Trustee can use them to transfer all the assets of the final beneficiaries.
5. CHECK SAFE-DEPOSIT BOX AND CHECKING ACCOUNTS
At one time, the death of an individual could have limited the surviving spouse’s or Successor Trustee’s ability to access funds needed for daily subsistence. Often checking accounts and safe-deposit boxes were sealed upon death and it took a tax waiver to release the funds. Fortunately, in Washington State, this practice no longer exists.
The Successor Trustee should look in the safe-deposit box for two reasons:
First, the deceased may have left a message or 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 its contents to be sure that all of the valuable assets (such as real estate deeds, stock certificates, bonds, etc.) are in the name of the Trust. All such documents should have been included or indicated in the Family Estate Plan as well.
Upon the death of the first spouse, the Successor Trustee may have the power to sign on to the surviving spouse’s checking account. This way the Successor Trustee will have rapid access to funds that may be needed upon the surviving spouse’s death.
Because cash is usually the only acceptable means for settling the funeral expenses, the Successor Trustee should confirm the amount of readily available funds in the checking account of the deceased person and make arrangements to have access to the funds.
Again, the safe-deposit box should be in the name of the Revocable Living Trust. The bank should readily give the Successor Trustee access to the safe-deposit box.
NOTE: The Successor Trustee should know where the safe-deposit box is located, as well as the location of the key to the safe-deposit box. The Successor Trustee should have access to a copy of the Revocable Living Trust at all times.
6. NOTIFY OTHER PEOPLE
Once the funeral arrangements have been made, those individuals and organizations listed on the Persons to Contact section of the Essential Facts form in the Personal Data section should be contacted.
7. FINAL FEDERAL INCOME TAX FORMS AND FEDERAL ESTATE TAX FORM
A final federal income tax form for the estate of the deceased Trustor must be filed with the federal government. An estate tax form may also be requested if the estate is large enough to be subject to estate taxes. A CPA or an attorney should be contacted to assist in filing such forms or other additional tax forms that may be needed.
8. INITIATE THE SETTLEMENT PROCESS
If the Trustor has transferred all of his or her assets to the Revocable Living Trust and have kept the sections of the Family Estate Plan package up to date, the Successor Trustee will have very little to do from a legal standpoint. The Trust or title of any assets that are in the trust need not be changed. The only exceptions would be:
1. If upon the death of a Trustor, the estate is large enough to be subject to federal taxation the trustee may have to hire an accountant or an attorney to prepare the estate tax returns.
2. If upon the death of the first spouse to die, the estate has grown large enough to warrant hiring an estate planning professional or an accountant to do some after death planning.
3. If upon the death of the first spouse to die, the trust calls for the creation of a “Credit Trust” or “Q-Tip Trust”, the Successor Trustee should have an accountant’s assistance in allocating the assets between the Survivor’s Trust and the Decedent’s Trust. Furthermore, the Successor Trustee should have the attorney who created the trust formalize the existence of those separate trusts.
4. If assets are to be distributed directly to the beneficiaries, the Successor Trustee must retitle those assets into their names.
In most cases, a 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.
Reviewing The Living Trust
If the Successor Trustee is the surviving spouse, he or she has the same power over the trust as before the death of the spouse (except to the extent there may be a Credit Trust). However, it is very important to be sure that there is a Successor Trustee named to assume the responsibility upon the eventual death or incapacity of the surviving spouse.
If there are any changes that the surviving spouse needs to make or if a Successor Trustee must be named, this should be done as soon as possible after the death of the first spouse.
The Termination section should be reviewed to determine if any of the deceased spouse’s assets are to be immediately distributed to any beneficiaries, rather than remaining in the trust for the benefit of the surviving spouse. The Successor Trustee should be sure to check for any amendments that affect how the assets are to be handled.
NOTE: It is important that an original copy of the trust, the original Will, a copy of the “Final Instructions”, and any ownership documents be placed in the safe-deposit box which is held in the trust’s name.
NOTIFY LIFE INSURANCE COMPANIES
Life insurance companies should be notified of the death of the insured.
Each insurance company will require a certified copy of the death certificate. The insurance policies should also be placed in your safe-deposit box and a list of policies should be placed in the Trustor’s trust safe-deposit box and the Family Estate Plan.
ENSURE ASSETS ARE WITHIN THE TRUST
The Successor Trustee should verify that all of the assets are within the Trust. Evidence of ownership of these assets should be found in the Trust Transfer Documents and Classification of Property sections of the Family Estate Plan. The actual documents should be in the Trust safe-deposit box.
If there are assets not owned by the Trust and the value of all assets outside the trust exceeds the value established by Washington statutory probate guidelines then those assets outside the trust must go through probate.
If all the Trustor’s assets are in the Trust, the Successor Trustee has the power to manage the trust according to the Trustors instructions with the Trust document and death certificate.
REVIEW THE SIZE OF THE ESTATE
The Successor Trustee should check the information contained on any financial statements or other information that shows the value of the estate. Ideally, a financial statement will have been updated within the last twelve months.
The value of the estate includes all property owned at the death of the Trustor, both in and outside of the Trust.
FILE A FINAL INCOME TAX RETURN
Upon the death of a Trustor, a final income tax return for the year in which the Trustor died must be filed. The Successor Trustee should keep an accurate record of the Trustor’s last medical and funeral expenses, because the medical expenses can be deducted from the Trustor’s taxable income, and if needed, the funeral expenses can be deducted for estate tax purposes.
GET A WRITTEN VALUATION OF ASSETS
One of the most important functions that must be completed when an individual dies is to establish a written valuation of assets held at the time of death.
When a person dies, the value of the property that would have been subject to a capital gains tax if the deceased had sold it while alive, included in his or her estate receives a new value or basis equal to the market value of the property on the date of the Trustor’s death.
This new basis is used when reporting any capital gains taxes due when assets are later sold by the deceased person’s heirs. This increase in basis is called a stepped-up basis. The value of the stepped-up basis to the deceased’s heirs is an overall reduction in capital gains because appreciation in the property is effectively ignored when calculating the capital gains.
A written valuation of the Trustor’s assets is necessary to establish their market value as of the date of death so that the beneficiaries can take advantage of this step-up in basis, thus minimizing the taxable gain when the assets are eventually sold by either the surviving spouse or other beneficiaries.
The Successor Trustee should provide the beneficiary who receives the property a copy of any written valuations.
NOTE: It is essential to establish a written valuation of each asset upon the death of both spouses. The written valuation provides a valid and documented justification of the assets current market value for determining the stepped-up valuation.
The simplest method for establishing current market value for real estate is to telephone:
– two (2) real-estate agents from separate agencies. These agents should be certified to appraise the kind of real estate that the Successor Trustee is having them review.
If the valuations from the two (2) agents are fairly close together, the Successor Trustee should take the average of the two (2) estimates for the value of the real estate.
If the two (2) estimates are far apart, a third real estate agent should be consulted for another valuation of the real estate.
The Successor Trustee must retain copies of the valuations in a safe place and should record any written valuations. The beneficiaries may need to use these valuations to substantiate the new cost basis to the Internal Revenue Service, possibly years later when they decide to sell the real estate.
NOTE: Be sure to use agents who are experienced and certified to appraise the type of real estate that you are having valued.
This is a very important point, if the wrong type of real estate agent is used and the IRS challenges your valuation, it could cost quite a bit in extra income taxes.
Establishing the current market value of stocks, bonds and other securities is very simple. The Successor Trustee should call the stockbroker or agent that sold you the investment and have him provide a letter stating the stock’s or bond’s value at the date of death. The Successor Trustee should retain copies of these valuations and provide them to the beneficiaries when the assets are distributed to them.
COLLECTIBLES AND OTHER ASSETS
If the Trustor has any collectibles such as rare coins, or works of art, a qualified appraiser will be needed to appraise the property. The same dealer or anyone connected with the dealer that sold the Trustor the coins, stamps, or other collectibles cannot be used or the IRS will challenge the valuation. The Successor Trustee should be instructed to retain copies of these valuations and provide them to the heirs when the assets are distributed.
REVIEW BUSINESS OR OTHER AGREEMENTS
The Successor Trustee should review any business agreements for actions, dispositions, and benefits.
Copies of any corporate stock certificates, partnership agreements, buy-sell agreements,
stock-redemption agreements, Deferred compensation agreements, Pension Plan documents, benefit statements, etc., should be retained in the safe-deposit box and copies should be kept in the Trust Transfer Documents of the Family Estate Plan.
The Successor Trustee should hire at least two (2), and possibly three (3), certified public accounting firms to help establish the date of death value for the Trustor’s business. Since most privately held business have a minimal cost basis, stepped up valuation can become extremely important. However, a sound and justifiable basis must be established to satisfy the Internal Revenue Service.
NOTE: If the Trustor has an interest in a business of substantial value, the Trustor 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 the Trustor’s children. These various alternatives should be pursued with a knowledgeable estate planner.
Any credit cards that were issued to the deceased individual should be reviewed to determine whether they should be destroyed.
Cards that should definitely be destroyed are those issued only in the name of the Trustor or for business use only.
The Successor Trustee should contact the credit card companies to see if the cards were covered by insurance, some credit cards provide insurance that pays the card’s balance at death. Upon the death of the Trustor, the Successor Trustee should cancel any remaining, credit cards in force at the Trustor’s death.
NOTE: The Trustor should always have a list of your credit cards readily available for the Successor Trustee in both a safe-deposit box and in the Family Estate Plan.
DISTRIBUTE PERSONAL EFFECTS
The Successor Trustee should check the trust documents for the Directive or Letter of Instructions for specific bequests of property made by the deceased Trustor and make any distributions so required.
REVIEW ALLOCATION AND DISTRIBUTION
The importance of the allocation and distribution aspects of settling an estate cannot be overemphasized. The Termination section of the Trust should be reviewed very carefully.
Since the Successor Trustee should be given the choice of distributing cash or distributing the assets, the Successor Trustee preferably should distribute the assets outright, rather than selling them and then distributing cash.
At the Trustor’s death, if the Termination provisions provide that the assets are to be distributed to the beneficiaries, again, it is usually preferable to distribute assets, where appropriate, rather than simply selling the assets and then distributing the cash.
On the other hand, to be perfectly fair to the beneficiaries, it is often difficult to divide assets equally, so it may be necessary to sell some of the assets and then distribute equal dollar amounts in cash to each heir.
The Successor Trustee must still apply for a separate Trust Identification Number for the Decedent’s Trust if one is created because of the size of the estate. The Successor Trustee may want to hire an accountant experienced in estate planning taxation to assure that adequate records are created and maintained.
UPON THE DEATH OF THE FIRST SPOUSE
When the Trust provides for both a Credit Trust and a Survivor’s Trust, or if the surviving spouse should create a Decedent’s Trust by executing a valid disclaimer, that portion of the estate allocated to either the Credit Trust or the Decedent’s Trust becomes irrevocable.
A form formally known as the “U.S. Fiduciary Income Tax Return” must be filed each year, but only for the assets in the Decedent’s Trust. The Successor Trustee should contact an accountant to assist in the preparation of this and related forms.
UPON THE DEATH OF BOTH SPOUSES
Upon the death of both spouses, the entire Trust becomes irrevocable. The Successor Trustee must apply for and use a new IRS Trust identification number. The Successor Trustee will also have to notify the institutions to change the identification number of the trust assets.
REVIEW INVESTMENTS AND INVESTMENT OBJECTIVES
The Successor Trustee should review the investments in the Trust to see whether they meet the objectives of income, growth, and security and determine whether some assets should be reinvested to provide adequate income as well as appropriate growth for a hedge against inflation.
FILING THE FEDERAL ESTATE TAX FORM 706
The Form 706 need only be submitted if the estate is larger than the current applicable Unified Credit Against Estate Taxation or if there are federal estate taxes to pay. 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. The Successor Trustee should not prepare the Estate Tax Return. An accountant or other estate planning advisor should be consulted.
If any federal estate taxes are due, the Form 706 must be filed, and any taxes due must be paid within nine months after the death of the Trustor.