Executive Summary
- A revocable trust is a type of trust where the grantor maintains control over the trust and has the ability to revoke the trust at any point prior to their death.
- After the grantor dies, a revocable trust is placed under the control of the trustee, as identified by the trust instrument. Typically, upon the grantor’s death, the revocable trust will also become irrevocable, at least in part, meaning that no additional changes can be made to it.
- To settle the trust, the trustee must responsibly manage all assets within the trust and distribute them to beneficiaries in line with the terms of the trust.
- When settling a trust, it’s advisable for the trustee to consult a trust administration attorney to ensure they are following all necessary processes in accordance with state laws.
Introduction
A trust is a fiduciary arrangement where the title of assets are placed under the control of a third party known as a trustee until the assets can be distributed to the beneficiaries of the trust. A trust instrument will describe the wishes of the trust creator, also known as the grantor, for how these assets will be distributed to their identified beneficiaries.
A trust is a helpful estate planning tool, allowing for the transfer of assets from a deceased individual to the beneficiaries they identify in the document, typically while also being able to avoid the delay and expense of those assets having to pass through a probate court proceeding. There are multiple types of trusts—the two most common types are revocable trusts and irrevocable trusts. Each of these trusts has two separate processes for how they are managed during a grantor’s lifetime, but they are managed similarly after the grantor dies.
When a grantor dies, a revocable trust becomes irrevocable and will then be managed and distributed by the trustee identified in the trust instrument. Understanding how this process works is essential for ensuring the smooth administration of a trust while honoring the wishes and instructions of the grantor.
Understanding Revocable Trusts
A revocable trust, also known as a living trust, is a trust that contains assets but may be amended or revoked by the grantor at any point during their lifetime. While the grantor is alive, the grantor is legally considered the owner of these assets, and the assets are still considered part of the grantor’s taxable estate. However, after the grantor dies, the ownership of these assets is then transferred to a trustee to handle the administration and distribution of all property in the trust.
The key benefit of a revocable trust is that it allows assets to be transferred directly to beneficiaries without having to navigate the probate process. Having a revocable trust differs from the estate administration process in all the following ways:
- The titles of assets must be formally transferred into the name of a trust and named in the trust instrument to be considered separate from the estate.
- After the grantor’s death, assets are transferred directly to beneficiaries without the need for probate, which can be complex, time-consuming, and costly.
- Trustees are identified in the trust and do not have to be appointed by the court to assume responsibility over the assets.
Transition to Irrevocable Trust
When a grantor dies, a revocable trust turns into an irrevocable trust. An irrevocable trust is a type of trust that cannot be changed, modified, or revoked by the grantor once it is established, meaning that its terms are final once the trust is created. The irrevocable trust also becomes its own legal entity with its own Employer Identification Number (EIN) once it is created, as compared to a revocable trust, where the trustee will only obtain a separate EIN once the grantor passes.
An irrevocable trust can be created in three ways:
- A grantor initially chooses to create an irrevocable trust rather than a revocable trust
- A grantor becomes incapacitated and is no longer able to make crucial decisions around the assets within the trust.
- The grantor dies, and a revocable trust transitions into an irrevocable trust
Once a revocable trust becomes irrevocable upon the death of a grantor, the terms of the trust cannot be changed, and the successor trustee assumes the responsibility for managing the trust and the assets within it.
Key Differences Between Revocable and Irrevocable Trusts
Revocable trusts and irrevocable trusts may be used as two different estate planning tools, and each offers its own unique considerations. After a grantor dies, a revocable trust becomes irrevocable and is handled following the same procedures. However, up until this point, they have the following differences.
Revocation
After the creation of a revocable trust, the grantor has the control to change, revoke, or amend the trust at any time during the remainder of their lifetime. Revocable trusts offer more flexibility for the grantor, as they are able to make any adjustments to the property included in the trust, add or remove beneficiaries, change the trustees, or revoke the trust entirely.
In the case of an irrevocable trust, typically, the grantor cannot modify or revoke the trust for the remainder of their lifetime unless the change is approved by all beneficiaries listed in the trust instrument. This means that there may be significant limits on the ability to change the terms of the trust once it’s created.
However, after a grantor dies, neither a revocable trust nor an irrevocable trust can be changed. After the grantor’s death, the terms of the trust must be carried out by the trustee exactly as they are defined in the trust document.
Influence on Taxable Estate
Any assets included in a revocable trust are considered a part of an individual’s taxable estate, which means they are subject to federal estate taxes and can increase the estate’s overall tax liability.
On the other hand, assets included in an irrevocable trust are not technically owned by the grantor and are not considered to be part of the overall estate, which may reduce the value of the grantor’s estate subject to taxes. This benefit is especially valuable for individuals who have high-value assets and are seeking to keep their taxable estate under the federal estate tax exemption of $13.99 million.
Using an irrevocable trust to handle the ownership of some assets may allow you to remain under this threshold. That said, irrevocable trusts are still subject to their own separate taxes, which will be an important consideration for trustees as they must file a separate tax return and pay any taxes generated by the trust.
Creditor Protection
Revocable trusts do not offer any protection against creditors seeking to resolve debts levied against the grantor. Irrevocable trusts, on the other hand, may be used to protect assets as they are not considered the grantor’s/debtor’s property. As a result, this may make it more difficult for creditors to target trust assets and reduce the inheritance of trust beneficiaries for the grantor’s personal debts.
Primary Goals
The key reason to opt for a revocable or irrevocable trust depends on the grantor’s goals. Often, the primary objective of creating a revocable trust is to preserve assets and estate property for beneficiaries while avoiding probate. Although irrevocable trusts are also a helpful estate planning tool that allows assets to bypass probate, they are often used for the explicit intention of minimizing gift and estate tax obligations.
Role of the Successor Trustee
After the death of a grantor in a revocable trust, the grantor is no longer considered the owner of the trust and the assets within it, and the successor trustee identified in the trust instrument assumes responsibility over the trust. The trustee is considered the owner of the trust, but they maintain a fiduciary duty to act within the best interests of the trust’s beneficiaries.
It will become the responsibility of the successor trustee to manage and distribute all assets within the trust while following the instructions left by the trust’s grantor. In the event that the successor trustee is unable to fulfill their duties, an alternate successor trustee may be appointed based on the provisions described in the trust or on the court’s authority.
The trustee is responsible for managing the trust’s assets, which may include marshaling, inventorying, and overseeing financial accounts, real estate, investments, and other property. The trustee is also responsible for managing any potential disputes that may arise between beneficiaries. Once all debts and taxes are paid and all disputes have been resolved, the trustee can then distribute assets to the beneficiaries identified in the trust instrument.
In this process, the trustee has the full authority to manage assets and make any necessary transactions to act in the best interests of the trust and fulfill the terms identified in the trust instrument. The powers of a trustee include the authority to pay debts or taxes using trust funds, make investments in the best interests of the trust, facilitate the transfer of titles to beneficiaries, and more.
Trust Administration Processes
After a revocable trust turns into an irrevocable trust upon a grantor’s death, it will kickstart the administration of the trust to beneficiaries as outlined by the grantor’s wishes described in the trust instrument. As part of the trust administration process, the trustee will be responsible for carrying out the following steps. Keep in mind that this is a broad overview of the trust settlement process, and unique issues may arise that make it wise to seek legal counsel for additional advice.
Managing Trust Assets
A successor trustee is responsible for carrying out all necessary tasks involved with the management of the trust after a grantor’s death. The full scope of the trustee’s responsibilities when managing a trust depends on the needs of the trust itself and the terms defined in the trust agreement. In general, managing the trust may entail the following responsibilities:
- Reading and understanding the terms outlined in the trust instrument
- Inventorying and securing all property and assets in the trust to ensure they are accounted for and protected
- Securing an Employer Identification Number (EIN) through the IRS for tax filing purposes
- Obtaining accurate appraisals from a professional appraiser to ensure an accurate fair market value for each asset and a fair distribution of assets to trust beneficiaries
- Holding assets within the trust until beneficiaries reach an appropriate age or milestone, if applicable, according to the terms of a trust instrument
- Enlisting the support of financial advisors, tax advisors, and CPAs to ensure all transactions are in the best interests of the trust
Once the above responsibilities have been addressed, the trustee can move forward with paying debts and distributing assets to beneficiaries identified in the trust.
Paying Debts and Taxes
The trustee will be responsible for using the funds in the trust to resolve any outstanding debts the grantor owed, as well as any taxes related to the trusts. The trust is still liable for some debts that the grantor left behind, including credit card debts or property mortgages, and must be resolved before assets can be distributed.
These debts must be paid using the trust’s liquid assets or through the sale of trust assets used to raise funds. This step is crucial prior to distributing property or money to beneficiaries to prevent creditors from pursuing litigation to seek restitution for these debts..
Trustees should also file IRS Form 1041 on behalf of the trust to ensure compliance with tax obligations. Other taxes involved in the process may include capital gains taxes, property taxes, federal estate taxes, and state estate taxes.
Some states, like California and Texas, legally do not require estate taxes, so it’s important to understand the unique laws of your state and jurisdiction. It’s advisable that trustees consult a financial advisor and/or tax professional to ensure that they understand trust tax obligations and how to maximize any potential tax benefits.
Distributing Assets to Beneficiaries
After the trustee has settled all outstanding debts and taxes, they may begin the process of distributing assets to beneficiaries. The process by which these assets are distributed will depend on the instructions specified in the trust instrument by the grantor.
Some grantors will allow for the direct, singular distribution of assets as soon as possible once all debts and obligations are addressed. In other cases, a grantor may set conditional terms for distribution, such as instructing that assets be distributed over time or after a certain time period, such as a beneficiary reaching the age of adulthood. Sometimes, grantors might leave this up to the trustee’s discretion.
Ultimately, the timing of trust distribution depends on the instructions outlined in the trust instrument. Every situation is different, but on average, the trust administration process can take around 18 months from start to finish, depending on the complexity of the trust and state requirements. In some cases, trusts may require court approval before the trustee can distribute assets to the beneficiaries, which may delay the distribution.
Closing the Trust
After all debts have been paid, all assets have been distributed to beneficiaries, any disputes have been resolved, and the trustee has followed all terms of the trust instrument, they may close the trust.
Before closing the trust, all assets and transactions should be accounted for in a trust accounting. This accounting should include receipts of all transactions, statements of bank and investment accounts, and documentation of the transfer of property titles to beneficiaries.
Then, the trustee should provide notice of their intent to close the trust and submit a petition to close the trust to the probate court. After this step, the trust is dissolved, and the trustee is relieved of their responsibilities.
Beneficiaries’ Rights and Responsibilities
During the administration of an irrevocable trust, beneficiaries have several crucial rights, as described below.
The Right To Receive Notifications
In accordance with California Probate Code § 16061, beneficiaries and legal heirs of the grantor have the right to receive information about a trust and its administration. The trustee must provide written notice within 60 days from the date of the grantor’s death or 60 days from the date the trustee assumed responsibility, depending on which is later.
Under state law, this notification should include important information, such as:
- The name of the grantor
- The date the trust was signed
- The contact details of each trustee
The Right To Receive Information About the Trust
Beneficiaries may request an accounting of trust assets and transactions relevant to their interests at any time, in addition to the yearly accounting that must be provided by the trustee. Beneficiaries also have the right to receive a copy of the trust instrument itself.
A trustee should maintain clear communication with beneficiaries throughout the trust administration process and fulfill their responsibility to provide a formal accounting every year the trust is open. Being proactive will ensure that the trustee is upholding beneficiaries’ rights and providing appropriate information to prevent trust disputes.
The Right To Distributions from the Trust
Beneficiaries are entitled to receive distributions from the trust as specified in the trust instrument. These distributions will depend on the specified wishes of the grantor and may include trust income, real property, lump-sum monetary distributions, or other assets belonging to the trust.
When beneficiaries receive their distributions from the trust may differ based on the terms of the trust. In some cases, the grantor may call for an immediate distribution of assets to beneficiaries. For example, the trust instrument may instruct that the title of a real estate property is transferred directly to a beneficiary after all debts have been resolved.
In other cases, a grantor may instruct that a beneficiary must wait to receive assets until a designated timeline has been reached. For example, the grantor may request that an investment account be held in the trust to accrue in value until a young beneficiary reaches the age of 18.
The Right To Contest the Trust
If beneficiaries believe that the trust instrument being used to guide the trust administration is inaccurate or invalid for any reason, they have the right to contest the trust within 120 days of receiving notification of the beginning of trust administration. Common reasons for trust disputes include fraud and undue influence involved in the creation or alteration of a trust document that may invalidate the trust.
If they believe the trustee is failing to uphold their duties, they also have the right to petition the court to urge the trustee to take action. Similarly, beneficiaries also have the right to raise disputes if they have evidence to suggest that the trustee is not managing the trust responsibly in a breach of fiduciary claim. These cases may occur if a trustee is acting with misconduct, such as self-dealing or making irresponsible investments with trust assets.
If beneficiaries believe they have a legal contest, it’s advisable to consult a trust litigation attorney as soon as possible so that they understand their rights and can raise their case within the statute of limitations.
Trust Funding Issues
In some cases, there may be confusion around the funding of a trust after the grantor dies. Upon establishing a revocable trust, a grantor must fund the trust by transferring the titles of the property into it. If the grantor fails to fund the trust with property, legal questions may arise about how to proceed.
This often leads to one of two separate scenarios, depending on the circumstances of the trust:
- If it was not clear that the grantor intended to fund the trust with property, then the excluded property will have to pass through the formal probate process to determine how to transfer ownership of the property.
- If there is clear documentation and proof that the grantor intended to fund the trust with titles of property before their death, the trustee may file a Heggstad petition, also known as a California Probate Code 850 petition, to fund the excluded property into the trust.
Because a revocable trust cannot be changed after the grantor’s death, the only way to legally add new assets into the trust is through a Heggstad petition that must be approved by the court. It’s important to consult an attorney who can offer guidance in completing these forms and ensuring that the trustees follow the appropriate process for transferring assets to beneficiaries.
Legal Compliance and State Laws
It’s crucial that the trustee carries out the administration of a trust in close compliance with state laws to avoid legal disputes, trust contests, or personal liability. Legal obligations may vary by state and county jurisdiction where the trust administration process takes place, so it’s important that a trustee does their due diligence to understand the laws and regulations that dictate how they should manage assets within a trust.
Key legal considerations include:
- Obtain a copy of the trust instrument, a copy of the grantor’s death certificate, and proof of identification to demonstrate the trustee’s authority to manage trust assets.
- Notify beneficiaries of the beginning of the trust administration process within 60 days of the death of the grantor or the trustee’s appointment, whichever happens later.
- Notify creditors of the beginning of the trust administration process and provide a 90-day window for creditors to submit their claims.
- Ensure the title of trust assets is legally transferred to beneficiaries to ensure legal ownership.
Failing to understand and comply with state laws could delay trust administration and expose trustees to legal liabilities, such as lawsuits from beneficiaries or creditors. Consulting a trust administration attorney who is familiar with the laws and regulations in your state is crucial for helping you understand your responsibilities.
Engaging a Trust Administration Attorney
The trust administration process can be complex, between managing assets and distributing them to the appropriate beneficiaries in line with the necessary legal processes. The support of a trust administration attorney who is familiar with the process and local regulations can be invaluable for supporting a trustee in their duties.
An attorney may be able to offer crucial guidance in navigating the complexity of trust administration and ensuring that trustees understand their responsibilities in the process. It’s advisable for a trustee to engage the support of a trust administration attorney as soon as they accept the role of the trustee. Enlisting the support of an attorney early will allow the trustee to guarantee they are honoring the instructions of a trust instrument and doing their due diligence to avoid disputes before they arise.
If there are any disputes involved in the process, an attorney can help you understand your rights, offer support in finding an appropriate mediator, or provide legal consultation during litigation.
Need Help With a Revocable Trust? Consult the Attorneys at RMO Lawyers
After the grantor of a revocable trust dies, the trust becomes irrevocable and can no longer be changed. Then, the successor trustee has an important duty to ensure that they manage the assets in the trust while honoring the wishes of the grantor. The support and guidance of a trust administration attorney is valuable for ensuring that a trustee understands their responsibilities and can adequately fulfill them.
The attorneys at RMO Lawyers have decades of experience in the trust administration process and a detailed understanding of the laws and regulations involved. Our team is well-equipped to support trustees in fulfilling their duties and beneficiaries in understanding and securing their rights.
Schedule a consultation with us at RMO Lawyers to discuss together how we can offer support for you in your case.
Glossary
Beneficiaries – A beneficiary is an individual or entity identified in a will as being entitled to receive benefits from the estate
Decedent – A person who has died and left behind assets to be distributed.
Fiduciary duty – The legal obligation that an estate executor or administrator has to an estate and its beneficiaries to act in their best interests.
Grantor – A person who creates a trust to specify how they want their assets distributed upon their death and to which beneficiaries.
Heggstad petition – Under California Probate Code 850, a Heggstad petition governs the “conveyance of transfer of property claimed to belong to decedent or other person.” Generally, an 850 Petition is used when a decedent created a trust but failed to title one or more properties in the name of the trust, the most common properties being real property and bank or investment accounts.
Probate – the court process in which the assets of an estate are gathered, accounted for, and distributed to the heirs or beneficiaries after an individual passes away, either in accordance with the deceased’s wishes if they had a will or following local intestacy laws if there was no will.