Arthur S. Brown - Trust & Probate Administration

CHECKLIST FOR SETTLING A SIMPLE CALIFORNIA LIVING TRUST

Upon the death of a Settlor/Trustor, certain actions must be taken by the Successor Trustee of the Living Trust. The following covers a wide range of tasks. All of the items may not apply to your situation. The most important thing is DO NOT PROCRASTINATE. You may also need to work with a competent accountant who has performed accounting for Living Trusts. If you do not know a competent accountant, contact my firm.

As you will see, there is a great deal of similarity between probating an estate and settling a trust estate. The major difference is that a trust settlement takes place outside of the court system, is faster and is less expensive. The following plan will give us both an understanding of our respective duties:

I. INITIAL ACTIONS:

A. COLLECTION OF ESTATE PLANNING DOCUMENTS: The first step in any administration is the collection of important papers. The following documents are essential to a Probate or Trust Administration:

1. Last Will and Testament(s)

2. Codicil(s)

3. Revocable Trust(s)

4. Any Amendments(s) to Trust

5. Income Tax Returns (for the last two years)

6. Certified Death Certificates (10-15)

7. All Real Estate Deeds

8. All Deeds of Trusts

9. All Brokerage Statements

10. All Bank Account Statements

11. All Mutual Fund Statements

12. Marriage Certificate

13. Naturalization Documents

B. LODGING OF WILL. Pursuant to Probate Code § 8200, the possessor of the original Will needs to lodge the original Last Will and Testament for safekeeping within 30 days. Lodging the Will does not mean there is a probate being commenced.

C. NOTICE TO BENEFICIARIES AND HEIRS. As of January 1, 1998, within 60 days of a Trust becoming irrevocable, which is normally at the death of the Settlor, the Trustee must send out written notices which include appropriate warnings and information regarding the Trustee to the named beneficiaries and heirs of the decedent. Each heir and beneficiary then has 120 days to contest the Living Trust. Failing to contest within the 120 days bars any actions regarding the creation of the Trust.

D. MARSHALLING OF ASSETS: All assets must be identified and a complete and accurate inventory prepared for one or more of the following reasons:

1. To determine whether federal estate tax is due.

2. To determine new depreciation schedule on income property.

3. To document the stepped-up basis.

4. As a starting point for an accounting.

5. For guidance of the surviving spouse or successor Trustee.

Personal effects and items should be inventoried and secured. It is recommended the household locks be changed as soon as possible.

E. COLLECTION OF DECEDENT'S BENEFITS: After the death of a spouse or surviving spouse, the surviving spouse or Successor Trustee should take action to collect benefits for the Decedent. These benefits may include state disability payments (SDI); retirement or disability income, either from federal social security or as a fringe benefit from an employer; funeral and death benefits from social security, Veteran's Administration, or employment agreements; medical expenses from group insurance; group life and disability income benefits; and workers compensation claims.

F. QUALIFIED PENSION PLANS: The Trust, the surviving spouse, or other beneficiaries may receive the proceeds of a qualified pension plan. A number of elections are available to recipients of those proceeds. Plan proceeds received in a lump sum may be eligible for special five and ten year averaging tax treatments. Additionally, a surviving spouse (but not the other beneficiaries) has the opportunity of rolling over proceeds of a qualified plan into an IRA. The IRA can defer income taxes on those proceeds until they are actually collected.

G. APPRAISAL: After the death of a Settlor, (a single person, the first spouse to die or upon the death of the surviving spouse) an appraisal is necessary for the following reasons:

1. To determine the amount of the stepped-up basis.

2. For asset splitting.

3. For an accounting.

4. To determine whether estate taxes are due.

The value may be determined as of the date of death or six months after the date of death. It is recommended that the inventory be appraised by an official probate referee or licensed appraiser.

H. CREDITORS: If a probate estate is opened pursuant to Probate Code Section 18201, the probate estate is primarily liable for Decedent's debts, and if it does not have enough assets, then the trust will pay the creditor. The trust document requires that the Trustee pay the outstanding debts and liabilities of the Decedent. Therefore, as Trustee you must determine the debts and liabilities of the Decedent and make provisions for payment.

I. CLEARING TITLE: When a Settlor dies, an Affidavit of the Death of a Settlor/Trustee along with a death certificate should be recorded for each piece of real property. Also maintain a copy of the trust in the event a title insurance company wants to see the trust distribution provisions. It is recommended to remove the Decedent's name from the assets. This is easily accomplished by providing my office with a copy of the Quitclaim Deed placing the property into the Living Trust. At the death of the Settlor the distribution provision should be followed which may require still a further deed to the beneficiary of the trust. Upon execution of such deed distributing property from the trust to the beneficiary, it should be recorded.

J. HOLDING TITLE: After the death of a settlor, title to assets remain in the name of the trust. The trust will require some bookkeeping entries. Generally, assets can be retitled to show the Successor Trustee. In addition, as to real property, an Affidavit of the Death of a Settlor/Trustee along with a death certificate should be recorded for each interest of real property. After the Settlor dies, the death certificate should be recorded and assets distributed if required by the trust terms. If assets are distributed the assets should be re-titled in the name of the beneficiary. If assets remain in trust then they can remain titled in the name of the successor Trustee under the trust.

K. OBTAINING EIN: Whenever a Trust becomes irrevocable or whenever a Settlor is not acting as the Trustee, the Successor Trustee shall obtain an Employer Identification Number (EIN) through the IRS. In order for the Successor Trustee to hold title, the EIN will be necessary for the financial institutions to open and maintain accounts.

II. ACCOUNTING AND TAX MATTERS

A. ESTATE TAXES: A Federal Estate Tax Return (form 706) may be required upon the death of an individual. It is required when the estate is greater than $3,500,000.00 for the year 2009. For 2010, unless changed by Congress, the amount of the estate passing at death is unlimited and no estate taxes are due. For 2011, unless changed by Congress, the limit reverts back to $1,000,000.00. Any amounts over $1,000,000.00 are subject to estate taxes. The California form is generally required if the Federal form is required.

B. TAX ELECTIONS: A number of tax elections are available to the Trustee/Executor when preparing the federal estate tax return.

The following are tax elections which may be significant if estate taxes are contemplated. These tax elections should be discussed with your accountant:

1. Alternate valuation date

2. Special use valuation

3. Deductible fees

C. INCOME TAXES:

1. Tax Returns for the various Irrevocable Trusts: Whenever a Trust becomes irrevocable tax returns are required each year. This is filed on Form 1041 U.S. Fiduciary Income Tax Return. This will also support the division of assets between the various Trusts.

2. Apply for a Tax Identification Number for the trust when any of the following occur:

I. The trustmaker or trustmakers are no longer the Trustees of the Trust. This occurs upon disability of a single person.

(b) The Trust becomes irrevocable. This will occur at the death of a trustmaker.

3. Prepare the Decedent's final income tax return. The Decedent's final income tax return is due on April 15 of the year after death. The return should be marked "FINAL RETURN". Consult with your accountant or my law firm regarding this matter. If you and your spouse previously filed a joint tax return then you can file either a joint return or separate returns. There are several factors which will impact this decision and you should consult with your accountant or my law firm regarding this matter.

4. A number of elections are available to the Executor and the surviving spouse in connection with the filing of the Decedent's final return. A joint return may be filed if consented to by the surviving spouse and the Decedent's Executor. Under most-but not all-circumstances, this would be advisable. The mix of each spouses' income and deductions, and available losses and various carryforwards ending at death may prove deciding factors in determining the appropriate choice.

1. Determine whether the Decedent made estimated income tax payments. If so, make the estimated payments when due.

2. If the Decedent owned real property, be sure that real property taxes are paid before the due dates.

3. Stepped-up Basis: Basis is the purchase price plus capital improvements minus depreciation. Whenever property is sold, any amount received over the basis will be taxed at ordinary income tax rates. The stepped-up basis is the value of the property as shown on the inventory and appraisement at the time of death of a Settlor. The inventory and appraisement should be safeguarded because this is what documents the new basis for tax purposes pursuant to I.R.C. Section 1014.

A. Distribution of Assets: Upon distribution of assets the successor Trustee should obtain receipts from beneficiaries receiving assets.

B. Report to Beneficiaries: A Trustee is required to report and account no less often than annually. Probate Code Section 16060, et seq., requires the report and account to be in a certain form and contain certain notices.

1. A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.

2. A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or since the last account.

3. The Trustee's compensation for the last complete fiscal year of the trust or since the last account.

4. The agents hired by the Trustee, their relationship to the Trustee, if any, and their compensation for the last complete fiscal year of the trust or since the last account.

5. A statement that the recipient of the account may petition the court pursuant to Section 17200 to obtain a court review of the account and the acts of the Trustee.

6. A statement that makes a claim against the Trustee for breach of trust may not be made after the expiration of three (3) years from the date the beneficiary receives an account or report disclosing the facts giving rise to the claim.

C. File Change of Ownership With County Tax Assessor: When real estate will change title, it is necessary to file a Change of Ownership with the County Tax Assessor.

D. Safe Deposit Box: Inventory the contents and distribute the contents as directed by the trust document.

E. Decedent's Business: If the Decedent owned a business, then steps must be taken to preserve and protect the enterprise. Continuation or liquidation is an issue which must be addressed immediately and appropriate steps taken after this determination is made.

F. Insurance: When acting in the capacity of a Trustee, you are responsible for the maintenance of the trust assets. Therefore, you must review the Decedent's automobile, homeowner's liability, and other insurance to assure coverage continues until assets are distributed. In addition, determine if any life insurance existed and collect the proceeds of the policy.

G. Lawsuits: Determine if there are any actions pending on behalf of the Decedent. Also, determine if the Decedent's estate has an action for wrongful death of the Decedent.

H. Cash Needs: It is a good idea when acting as a successor Trustee to estimate the cash needs of the trust at the time of death of the Settlor. This will enable you to take action in order to obtain the cash needed to pay the obligations of the Decedent and any obligations of the trust which arise in the near future. Some obligations include debts, funeral expenses, taxes and reserve for miscellaneous and general expenses.

I. Non-probate Assets: Assets not in the trust should be placed into the trust pursuant to the Pour Over Will, so as to:

Whenever a beneficiary under any Estate Plan receives his or her inheritance, the beneficiary should review and take into consideration the added wealth. The beneficiary should consider establishing a revocable trust or amending an existing trust. Title to the newly acquired assets should also be reviewed in light of preserving the character and nature of inherited assets.