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A husband and wife establish a revocable living trust and transfer assets into their names as trustees of the trust. Then one of the spouses dies. What action has to be taken by the successor trustee or trustees of this trust?
A number of things have to be done, depending upon the terms of the living trust. The successor trustees who are designated in the trust document must take some actions which are legally required by the trust document, California law, and federal tax law.
The first concern is determining who is the successor trustee. In most trust agreements or trust declarations the surviving spouse is the sole successor trustee. In other cases the surviving spouse and a child or children are the successor trustees. The trustee or trustees have the legal responsibility to see that a number of actions are undertaken. If these are not done or are done incorrectly, then the trustees may be liable for additional taxes due or may be liable to the ultimate trust beneficiaries for mistakes which are made, even if made in good faith.
Most living trusts established by husband and wife are revocable living trusts until the death of the first spouse. Then the trust is divided into either two or three subtrusts (depending upon the terms of the trust document).
If divided into two trusts, one of the two trusts contains the deceased spouse's half of the community property and all of the deceased spouse's separate property, but no more than the federal estate tax exemption existing in the year of death ($1,500,000 to $3,500,000). This subtrust is frequently referred to as Trust "B." It also may be called the "family trust," "residuary trust," "bypass trust," or something else. They all mean the same thing. The largest amount which can be placed in this trust is the federal estate tax exemption for the year of death. In 2004 this would be $1,500,000, with larger amounts for later years. This trust becomes irrevocable and the terms cannot be changed.
The remainder of the assets pass to a second subtrust designated as "Trust A," or sometimes called the "marital trust," "survivor's trust," or something else. This trust contains the surviving spouse's half of the couple's community property plus the survivor's separate property, if any. In addition, if the deceased assets exceed the estate tax exemption, the excess over this exemption is placed in the survivor's trust. This normally continues as a revocable trust, revocable by the surviving spouse.
As long as the surviving spouse is a United States citizen, then there is no estate tax at the death of the first spouse no matter how large the decedent's estate.
Some trusts establish three subtrusts. In addition to the trust A and B (or other designations as listed above) there is third trust established, which is referred to as "Trust C," or a "qualified terminable interest trust." This is a second irrevocable trust.
In most trusts, no matter how the assets are divided, the assets are initially held in one trust, called an administrative trust, for a period of from 6-12 months, until all bills and debts are paid, values of all of the assets are obtained, an estate tax return is filed (if required), and all other legal matters are completed.
The successor trustee or trustees need to reregister the assets in the name of the successor trustee or trustees. If John and Mary Doe established a living trust, John Doe dies, and Mary Doe is the successor trustee, then the assets should be reregistered in the name of "Mary Doe, Trustee of the Mary Doe and John Doe Living Trust dated August 17, 1995." A certified copy of the death certificate and a certification of the trust needs to be provided to each institution or party holding title to assets, such as stock brokers, mutual funds, banks, general partners of a limited partnership and others.
Tax Identification Number
A tax identification number for the administrative trust needs to be obtained from the IRS Service Center. This is done by completing IRS form SS-4 and submitting it to the appropriate IRS Service Center depending upon where the trustee resides. The Center will mail the number to the trustee or trustees within approximately four weeks. This number is used in place of a social security number for all of the trust assets. Trust income tax returns (federal and California) will also have to be filed as of December 31st of each year.
Trust Certification
California law allows a "certification" with regard to the trust. This certification is merely a typed statement which lists the current trustee or trustees, tax identification number, powers of the trustee or trustees, and other pertinent provisions of the trust and is signed by the successor trustee or trustees and notarized. This certification, along with a certified copy of the death certificate of the deceased spouse, is submitted to each organization to transfer assets into the name of the successor trustee or trustees.
Change of Ownership Statement as to Real Property
Whenever the owner of California real estate dies, it is necessary to file a special statement entitled "Change of Ownership Statement--Death of Real Property Owner" with the county assessor of each county where real estate is owned. This notifies the county assessor whether the property is subject to reassessment for real estate tax purposes or is exempt. A statement for each separate parcel of real estate is to be filed within 150 days of the date of death.
Change in Title to Real Property
An "Affidavit-Death of Trustee" is a real estate form which is recorded for each parcel of real estate in the trust, along with a certified copy of the death certificate. This changes title of the property or properties into the names of the new trustee or trustees.
Preliminary Change of Ownership Report
Whenever any change of ownership for real property occurs, it is necessary to file a real estate form called "A preliminary change of ownership report." This document notifies the county assessor whether real estate is subject to reassessment or not. This is normally filed whenever there is a document which is recorded which changes title of the real property, such as an "Affidavit-Death of Trustee."
Real property passing to the surviving spouse or a trust for the surviving spouse's benefit, or to children of the deceased, son-in-laws, daughter-in-laws, or to children of a deceased child is exempt from reassessment. Transfers to other relatives or someone who is not related to the deceased triggers a reassessment. The property is reassessed as of the date of death at its fair market value and the real estate taxes are increased accordingly to 1 to 1.2% of this value. A supplemental real estate tax bill is later mailed, if required, for the year of death.
Filing Original Will
California law requires that within 30 days of the date of death the original will of the deceased along with any codicils be filed with the county clerk in the county where the deceased resided at the time of death. This includes all original wills and codicils, even if they have been revoked. These documents are "filed" with the county clerk, and if there is no probate required, then there is no filing fee. In addition, a copy of the will must be mailed to the person named in the will as executor, even if no probate is necessary.
Notifying all Trust Beneficiaries and Heirs
Starting in 1998 it is necessary within 60 days of the date of death to notify in writing all trust beneficiaries and the deceased's heirs at law of the living trust and to send them a specifically worded notice of the living trust and, if they request it, a copy of the trust and all amendments to it. Since the beneficiaries who receive the trust assets are not fixed until the death of the second spouse, many contingent parties may have to be notified. Once the notice is mailed then a party has only 120 days from the date of the mailing of the notice to contest the trust. Each party must be advised of his or her right to contest the trust. If the notice is not mailed then a beneficiary may have up to four years or longer to contest the trust. There are potential damages, including attorney's fees and costs, if the trustee or trustees do not mail notice and comply with all of the legal requirements. Any party who receives this notice may legally request a copy of the trust, including all amendments to the trust.
Notice to Creditors
There is a special provision in California law allowing a notice to creditors to be filed for a living trust similar to that used in a probate procedure. This requires a filing with the county clerk and publication of a notice three times in a local newspaper. The costs can run $400-500, in addition to attorney's fees. A special notice must also be mailed to any known creditors of the deceased. Creditors then have a maximum of four months to file a claim in the trust, with some exceptions. If a claim is not filed and all procedures have been followed, the creditors loses his right to payment.
While this procedure is not legally required, if it is not done a creditor could have a period of up to three to four years to seek payment. If the trustee does not use this procedure and a creditor later appears, the trustee or trustees may be personally liable because they failed to follow this procedure.
Valuation of Assets
It is necessary to value all assets in the trust, as well as all assets which the decedent owned which were not in the trust, as of the date of death. All community property (both halves) and all of the deceased's separate property, if any, should be valued. The surviving spouse's separate property, if any, is not valued.
The value which is used is the fair market value as of the date of death. Stocks and bonds must be valued by taking the average between the high and the low as of the date of death. If the deceased died on a weekend or holiday, the average between the high and low for Friday and Monday must be re-averaged. Mutual funds take the closing price on the date of death. Other assets such as real property, partnerships, automobiles and certain other assets need a written or appraised value by a competent appraiser such as a real estate agent or broker for real property. A valuation for all assets, in and out of the trust, should be obtained. This includes life insurance, IRA accounts, 401k plans, etc. Furniture and furnishings are not normally valued unless they have a high value. Generally, a value of $2,000-5,000 is used for personal items.
Federal Estate Tax Return
A federal estate tax return must be filed if the deceased's assets exceed a gross value of a certain amount. This value is based on all assets, whether in the living trust or not. The value is based on one-half of the couple's community property and all of the deceased's separate property, if any.
If this total, before deducting any expenses or costs, exceeds the following amount, a federal estate tax return must be filed within nine months of the date of death. If necessary, an extension can be obtained for up to six months to file the return.
| Year of Death | Exempt Amount |
|---|---|
| 2005 | $1,500,000 |
| 2006 | $2,000,000 |
| 2007 | $2,000,000 |
| 2008 | $2,000,000 |
| 2009 | $3,500,000 |
The values used on this return are the values for dividing the assets. If a federal estate tax return is not required then the values used are the date of death values for all of the assets.
Probate
Normally, assets in a living trust avoids probate. However, occasionally someone dies and has too many assets outside the living trust. These assets not in the trust may have to go through probate.
California does not require a probate unless the assets outside the living trust exceed the value of $100,000 as of the date of death. In addition, this figure does not include any assets in joint tenancy, any vehicles, or any assets where a beneficiary is specifically named such as life insurance or IRA accounts. If a probate is not required, then the trustee or trustees of the living trust have to wait for 40 days from the date of death. They can then sign a special certification form and transfer the assets into the living trust, or to whoever is legally entitled to the assets.
If the total outside the living trust and over and above the excluded assets listed above is worth more than $100,000 as of the date of death, these assets will have to go through probate before they can be placed in the living trust.
Trust B (or whatever term is used) contains an amount up to the federal estate tax exemption, but no more than the deceased's half of the community property and all of the deceased's separate property, reduced by the debts and costs (legal fees, funeral expenses, accountant's charges, etc.). If a couple has a $1,500,000 of community property in trust after expenses, only one-half, or $750,000 may go into Trust B. If there was $3,500,000 of community property after expenses and the deceased died in 2004, then a maximum of $1,500,000 would go into Trust B.
If there are only two trusts-Trust A and Trust B, then the assets not going into Trust B consist of the remaining assets and go into Trust A. If there is $3,500,000 of assets in the living trust as of the date of death (2004) and $1,500,000 is allocated to Trust B, the remaining assets, $2,000,000, go to Trust A.
If the trust is subdivided into three trusts, Trusts A, B, and C, then Trust B would still contain the maximum amount exempt from estate tax--$1,500,000 in 2004. Trust C would contain the rest of the decedent's assets and would be a second irrevocable trust. Trust A would still be a revocable trust and would contain all of the surviving spouse's assets. Again, if the couple had $2,500,000 in a living trust, all community property, and one spouse died in 2004, the decedent's assets of $3,500,000 would be divided with $1,750,000 going into Trust B, and $250,000 into Trust C, and all of the survivor's $1,750,000 in Trust A.
Tax Identification Numbers
When it is time to fund the various trusts a tax identification number must be obtained from the Internal Revenue Service for Trust B and if there is a third trust, also for Trust C. If the survivor is the trustee or co-trustee of Trust A, a tax identification number is not needed for Trust A, and the survivor's social security number can be used for this trust.
Once assets are transferred into Trust B and, if appropriate, Trust C, an annual federal and California income tax return must be filed for each trust each year. Normally, no trust tax return is necessary for the survivor's trust, Trust A, and the tax information for these assets can be reported on the survivor's personal income tax returns.
Division of Trust Assets
After the first spouse's death, assets have to be held in the administrative trust. Then when the estate tax return is filed, decisions can be made to divide the assets based on their values into Trusts A and B or Trusts A, B, and C, depending upon the terms of the trust.
Once a decision has been made about to the division of the trust assets, a detailed list should be prepared showing the allocation of assets to the various trusts. This list should itemize all of the assets with their date of death values and then show the allocation to the respective trusts. The list is then signed by the trustee or trustees and retained should any question ever arise as to how the assets were divided. Upon the second spouse's death, the Internal Revenue Service may ask for information and a copy of this form to show the division was done properly.
Re-registration of Assets
After a division has been decided and a list signed, then the assets need to be re-registered in the name of the trustee or trustees with regard to the respective trusts. Assets should be registered in the name of " Mary Doe, Trustee of the Mary Doe and John Doe Living Trust dated August 17, 1999-Trust A" (or Trust B or C). The social security number or tax identification number for that respective trust should be used.
Again, each transfer agent, bank, brokerage firm, etc., is contacted and a transfer of title undertaken. New deeds are recorded for each parcel of real estate.
Trustees' Duties
Once a trust becomes irrevocable, the trustee or trustees must follow certain laws regarding the handling of the trusts. The trustee or trustees must invest the funds in accordance with the trust agreement or declaration and following the California Uniform Prudent Investors Act. Also, the trustee or trustees must keep records for the trusts and file annual trust income tax returns.
In addition, the trustee or trustees of any trust created after July 1, 1987, must file annual accountings with the trust beneficiaries who receive payments from the trust and also do an accounting upon a change of trustees and upon the termination of the trust. This accounting can be waived in writing and is not required if the sole trust beneficiary and the trustee are the same person. Other people who have a future interest in the trust, even though the interest is remote, may demand and receive an accounting each year.
Trust beneficiaries also have the right to request certain information such as assets on hand, sales, purchases, etc., from the trustee or trustees on a regular basis.
Upon the death of the first spouse it is important to set up and administer a living trust or trusts established by husband and wife. There are many legal requirements for the trustee or trustees when the first spouse dies and a portion of the trust becomes irrevocable. The failure to follow the law properly can result in possible litigation, the trustee being personally liable for damages and the trust being attacked by the Internal Revenue service as invalid because of its improper administration and a much larger estate tax at the second spouse's death may be imposed.
It is very important for the trustee or trustees to have an attorney and accountant or tax preparer who is familiar with the law and the handling and administration of trusts in California as advisors.
© Milton Berry Scott, 1998-2005