Perhaps a grantor has named you as the successor trustee of their trust in their trust instrument, and you want to learn about what your job will entail.
Perhaps you are the beneficiary of a trust who wants to know more about the process of administering a living trust after death.
Perhaps you are the successor trustee of an irrevocable trust who’s struggling to understand how the process of settling an irrevocable trust after death differs from the process of settling a revocable trust.
On the surface, estates and trusts have many similarities, but the inner workings of a trust are actually quite different from those of an estate.
It’s important for successor trustees to understand what happens to a trust when someone dies in order to effectively manage the trust and avoid becoming the subject of fiduciary misconduct claims. It’s also important for beneficiaries to keep tabs on the trust administration process so that they can hold trustees accountable.
In the following subsections, we’ll discuss what a trust is and how it is different from an estate.
What Is a Trust?
A trust is a fiduciary arrangement in which a third party (the trustee) is permitted to hold title to trust assets for the benefit of trust beneficiaries until the assets can be distributed to them at the close of trust administration. The person who creates the trust is called the grantor, and the person they appoint to manage their trust after they die or become incapacitated is called the successor trustee.
While there are many types of trusts, the two broadest categories of trusts are revocable living trusts and irrevocable trusts. Each type of trust has a different set of rules that governs it.
How Does a Living Trust Work After Death?
A revocable living trust is a type of trust that can be modified and/or revoked by the grantor during their lifetime. However, a living trust in California after the death or incapacitation of the grantor generally becomes irrevocable, meaning that its terms must be carried out by the successor trustee exactly as they are written.
Most people opt for revocable living trusts when creating their estate plans because of the flexibility they offer. For example, if a person is single and childless, they may choose to go with a revocable living trust so they have the ability to amend their trust should they get married or have children in the future.
Revocable trusts generally don’t come with many tax savings or protect assets from the reach of creditors.
How Does an Irrevocable Trust Work After Death?
An irrevocable trust is a type of trust that generally cannot be modified or revoked by the grantor after its creation. In other words, once an irrevocable trust is signed by the grantor, it’s out of their hands (with limited exceptions), and the trustee must abide by the terms of the trust exactly as they appeared when the trust was executed.
Because grantors of irrevocable trusts typically have no control over trust assets once they sign the trust, irrevocable trusts are considered separate tax entities. To put it another way, the assets held by the irrevocable trust will not be a part of the grantor’s taxable estate. This may result in tax savings for the grantor.
Additionally, creditors will have a difficult time accessing assets being held by an irrevocable trust to satisfy the grantor’s debts since they technically are not owned by the grantor.
How Does a Trust Differ From an Estate?
While both trusts and wills instruct how to dispose of a person’s property after they die, there are notable differences between these common estate planning documents that you should be aware of.
If you need help understanding how these differences play out over the course of administration, be sure to get in touch with our trust and estate administration attorneys.
Assets Must Be Transferred Into a Trust
Wills govern the assets of an estate, whereas trusts govern the assets of a trust. A decedent’s assets are regarded as being a part of their estate if they are not being held by their trust or being transferred via other non-probate means, such as through a joint tenancy deed or beneficiary designation.
On the other hand, for an asset to belong to a trust, its title must be transferred into the name of the trust. If this transfer was not completed by the grantor prior to their death, the asset will be seen as belonging to the estate, even if it is listed on the trust instrument (although there are expedited procedures called 850 petitions that potentially can be used to transfer property into or out of a trust without the property having to pass through probate). We explain 850 petitions in more detail in the FAQs section.
Trusts Are Not Subject to Probate
Probate is a court-supervised process for appointing an executor/administrator and authenticating the decedent’s will (if one exists), among other things. Estates are subject to probate, whereas trusts generally are not. For many, the allure of trusts is that they avoid probate, which can be complex, costly and time-consuming. Probate also generally requires for the executor/administrator to obtain prior court approval to make distributions to estate beneficiaries, but no such rule exists with trusts.
Trustees Are Not Appointed by the Court
With estates, an executor or administrator will need to be officially appointed to their role by the court in order to begin managing the estate. With trusts, successor trustees can usually begin managing the trust immediately upon the grantor’s incapacitation or death without approval from the court unless the terms of the trust require court appointment.
How to Close a Trust After Death
If you are the successor trustee of a trust, then you will be responsible for settling the trust, which is another way of saying that you will need to eventually bring the trust to termination by distributing its assets in accordance with the terms of the trust.
While it is common for trusts to be distributed in their entirety not long after the grantor dies, some trusts are designed to remain open for the long run.
For example, a dying grantor may create a trust for the benefit of their minor children, but because California law prohibits children from accessing their inheritances until they’re adults, the trustee may need to keep the trust open for years after the grantor dies to carry out their final intentions. A grantor who is worried that one or more of their adult children could squander their inheritances may provide for their trust to remain open for years after their death so distributions can be made to the children over time, instead of as lump sum payments. Some grantors may even attach conditions to beneficiaries’ inheritances in order for them to be claimed, such as requiring beneficiaries to finish college.
As you can see, “settling” a trust will mean different things to different trustees. Ultimately, it will come down to what the trust instrument calls for them to do. It is crucial for trustees not to stray from the terms of the trust, or beneficiaries could sue them for breach of trust.
If you are a trustee who is struggling to accurately interpret the terms of a trust, it is recommended that you consult with a probate attorney before taking any further actions related to the trust.
Steps for Managing a Trust After Death
If you are wondering what to do with a trust after death, you are not alone. The administration process can be confusing, but if you take care to complete each step accurately and in the right order, your job will be made that much easier.
Having a trust administration attorney in your corner can make a world of a difference in protecting you against liabilities. If the court finds you to have committed a breach of duty at any point during administration, you could be ordered to pay a hefty surcharge from your own pockets. Therefore, working with a lawyer is a protective measure every trustee should consider taking.
Furthermore, the costs of a lawyer generally can be paid from trust assets, so there is little reason not to enlist the help of one.
In the following subsections, we’ll discuss the steps involved in managing a trust fund after death.
Locate and Review Relevant Documents
Your first task upon learning that a grantor has died or become incapacitated is to collect the necessary documents, which generally consist of certified copies of the grantor’s death certificate from the coroner’s office and the trust instrument itself, along with any other estate planning documents.
Sometimes, the grantor previously will have informed you about the location of the trust instrument, but other times, you may have to dig through their office or personal documents to find it. If the trust instrument cannot be found, ask the grantor’s family and friends if they have an idea where it might be. After that, if it still can’t be found, then trust administration generally cannot proceed, and the decedent’s assets may need to pass through probate and be distributed to their closest heirs in accordance with the laws of intestacy (that is unless the decedent had a will that disposes of these assets to beneficiaries).
Before you can move on to the next step, the trust instrument will need to be interpreted. This is sometimes a straightforward process; however, there often are ambiguities in the document or other problems with it that may require you to enlist the help of a lawyer or possibly even the court. Do not proceed to the next step unless you have a thorough grasp of the trust instrument and its terms.
Provide Notice to Beneficiaries and Heirs About Trust Administration
According to California Probate Code section 16061.7, trustees are required to serve written notice to trust beneficiaries and the grantor’s heirs about the start of trust administration within 60 days from the grantor’s date of death or 60 days from the date they took over as trustee (whichever is later).
For a notification by trustee to be valid, it should contain all of the following information:
- The name of the grantor and the date the trust was signed by them;
- The name, address and phone number of each trustee of the trust;
- The address where trust administration will take place;
- Any additional information required by the terms of the trust;
- A note that the recipient may request from the trustee and be provided a complete copy of the trust;
- A note that the recipient has 120 days from the date they received notice or 60 days after a copy of the trust is mailed or delivered to them (whichever is later) to bring legal action to dispute the trust.
If the notification by trustee is invalid for any reason, if it’s served late, or if a copy of the trust is not provided to beneficiaries/heirs in a timely fashion upon request, administration could not only be prolonged, but the trustee also could be accused of breaching their duties.
Gather and Value Trust Assets
Once you’ve completed the initial two steps of managing a trust after death, you can begin the process of creating an inventory of trust assets. To do this, you first must gather the assets mentioned in the trust instrument.
At this point, you should make a spreadsheet of the assets so you can easily keep track of which assets are entering and leaving the trust, the value of each trust asset at the time of the grantor’s death, and any fluctuations in their value.
For liquid assets, such as bank accounts, you can simply list their value at the time of the grantor’s death. For non-liquid assets or assets whose values fluctuate, such as real properties or stocks and bonds, you’ll likely need to hire a third-party appraiser or probate referee (i.e., a neutral licensed appraiser appointed by the state) to value the assets. When it’s possible to use a probate referee, they are generally the less costly option.
It’s a good idea to avoid valuing trust assets yourself if you are the trustee, as doing so could be seen as a breach of trust and lead to problems with beneficiaries down the road.
Be sure to keep the inventory up to date at all times, and maintain thorough records of any transactions you make on behalf of the trust. This will streamline trust accounting for you and enable you to back up your actions should beneficiaries ever ask you to justify them.
Satisfy Grantor’s Debts
Generally, before you can make trust fund distributions to beneficiaries, the grantor’s creditors must be paid (as long as their creditor claims are valid).
That being said, if the grantor has an estate with sufficient assets to satisfy their debts, then the estate will generally pay them. Conversely, if the assets in the grantor’s estate cannot adequately satisfy their debts, then the creditors may be able to enforce their creditor rights by reaching into their trust, especially if said trust was revocable when created.
As trustee, if you fail to fulfill your obligation to pay all of the grantor’s outstanding debts before distributing trust assets, you may become personally liable for paying them. Keep in mind that the government counts as a creditor, so be sure to fulfill the grantor’s and trust’s tax obligations in addition to any other debts the trust or grantor personally may have. A CPA is always a good resource for help preparing tax returns.
Prudently Manage and Invest Trust Assets
Depending on the terms of the trust, the trustee may be required to make responsible investments of trust assets in order to generate income for the trust. For example, they may want to invest a portion of the trust’s liquid assets in safe stocks that yield dividends. On the other hand, an unsafe investment may consist of them putting money into a business that won’t turn a profit for several years.
Trustees should also be mindful of not allowing assets that could be earning income to remain empty. As an example, if a trust holds title to a vacant property, it may be a good idea to rent it out or sell it.
While trustees can be sued for making poor investments or selling a real property for below fair market value, they may be able to avoid a breach of trust claim if they have evidence to support the rationality of their actions, even if those actions did ultimately lower the value of the trust.
Track Down Titles to Trust Assets
As noted above, in order for the trustee to effectively manage trust assets, assets need to be appropriately marshaled and titled in the name of the trust. Sometimes, assets are already formally titled in the name of the trust and the trustee needs only to prepare documents to change the name of the trustee on such assets. This can involve formally recording documents on title to real estate to change the identity of the trustee, or, for liquid assets, providing the financial institution with formal documents evidencing the change of trustee.
When the property has not been formally titled in the name of the trust, the trustee may need to petition the probate court to formally change title to the asset using an 850 petition, which we defined in an earlier section.
Account to Beneficiaries and Heirs
As previously mentioned, trustees are responsible for keeping tabs on any fluctuations in the trust’s value, as well as on every asset that enters and leaves the trust.
Trustees must provide beneficiaries with a formal accounting every year the trust is open. Beneficiaries can also request reasonable financial information relevant to their interests from trustees at any time. For this reason, it would be wise for the trustee to be meticulous when handling the trust’s finances. They may wish to utilize trust accounting software, a filing system and any other tools that can help them stay organized.
Because the costs of professionals generally can be paid from the trust, it is recommended for trustees to at least have a CPA or probate attorney review their accountings to make sure they are accurate, if not prepare them in their entirety.
Make Distributions to Beneficiaries in Accordance With Terms of Trust
Trusts could call for distributions to be made to beneficiaries as a lump sum or over time. It is important that you, as the trustee, understand the terms of the trust so that you are making distributions in the manner that’s instructed.
Trustees should be mindful of making distributions in a timely fashion. In other words, if trust administration is complete, distributions should be made fairly quickly thereafter. While executors/administrators cannot arbitrarily withhold distributions, trustees generally have more discretion when it comes to withholding distributions.
For example, it may be legal for them to temporarily withhold a distribution to a beneficiary if the beneficiary is a drug addict and could harm themselves further as a result of it. Trustees, however, cannot withhold distributions without reason, unless the terms of the trust have explicitly granted them that authority or the trust itself is discretionary.
When a trustee does not make timely and accurate distributions, beneficiaries are entitled to sue for breach of trust, so it is crucial for trustees to get this step of the process right.
FAQs About How to Administer a Trust After Death
If you still have questions about trust administration, check out our frequently asked questions on how to manage a trust fund after death below. If you’re unable to find the answer you’re looking for, don’t hesitate to schedule a free consultation with one of our skilled probate attorneys.
Am I allowed to hire professionals to help with administration?
Yes, trustees almost always have the right to seek the assistance of third-party professionals (e.g., probate attorneys, CPAs, appraisers, real estate agents) for help with their trustee responsibilities, so long as the services of the professionals they hire benefit the trust.
As previously mentioned, the fees of professionals can generally be paid directly from the trust, so long as the services they provided benefited the trust and the trust does not explicitly forbid the hiring of professionals.
Hiring professionals is something trustees should strongly consider doing, even if they have prior experience managing a trust.
What do I do if beneficiaries are contesting the trust?
If beneficiaries have brought a trust contest that you, as the trustee, believe to be invalid, you may want to strongly consider defending it. You generally can hire a trust contest attorney using trust funds to help you uphold the terms of the trust.
If beneficiaries have successfully contested the validity of the trust, then the trust assets that are affected may become the property of a prior valid trust created by the grantor (if a prior valid trust exists). Another possibility is that the assets will become a part of the decedent’s probate estate, which ultimately will be distributed to their beneficiaries (if a prior valid will exists) or to their heirs in accordance with intestate succession laws (if no prior valid will exists). Once this happens, the assets will no longer be under the trustee’s control.
How does a trust work when someone dies if it’s not funded?
If a trust isn’t funded, it means that the grantor failed to transfer titles to property into the trust’s name prior to dying. Unfortunately, if this is the case, and the intent of the grantor to transfer titles into the trust’s name is not clear, then the assets in question may need to be distributed as part of a formal probate estate.
Conversely, if the grantor’s intent to transfer titles to assets into the trust’s name is clear (i.e., they mentioned the assets in the trust instrument), then you may be able to use a type of petition known as a Heggstad petition (which is a type of 850 petition) to complete the transfer without the property having to pass through probate.
If you wish to make use of the 850 petition, it is ideal to work with an experienced probate attorney, who can draft the petition for you and argue your case to the court. If successful, 850 petitions can save petitioners time and money.
What happens to a family trust after death?
“Family trusts,” like any trust, can be either revocable or irrevocable. Assuming the term “family trust” refers to a typical revocable living trust, they are handled no differently from the revocable living trusts discussed above, as they are fiduciary arrangements created for the benefit of beneficiaries, who, in this case, are family members of the grantor(s). The assets of a family trust can include everything from a family home to a family business.
After death, family trusts can be managed in a variety of ways. For example, if the trust was jointly created by husband-and-wife grantors, then once one spouse dies, the surviving spouse may gain control of all of the trust assets or a portion of them. Sometimes, the death of a spouse triggers the creation of sub-trusts for the purpose of preserving assets for the grantor’s children, while also providing money for the surviving grantor to cover their living expenses. Once the surviving grantor dies or becomes incapacitated, the trust generally becomes irrevocable and trust administration begins.
Still need help understanding how a trust works after death? We are standing by to answer your questions.
If you have not administered a trust in the past, it is natural to ask, “How do trusts work after death?” Trusts are complex fiduciary arrangements, which is why they can be overwhelming to figure out. However, with the right help, trust administration can be completed accurately and efficiently without issue. Call us today to request your free consultation.
