James H. Beauchamp

TRUSTEE’S DUTIES AFTER SETTLOR'S DEATH

Whenever a person signs a trust, the question is usually asked, “what happens after I die?” Though I will try to list the duties of the Successor Trustee, within the confines of this article there is one assumption which I must make, and that is, that the decedent died owning no property subject to probate. Stated differently, all of the assets of the decedent must be part of the trust estate (i.e., owned by the trustee), or dealt with by contract (i.e., insurance with a designated beneficiary, IRA’s with death beneficiaries named, bank accounts with POD designations, and so forth; please review the article, “Tips in Estate Planning” for a further explanation on how a trust is funded). If there are property interests subject to probate, refer to the article, “Probate in Oklahoma”, which will give you some general information on the procedure and costs involved.

When both Settlors are deceased, or if there was only one Settlor, the next Successor Trustee will assume office. The Successor Trustee will then own everything in the trust, so the first thing to do is prepare a list (an inventory) of the trust assets. It is advisable to videotape the premises of the deceased as soon as possible. The homeowner’s insurance carrier should be notified about the death of the decedent, as well as the automobile insurance carrier – so that there will be no gap in coverage. The real estate should be secured, and this might require that the door locks be changed.

Assuming the real estate will be sold, the home must be prepared for sale, in the same way that any home would be prepared for sale. The sale cannot be consummated until tax clearances are received from the Oklahoma Tax Commission and the IRS (if applicable). A partial release can be issued by these taxing authorities within three or four weeks, if needed. If the household contents are not auctioned or given away, the Salvation Army provides a great service, which is, to pick up the contents of the house (which will then be offered for sale in the Salvation Army Thrift Stores). There is more physical labor involved in winding up an estate than you will anticipate.

Although the Oklahoma Tax Commission must still release the Safe Deposit Box, it is no longer necessary that it be inventoried. Each financial institution should also be notified of the death, so that the banks can put in motion a request for release of the account (on occasion, the Oklahoma Tax Commission will place a hold of 10% on the account; the balance of the account will be released, but the OTC wants the Successor Trustee to file an estate tax return, and the 10% will not be released until the return is filed, audited, the tax paid, and a formal release issued by the OTC). Some banks require original death certificates, as formal notification of death, but most don’t. In most instances, there is probably no need for a Successor Trustee to have more than 3 or 4 death certificates. A copy of the death certificate ought to be recorded with the County Clerk, so that if duplicate certified copies are required, you can obtain them from the County Clerk for $2 each.

Vested beneficiaries ought to be given a copy of the trust, and perhaps the will. Contingent beneficiaries are usually not entitled to receive copies of these documents.

Claims should be made for all the life insurance policies, and in this instance, each insurance company will need an original (or certified) copy of the death certificate. Similarly, claims should be made by the beneficiaries of the IRAs, §401(k) plans, etc., but the beneficiary should not accept payments under these plans until the income tax consequences are known. The beneficiary will have to pay income taxes (which is in addition to estate tax) for distribution received under these plans; it is advisable to consult with an accountant in that regard. Rather than take a lump-sum settlement, which might place the recipient in a 39.6% income tax bracket, there may be other settlement options available (a surviving spouse is usually granted the privilege of rolling over IRA benefits, but this settlement option is not available to children or other beneficiaries; charities which are designated as beneficiaries will not pay income taxes on IRAs they may receive).

An Oklahoma Estate Tax return must be filed, even if the surviving Trustee is a spouse, and even if there is no tax to pay (if all of the estate passes to a surviving spouse, the OTC accepts a two page affidavit signed by the surviving spouse plus a death certificate, in lieu of the estate tax return). The estate tax will include all property owned by the decedent, all property transferred 3 years before the decedent’s death, IRAs, and many other things you might not ordinarily think of. If the trust is an A/B tax sheltered trust, where a unified credit trust is created on the death of the first Settlor, there may be some Oklahoma Tax to pay at the first death. If the value of the estate exceeds the sum of $650,000 (for 1999), a Federal Estate Tax return will have to be filed, and as a parenthetical note, if a by-pass trust is to be created, it will have to be funded with part of the trust assets within six months after the date of death (and a federal taxpayer identification number will have to be obtained). Both estate tax returns are due 9 months after date of death. The Successor Trustee ought to hire an accountant or lawyer to assist with the filing of these returns.

The Successor Trustee should also procure a taxpayer identification for the trust, since it will be irrevocable on the death of the Settlor. If, however, the Successor Trustee is a surviving spouse, and there is no by-pass trust created (mentioned in the paragraph above), the Successor Trustee may use his or her social security number, as the taxpayer-id number for the trust.

In addition to tax issues, the Successor Trustee should pay all of the valid debts of the decedent from trust assets. However, in most instances the Trustee should not use insurance proceeds or retirement funds to pay for these debts. In addition, the Trustee should reimburse himself or herself for out of pocket expenses, and if the trust so provides, a fee for services rendered as trustee (if a fee is paid to the trustee, the trustee will have to pay income taxes for that fee). The trustee might want to discuss the topic of debts and fees with an attorney.

Distribution of the estate should not be made until after the estate tax releases have been issued by the Oklahoma Tax Commission, and if applicable, the IRS – and until after all valid debts have been paid. Whoever receives the property being distributed should sign a receipt. Distribution will be made either in kind or by check – and the value of what is distributed will be based on the distribution date, not the date of death. However, for income tax purposes, the tax basis for capital gains purposes will be the date of death value, or the alternate valuation date (which is six months after date of death), as shown on the federal estate tax return. If real estate or minerals are distributed, deeds and assignments will have to be prepared and filed. If stock is distributed, the Successor Trustee should probably retain a stock broker, to assist in the transfer.

Except for IRA, §401(k) distributions, and similar property interests, beneficiaries will not pay income taxes on their inheritances. The estate may have an estate tax to pay (think of this as an inheritance tax).

It will probably take a minimum of two months to conclude all of these tasks. In addition, the Trustee will have to file a final income tax return for the decedent, and may have to file a fiduciary income tax return (Form 1041). Again, consult with an accountant on tax matters.

The trust will continue to be in existence until all trust assets have been distributed. It is a good idea to provide an accounting to the beneficiaries, which will start with an inventory of what was initially held in trust, the income that was earned thereafter, the expenses that were paid (including taxes), the fees that were charged, and the final distribution to the beneficiary in question. Beneficiaries usually have five years within which to contest the actions of the Trustee, so the Trustee should plan on keeping records for at least that period of time.

The beneficiaries of the trust estate ought to consult with a financial consultant, before running out to buy a 52” TV or a Lexus. As I have stated many, many times, an inheritance ought to be viewed as if it were a herd of Guernsey cattle – the cows ought to be milked, the milk sold and income enjoyed, but the herd should not be sold for barbeque meat. We live in a capitalistic society, and we can increase our net worth through wise investments, not through buying frivolous household items.

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