Mom or Dad has passed away and left a trust. You are named a beneficiary of the trust. Your brother or sister is the trustee. Do you really know what a trust is or does? Do you know what to expect from the trustee?
The trust is the set of instructions that Mom or Dad left for the distribution of their property and other assets. The trust is not a magic document. It will not sprout arms and legs after a death, and then collect all the assets for distribution. Someone has to do that and that someone is the death trustee.
The death trustee’s primary duty is to preserve and protect the trust assets for the benefit of you and the other named trust beneficiaries. The trustees must follow the instructions left by Mom or Dad in the trust.
Unless you are the sole current beneficiary, you should not expect distributions from the trust right away. There are a number of things that death trustees have to do to be qualified to act on behalf of the trust. You as a beneficiary usually never need to see these, but they are critical in commencing the trust death administration.
Before successor trustees can act as trustees, they must sign an acceptance of trust in which they agree to follow the instructions of the trust. In order to make trust administration more efficient, they should also sign a certificate of trust.
The trustees have to apply for the tax identification number for the trust. Mom or Dad’s social security number would typically have been used by the trust during Mom or Dad’s lifetime. Social security numbers expire with their owners. The trust becomes a separate tax entity upon the death of a trustmaker, after which the trust must apply for its own tax identification number.
If the trust is revocable by Mom or Dad during lifetime, then you should see the creditors notice published in the local paper after being submitted by the death trustee. This notice gives creditors four months from the date of publication in order to file a claim against the trust.
Usually within 30-60 days after a death, you as a beneficiary should receive a notice of trust from the trustee. The notice of trust should include details about the trust including the trustee name and contact information, and that you have a right to certain trust information. This notice should also give you six months to challenge the trust.
When our office is representing a death trustee, unless there is a single beneficiary, we will generally recommend that the trustee not make any distributions to beneficiaries until after the expiration of both the four month creditor notice period and the six month notice of trust period, which often run concurrently.
Although accountings to beneficiaries are only required annually, I generally recommend that trustees prepare a date of death listing of all assets of the trust with the date of death values. This listing is usually sent to the beneficiaries within 60-90 days of a death. However, it may be later, especially when there are appraisals involved.
If trustees are attempting to do the death administration of the trust without an attorney, or are not using an experienced trust administration attorney, you should be concerned. In these instances, the trustee would lack adequate guidance in fulfilling their duties, especially in preserving and protecting the assets of the trust for the benefit of the beneficiaries.
Failure to obtain competent legal assistance with the administration of a trust may cause unintended consequences. These could include failure to comply with fiduciary duties; failure to accomplish the trustmaker’s wishes; increased personal and trust liability exposure; additional taxes; additional administrative, legal and other expenses; and decreased amounts available to trust beneficiaries.
The attorney assisting the trustees should be an experienced estate planning attorney. Not just any attorney will do. There are attorneys who do estate planning and there are estate planning attorneys. The trustees should work with an estate planning attorney whose core practice area includes trust administration. The attorney chosen should have experience in these matters and deal with them on a daily basis. The attorney can review the trust, outline trustee duties and responsibilities and prepare the necessary documents for the death administration of the trust.
For example, if Mom or Dad has created separate lifetime trusts for you and each of the other beneficiaries, the attorney will assist in the implementation of those trusts for each of the beneficiaries. The documents needed for each beneficiary’s separate trust implementation usually include an acceptance of trust for the beneficiary to act as a trustee of the separate trust, an appointment and acceptance of trust for the beneficiary’s chosen co-trustee, a certificate of trust to be signed by both trustees, and since the trust will be a separate tax entity, an application for taxpayer identification number.
When the time comes for a distribution, you should be getting an interim or annual accounting along with a list of the proposed distributions. You usually will have 28 days to review the accounting and proposed distributions and either object to the accounting and proposed distributions or sign a receipt for your proposed distribution to be held in escrow until the distribution is made.
You usually do not have to pay income taxes on your distribution unless there were dividends or interest earned on the trust assets prior to distribution, or the trustee had to cash-in an IRA or other pre-tax retirement account in order to make the distribution. Each year, the trustee will have to file a Form 1041 Fiduciary Income Tax Return for the trust. For each of those years in which there are distributions to you, you will usually receive a Form K-1 (Form 1041) Beneficiary’s Share of Income Deductions, Credits, etc. This form will list those items that you have to report in your own individual income tax return.
Our office regularly assists death trustees in the completion of the death administration of a trust after they have attempted the death administration of the trust on their own without legal assistance or have used attorneys who lacked the skill and/or experience with trust death administrations. Our fees in these instances are usually much higher than if we had been involved from the start because we often have to undo things that were done incorrectly.
It is like the old Fram oil filter commercial, “Pay me now, or pay me a lot more later.” With proper legal and accounting assistance right from the start after Mom or Dad’s death, the trustee usually can minimize attorney, trustee and other expenses, minimize taxes and maximize the amounts available to the beneficiaries.
By: Matthew M. Wallace, CPA, JD
Published edited February 28, 2016 in The Times Herald newspaper, Port Huron, Michigan as: I’m a Trust Beneficiary – What Can I Expect?