A single individual establishes a revocable living trust and transfers assets into his or her name as trustee of the trust. Then the individual dies. What action has to be taken by the successor trustee or trustees of this trust?
California law requires that the trustee or trustees take certain legal actions.
A number of things have to be done, depending upon the terms of the living trust. The successor trustee or 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 the successor trustee is? In most trust agreements or trust declarations the original trustor or settlor was the sole trustee. Upon that person’s death, a child or children are frequently 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 or may be liable to the ultimate trust beneficiaries for mistakes which are made, even if made in good faith.
In most trusts, 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 re-register the assets in the name of the successor trustee or trustees. If Mary Doe established a living trust and upon her death John Doe, the son, is the successor trustee, then the assets should be re-registered in the name of “John Doe, Trustee of the Mary Doe Living Trust dated August 17, 1999.” A certified copy of the death certificate and a copy or a certification of the trust need 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
In most cases the original trust creator, called the trustor or settlor, was the original trustee and no tax identification number was needed. The party used his or her social security number for trust assets. Upon the person’s death, a tax identification number must be obtained and used for all trust assets.
This tax identification number for the administrative trust needs to be obtained from the IRS. This is done by completing IRS form SS-4 and submitting it to the IRS, completing an online form at the IRS website, or having a CPA or enrolled agent obtain a number for the trust. The IRS 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, starting in the year of death.
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, or a copy of the trust document, along with a certified copy of the death certificate of the deceased, is submitted to each organization to transfer assets into the name of the successor trustee or trustees.
Change of Ownership Statement for Real Property
Whenever an 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 145 days of the date of death. A copy of the trust agreement and all trust amendments should be mailed to the assessor with the form.
Death is a change of ownership and causes the real property to be reassessed for real estate tax purposes at its current value, subject to limited exemptions to spouse or children.
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 a spouse, children of the deceased, sons-in-law, daughters-in-law, and, in some cases, to children of a deceased child is exempt from reassessment. The exemption applies to the residence of the decedent and to other real estate with a value of not more than $1,000,000 based on the assessed value as of the date of death. 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% or more 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 all persons named in the will as executor, even if probate will not later be undertaken. The county charges a $50.00 fee for this.
Notifying all Trust Beneficiaries and Heirs
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 specially worded notice of the living trust and copies of portions of the trust. 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.
Notice to Creditors
There is a special provision in California law allowing a notice to creditors to be filed in 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 $700-1,000 in addition to attorney’s fees. Special notice must also be mailed to any known creditors of the deceased. Creditors then have 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 lose their 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.
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 last business day prior to 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.
This new valuation is also the “cost basis” for these assets when they are later sold. All capital gains are forgiven at death and the assets are treated for income tax purposes as if they were purchased on that date at this new value.
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.
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
The tax rate on any amounts over the exemption is a 40% rate.
If a federal estate tax return is not required then the values used are the date of death values for all of the assets.
Normally, 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 $150,000 as of the date of death. In addition, this figure does not include any assets in joint tenancy, any vehicles including mobile homes, 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 more than $150,000 as of the date of death, these assets will have to go through probate before they can be placed in the living trust.
Trust Income Tax Returns
The income from January 1st until the date of death is taxed to the trustor. The income from the date of death until December 31st will be taxed either to the parties who receive the trust assets or to the trust, depending on how matters are handled. Trust income tax returns, federal and California, must be filed until the trust is terminated and assets are completely distributed.
DISTRIBUTION OF TRUST ASSETS
After the federal estate tax return is filed or, if there is no return, approximately nine months from the date of death, consideration is given to distributing the assets in the trust. Assets in the trust can be sold or divided among various parties if the parties agree. One beneficiary may wish to take California tax exempt bonds; another beneficiary may want the real property, etc. Normally, division is made based on the values as of the date of distribution, again provided the parties agree. If there is no agreement and the assets in the trust pass to three children, then each child would get one-third of each asset.
Once a decision has been made about the division of the trust assets, a detailed list should be prepared showing the allocation of assets to the various beneficiaries. This list should itemize all of the assets with their value on the estate tax return or date of death value if no estate tax return is necessary and then show the allocation to the respective parties. The list is then signed by the trustee or trustees and retained should any questions arise as to how the assets were divided.
If the trust continues in whole or part as a trust, then the trustee or trustees need to re-register assets in the trustees’ names, keep records, invest funds subject to the provisions in the trust document and California law, and provide the trust beneficiary or beneficiaries with an annual accounting.
Re-registration of Assets in Beneficiaries Names
After a division has been decided and a list signed, then the assets need to be registered in the names of the various beneficiaries. 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. After re-registration is completed, a receipt should be obtained from each beneficiary for the assets delivered and these receipts are retained by the trustees to show that the assets have been delivered.
In addition, the trustee or trustees of any trust created after July 1, 1987, must file annual accountings with the trust beneficiaries, and also do an accounting upon a change of trustees and upon the termination of the trust. Unless the accounting is waived by all of the trust beneficiaries, the accounting must show the assets on hand as of the date of death with their values, income received, disbursements, assets sold with the gain or loss being listed, and when distribution occurs. The accounting must also show the assets on hand with both their date of death and current fair market values.
It is important to administer the living trust correctly upon the death of the trustor. There are many legal requirements for the trustee or trustees when the creator of the trust dies and the trust assets are distributed. 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.
It is very important for the trustee or trustees to have an attorney and accountant or tax preparer that is familiar with the law and the handling and administration of trusts in California as advisors.
© Milton Berry Scott, 1998-2016
Revised January 5, 2016