Administration of a Joint Husband and Wife California Living Trust upon the Death of the Surviving Spouse

California law requires that the trustee or trustees of a living trust take certain legal action when the trust terminates, or upon the death of the surviving spouse.

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 and the trust assets are divided into either two or three subtrusts.  Trust A, which is also called the survivor’s trust, marital trust, or something else, is the revocable trust for the benefit of the surviving spouse and contains the surviving spouse’s assets

Trust B, also called the family trust, residual trust, or some other name, was previously established when the first spouse died and contained an amount which either was the maximum exempt from estate tax when the first spouse died, or the total assets the first spouse owned in the trust at the time of his or her death.  This became an irrevocable trust when the first spouse died and generally is for the benefit of the surviving spouse, with the surviving spouse as the sole trustee.

What action has to be taken with regard to these two trusts when the surviving spouse dies?

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 who the successor trustee is?  In the trust agreements or trust declarations there is normally a statement as to who the successor trustee is—who takes over the management of all of the trusts upon the death of the surviving spouse.  In many cases it is a child or children.  In some cases it is a bank or trust company.  If there are several trustees, then they must all act jointly in connection with the management of the trusts.  Whoever the trustee or trustees are have the legal responsibility to see that a number of actions are undertaken.  If these are not done or are done incorrectly then the trustee or trustees may be liable for additional taxes or may be liable to the trust beneficiaries for mistakes which are made, even if made in good faith.

 TRUST A
Trust A was the survivor’s revocable trust and in most cases the surviving spouse was the trustee until he or she died.

Re-registration of Assets
The successor trustee or trustees need to re-register the assets in the name of the successor trustee or trustees.  If John and Mary Doe establish a living trust, John Doe and Mary Doe both die, and Helen Doe Smith is the successor trustee, then the assets should be re-registered in the name of “Helen Doe Smith, Trustee of the Mary Doe and John Doe Living Trust dated August 17, 1999—Trust A.”  A certified copy of the death certificate and 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.  Financial institutions may have the trustee or trustees complete additional paperwork.

No distributions should be made from the trust immediately; the trust assets should be retained until debts, taxes and other expenses are paid.

Tax Identification Number
Normally, the surviving spouse was using his or her social security number for the assets in Trust A.  If not previously obtained, a tax identification number for Trust A needs to be obtained from the IRS.  This is done by completing IRS form SS-4 and submitting it to the IRS Service Center or doing this online.  If mailed in, 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 in Trust A.  A trust income tax return will also have to be filed for the trust as of December 31st of each year until the trust ends and the assets are completely distributed.

The income from January 1st until the date of death is taxed to the surviving spouse.  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 whether the income is distributed or accumulated in the trust.

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 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 from reassessment.  A statement for each separate parcel of real estate which is in Trust A is to be filed within 145 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 to 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 to the real property, such as an “Affidavit-Death of Trustee.”

Real property passing to children of the deceased, sons-in-law, daughters-in-law, and, in some cases, to children of a deceased child is exempt from reassessment as to the decedent’s residence and up to $1,000,000 of other real estate, based on the real estate’s assessed valuation as of the date of death.  Transfers to other relatives who inherit or someone not related to the deceased trigger 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. The court filing fee is $50.00.  In addition, a copy of the will must be mailed to the person named in the will as executor, even if probate may not later be undertaken.

Notifying all Trust Beneficiaries and Heirs
Since 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 special notice of the living trust and copies of portions of the trust.  Once the notice is mailed, then a party only has 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 Trust A 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 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 $2,000-10,000 is used for personal items.

Under federal and California income tax law all assets of the decedent, including all assets in Trust A get a “new” income tax value as of the date of death.  Most brokerage firms and mutual funds can provide the value of investments.  All potential capital gains are eliminated at death, and the assets are treated as if they were purchased for their value as of the date of death.

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 there is a Trust C, then the assets in Trust C also need to be valued since these assets will also be subject to estate tax.

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
2015                                                      5,430,000
2016                                                      5,450,000

The tax rate on the excess, above the estate tax exemption, is 40%.

Probate
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, 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 Trust A, or to whoever is legally entitled to the assets.

If the total amount of assets outside Trust A, and over and above the excluded assets listed above, is worth more than $150,000 as of the date of death, these assets will have to go through probate before they can be placed in Trust A.

DISTRIBUTING TRUST A
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 Trust A.  Assets in Trust A 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 wish 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 Trust A pass to the three children, then each child would get one-third of each asset.

Once a decision has been made as to 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 Trust A continues in whole or part as a trust, then the trustee or trustees need to re-register assets in the trustee’s 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 firms, etc., is contacted and a transfer of title undertaken.  New deeds are recorded with regard to 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.

Accounting
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 show the assets on hand with both their date of death and current fair market values.

TRUST B
Trust B has normally been an irrevocable trust with the surviving spouse as the beneficiary of the trust and the sole trustee.  Upon the surviving spouse’s death, the designated trustee or trustees must take over the administration of the trust.

Tax Identification Number
A tax identification number was obtained for Trust B when it was created.  This number will continue to be used for the assets in Trust B, and a new tax identification number is not needed.

Trust Income Tax Returns
The income from January 1st until the date of death is taxed to the surviving spouse.  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 Trust B is terminated and assets are completely distributed.

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 as trustees of Trust B.

Assets will be registered in the name of the new or successor trustee or trustees.  “Helen Doe Smith, Trustee of the John Doe and Mary Doe Living Trust dated August 17, 1999—Trust B.”

Change of Ownership Statement as to Real Property
If there is any California real estate owned in Trust B 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 which is in Trust B is to be filed within 145 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 Trust B, 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 to real property occurs, it is also 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 to the real property such as an “Affidavit-Death of Trustee.”

Real property passing to children of the deceased, sons-in-law, daughters-in-law, or to children of a deceased child is all exempt from reassessment, subject to the exemptions listed above.  Transfers to other relatives who inherit or someone not related to the deceased trigger 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.

DISTRIBUTING TRUST B
Trust B is not normally subject to estate taxes.  The assets can be distributed approximately three to nine months after the death of the surviving spouse.  Assets in Trust B 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 wish 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 Trust B pass to the 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 Trust B 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 firms, 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 as to the assets delivered and these receipts are retained by the trustees to show that the assets have been delivered.

Accounting
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 show the assets on hand with both their date of death and current fair market values.

SUMMARY
It is important to administer the various living trusts correctly upon the death of the surviving spouse.  There are many legal requirements for the trustee or trustees when the second spouse dies and the trust assets are distributed.  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.

It is very important for the trustee or trustees to have an attorney and accountant or tax preparer who are familiar with the law and the handling and administration of trusts in California as advisors.

© Milton Berry Scott, 1998-2016

Revised January 3, 2016

 

 

Administration of a Joint Husband and Wife California Living Trust upon the Death of the First Spouse

California law imposes duties upon the successor trustee or trustees of a living trust when a trustor dies and part of the trust becomes irrevocable.

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 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 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 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 sub-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.  This sub-trust 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 2016 this is $5,450,000.  This trust becomes irrevocable, and the terms cannot be changed.

The remainder of the assets passes to a second sub-trust designated as “Trust A.”  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’s assets exceed the estate tax exemption then the excess over this exemption is placed in the survivor’s trust.  Trust A 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.

ADMINISTRATIVE 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 re-register 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 re-registered in the name of “Mary Doe, Trustee of the Mary Doe and John Doe Living Trust dated August 17, 1999.”  A certified copy of the death certificate and 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
A tax identification number for the administrative trust needs to be obtained from the local IRS Service Center, online at the IRS website, or through the decedent’s accountant or tax preparer.  This is done by completing IRS form SS-4 and submitting it to the appropriate IRS Service Center or online. If mailed in, 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.

 
Many financial institutions will also have their own forms to be signed and occasionally notarized.

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 145 days of the date of death.

This statement lists who inherits the property and is signed by the trustee or trustees.  If the property is in a living trust, the beneficiary of the trust who can live in the property or who receives the income from rental of the property is the person considered under assessment rules as the person who inherits the property.  Copies of the trust document and all amendments must be sent in with this form

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.”  It is sent in with the Affidavit to the county recorder when the Affidavit is filed for recording.

Real property passing to the surviving spouse or a trust for the surviving spouse’s benefit, to children of the deceased, sons-in-law, daughters-in-law, and, in some cases, to children of a deceased child is exempt from reassessment as to the decedent’s residence and up to $1,000,000 of other real estate based on the real estate assessed valuation as of the date of death.  Transfers to other relatives or someone who is not related to the deceased triggers a reassessment of the property and increase in the real estate taxes.  If the property is reassessed as of the date of death it is reassessed at its fair market value and the real estate taxes are increased accordingly to 1 to 1.2% or more of this value.  A supplemental real estate tax bill will later be mailed, if the property is reassessed, 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 a filing fee of $50.  In addition, a copy of the will must be mailed to all the persons named in the will as executor, even if no probate is necessary.

Notifying all Trust Beneficiaries and Heirs
Since 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 special notice of the living trust and copies of portions of the trust.  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.

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 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 lose the 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 last business day before 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 $2,000-10,000 is used for personal items.

Under federal and California income tax law all community property assets (both halves) and all of the decedent’s separate property get a “new” income tax value at the date of death.  Most brokerage firms and mutual funds can provide the value of investments.  All potential capital gains are eliminated at death and the assets are treated as if they were purchased for the value as of the date of death.

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    Tax Rates
2015                                                      5,430,000          40%
2016                                                      5,450,000          40%

California has no estate or inheritance tax, and no reporting is required.

Probate
Normally, assets in a living trust avoid 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, 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 $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.

DIVIDING THE TRUST
After the federal estate tax return is filed, or if there is no return, approximately three to six months from the date of death, consideration is given to dividing the trust into two sub trusts.  This division is based on the date of death values and is up to the trustee or trustees.

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 $4,000,000 of community property in trust after expenses, only one-half, or $2,000,000 may go into Trust B.  If there was $12,000,000 of community property, after expenses, then a maximum of $5,450,000 would go into Trust B.

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.  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 an annual federal and California income tax return must be filed for this 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.

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, 2009-Trust A” (or Trust B).  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.

 SUMMARY
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 that is familiar with the law and the handling and administration of trusts in California as advisors.

© Milton Berry Scott, 1998-2016

Revised January 18, 2016

Administration of a California Living Trust for a Single Person upon the Death of that Individual

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.

ADMINISTRATIVE TRUST
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.

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, 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
2015                                          5,430,000
2016                                          5,450,000

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.

Probate

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.

Accounting
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.

 SUMMARY
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