Trust and Estate Administration

There is a common misconception that once an estate plan is in place, there is nothing left to do — that somehow the plan will magically be carried out upon death. But the reality is that the work really begins when the plan is implemented after death. The process of all things that must be accomplished after you’re gone is known as Trust or Estate Administration.

Depending on whether you’ve completed a will, a trust, or no plan at all, there are things to do when you die.

Typically, one of two things will take place. If you have no plan at all, or if you plan with a will, your estate will go through probate. If you plan with trusts, your estate will go through trust administration.

Probate is a court process in which a part of your affairs are settled. The court proceeding applies to assets owned in your own name.

If there is no will, the process is called intestate probate. The State provides a statute to indicate how assets will be distributed. If you have a souse, the spouse and children usually share in the estate assets in some way.

If there is a will, the process is called testate probate. The will tells the probate court how you want your assets distributed. Before distribution can take place, all debts, taxes and expenses of administration must be satisfied first. An Administrator or Executor is appointed by the court to handle the administration and will usually be required to post a bond with the court. The court oversees the entire administration from start to finish, which can be expensive and take a few months to many years to complete.

Instructions left in trusts and other planning documents usually make the administrative work easier, and can provide tax, asset protection, and other benefits. This work is handled by the Trustee, who is charged with the responsibility of carrying out the terms of the trust and providing information to the trust beneficiaries according to state law. If the terms of a will or trust require that distribution be made to sub-trusts, the assistance of competent legal counsel is recommended so that the sub-trusts are properly established and so that assets are properly distributed to those trusts. Again, debts, taxes and administrative expenses will need to be satisfied prior to making distribution. There may also be income and estate tax returns that may need to be prepared and filed. However, the trust administration process is private in that there are no ongoing court proceedings. This can make the administration less expensive. Nevertheless, there is work to be done and legal pitfalls to avoid.

The final step in settlement of a trust or an estate is to distribute the assets to those who should receive them. The trust, will, or state statute will direct how the final distribution is to be made.

If you are a personal representative of an estate or trustee of a trust, we welcome the opportunity to help you navigate through the complexity of a trust or estate administration efficiently and properly.

What is involved in the Probate process?

The probate process is different in every state. In many states, the probate process looks like the following:
• A petition is filed with the court requesting a probate.
• The petition identifies people who would be intestate heirs and if there is a will, identifying those named in the will.
• These people are given notice of the proceeding.
• In many states, the person petitioning may request an informal or independent proceeding in which probate can be accomplished without court hearings.
• In these proceedings, those who wish to raise concerns may need to file their own petition requesting a court hearing on the concern.

After petition, a person is named to administer the estate. In some states, different names are used for this position if there is no will in contrast to those where there is a will. In those states, the person named is an administrator (male) or administratrix (female) if there is no will, and an executor or executrix if there is a will. In some states the term personal representative is used whether or not there is a will.

What does the personal representative do in probate?

The issues addressed in a normal probate proceed are similar:

1. Identify and collect assets;
2. Verify the existence and validity of the decedent’s will admitted to probate, if one exists;
3. Identify and pay legitimate bills and claims;
4. Pay taxes;
5. Distribute assets to those who should receive them.

What happens next after the bills and taxes are paid?

After assets are collected and bills and taxes paid, the person administering the estate usually files an accounting with the court. Things that are typically included in that report are:

1. The inventory of assets and values when the process began;
2. A list of income and other funds received as well as assets sold;
3. A list of the expenses, fees, and claims paid;
4. A record of changes in the value of the assets during the period of administration (which will typically take months);
5. A revised inventory of assets and values at the time of the report;
6. A proposal for how the assets will be distributed;
7. The proposal often requires acceptance before distribution can begin.

After everything else is administered, the personal representative distributes the assets to those who should receive them. The Court may require that a notice be served on the interested parties, and after a stated period of time, the court may close the estate.

Are there any assets that transfer without having to go through probate?

Some assets may transfer without probate. These include:

1. Jointly held assets;
2. Accounts which are payable on death to a beneficiary other than your estate;
3. Assets such as life insurance, annuities, retirement plans, and IRAs, where the beneficiary is someone other than your estate.

There are many practical matters to take into consideration that should be discussed with an Attorney prior to changing title, which may include tax related matters.

Why is “title” important?

Title refers to how assets are owned, and there is a common expression among planners that “title equals results.” In trust planning, for example, the assets must be titled to the trustee of the trust in order for the instructions in the trust to apply to those assets.

If the assets are titled solely in the name of the person who died, those assets are probated. There may be a will which provides instructions to the probate judge.

As mentioned previously, assets may transfer outside of trust and outside of probate if they are jointly owned or a contract beneficiary designation as part of an annuity, life insurance, or retirement account.

In every case, the title of ownership on the asset determines how it is handled after death.

What is trust settlement or trust administration?

Instructions left in trusts and other planning documents usually make the administrative work easier, and can provide tax, asset, and other benefits. The Trustee is charged with the responsibility to carry out the administration of the trust instrument according to its terms. As a result, the trust administration process does not require the ongoing oversight of a court proceeding. The Trustee must keep the beneficiaries informed of the trust administration, gather and manage the assets of the trust estate, pay debts, administrative expenses and taxes, and make distribution according to the trust terms. The private administration of the trust can make the settlement process less expensive. Nevertheless, there is work to be done and legal pitfalls to avoid.

What happens in final distribution?

The final step in settlement of a trust or an estate is to distribute the assets to those who should receive them. The trust, will, or state statute will direct how the final distribution is to be made. Making a chart as to the sub-trust or person entitled to each asset’s value will be very helpful. The will or living trust may create sub-trusts or separate trusts. Those successor trusts will need to obtain their Tax Identification Numbers using IRS form SS-4 and should consider using IRS form 56 to notify the IRS that tax reporting is about to start.

If the administration follows the death of the first spouse, distribution may be to the surviving spouse or to sub-trusts created in the will or living trust of the deceased spouse. If outright distribution to a spouse or spouse and children is instructed, the distribution may not require extensive analysis. If distribution is to sub-trusts, the assistance of a competent professional is recommended so that the sub-trusts are properly established and so that assets are properly distributed to those trusts.

What income tax issues should be considered?

There will eventually be a final income tax return prepared for the deceased for the year of death. You should consult your professional advisors for help with this step. A review of returns for the past three years will help identify income tax issues and, in addition, may alert the Personal Representative or Trustee to additional assets.

Will federal and state death taxes have to be paid?

Federal and state death taxes are not necessarily tied together in any logical fashion. Each state may have its own death tax pattern. Generally, a tax on the transfer of assets at death is called an “estate tax.” The tax is usually calculated on the total value of the “estate” of the deceased person.

An “inheritance tax” is a tax on the receipt of assets by beneficiaries. Generally, the tax is calculated based on the amount the beneficiary receives and the amount exempt from tax. The tax rate may even vary depending on the relationship of the beneficiary to the deceased.

How are federal estate taxes handled?

If there is a federal estate tax, the value of the estate assets for federal estate tax purposes needs to be determined as quickly as possible.

If there is a federal estate tax, it applies to all assets owned by the deceased, including assets in his or her revocable trust. Assets not included in the deceased’s probate estate are included in the deceased’s estate for federal estate tax purposes. It includes real property, bank accounts, investments, insurance owned by the deceased, joint property for which the deceased paid, tangible personal property, retirement accounts, stock options, deferred compensation, and more.

If husband and wife planned, there may be a living trust or a trust in a will which divides the assets of the first to die into two (or more) trusts which are created after the death of the first spouse to die. One trust is used to preserve the exemption amount of the deceased person and the other is to obtain the marital deduction available because there is a surviving spouse.

What do I do about the Generation Skipping Transfer Tax?

The generation skipping tax is an additional tax to the federal estate tax designed to discourage skipping generations as a means of avoiding federal estate tax. This tax is meant to preserve the federal estate tax by imposing an added tax when generations are skipped.

If assets are transferred to grandchildren, grandnieces and grandnephews, etc. or to persons 35 or more years younger than the deceased, there may be a generation skipping tax issue if the deceased transfers more than the amount allowed in total to people in these categories. Any questions about the application of the generation skipping tax should be addressed with a competent professional.

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