The grantor has done the hard work – set up a living trust, funded it, and maybe even served as its trustee for the first few years.
The grantor also nominated you as the successor trustee, to step in when he chooses to step down as trustee, or when he is no longer able to perform the duties of being a fiduciary.
Everything is proceeding like clockwork.
The grantor has left specific instructions for how the trust will be administered, which you followed when you stepped in as trustee.
Then the grantor passed away and you need to close the trust.
Or the grantor passes away and you administer the trust for a few years until the grantor’s child reaches legal age. The child just reached the age of majority yesterday. Now you need to close the trust.
The grantor’s instructions, though comprehensive for the operation and administration of the trust, is nevertheless silent on how to close the trust.
What do you do?
Well, you call an estate planning lawyer.
And maybe also do some research on your own.
The process of winding down and closing a trust is a process, not an automatic trigger that just terminates the trust as soon as its purpose is fulfilled.
In this article we take a look at some of the crucial steps to take to close a trust after the grantor passes away.
Asset Distribution Should Not be Immediate
When the next step is to close a trust, for many, the immediate thought might be the distribution of the trust assets to the beneficiaries. After all, that may be the purpose of the trust. Once the assets are distributed, the trust ceases to exist.
But that’s not exactly how it works.
In reality, the process of winding down involves a number of steps that must be taken before the assets of the trust can be distributed to the beneficiaries.
There are notices to send and debts, taxes, and liabilities to pay.
The goal is to ensure that the beneficiaries receive the assets in a way that shields them from further creditor claims, and protects the trustee from future liability.
The 120-Day Notice of Irrevocability
The first and one of the most critical steps for the trustee to take is to send out the mandatory Notice of Irrevocability.
Under California Probate Code §16061.7, the trustee is required to serve this formal notice to all the beneficiaries and heirs of the deceased settlor should a revocable trust become irrevocable due to death.
Publishing a Notice to Creditors
Notice must also be made to creditors. This is provided for under Probate Code §19003 which states that, at any time after the death of a settlor, before any petition for probate, the trustee may file a proposed notice to creditors.
The court will usually assign a proceeding number to this proposed notice, which notice shall then be published by the trustee, and served upon the creditors in the form legally required. This process is often referred to by some estate planning attorneys as “dry probate.”
If this process is not undertaken, the period for bringing creditor claims remains open for one year reckoned from the date of death. In short, if the trustee does not serve notice upon the creditors, the law allows creditors to file claims for a year after the date of death.
In the meantime, trust assets should not be distributed. Doing so exposes the trustee to potential legal liability, and creditors may go after the assets already distributed to the beneficiaries.
A different way of looking at this is that this mandatory notice creates a kind of procedural shield for the trustee. By giving notice through publication, the trustee can set a shortened window within which creditors may bring their claims against the trust.
Regardless, if no creditor notice is published, under California Code of Civil Procedure §366.2, creditors generally only have a year to bring a claim against the trust. This is it is advisable for creditors to wait until after the time limit for filing creditor claims has elapsed before making final distribution.
Marshaling the Trust Assets and Heggstad Petitions
It happens more commonly than people may think. A person sets up a trust but never actually funds it. That is, they don’t transfer funds or property into the trust. After they pass away, the trust is, for all practical purposes, an “empty vessel.”
Other times, the grantor may transfer some properties into the trust, but not all titles were transferred to the trust. Financial accounts, personal or real properties remain in the name of the trustor upon their death.
The practical effect is that the trust may not have sufficient resources to fulfill its purpose. Or trust assets intended to be distributed to the beneficiaries may inadvertently end up in probate instead.
The trustee’s task is to marshal the trust assets. One remedy that may be used is referred to as the Heggstand Petition, named after the 1993 case Estate of Heggstad. In that case, a written declaration by the decedent stating that he holds property as trustee was considered sufficient to create a revocable living trust in that property.
Today, a Heggstad Petition is brought under Probate Code § 850 seeking an order from the court to transfer an asset into a trust, upon proof that a valid trust was created and there was a clear intention by the settlor to transfer the asset to the trust. If the Heggstad Petition is successful, the asset is transferred to the trust and need not go through probate proceedings.
Settling Accounts and Final Distribution
As with most things post-death, before properties or assets can be distributed to heirs or beneficiaries, accounts must be settled and any debts and taxes paid.
Some of the costs that a trustee would need to clear may include:
- Outstanding debts
- Funeral costs
- Property expenses
- Outstanding debts
- Income taxes
- Property taxes
- Trust administration costs
Needless to say, if a portion of the estate of the trustor still goes to probate, then there must be coordination between the trustee and the personal representative of the estate to ensure that costs and creditor claims are not paid twice.
It is good practice for the trustee to maintain complete and accurate records and receipts of trust expenses and payments made. Transparency when it comes to accounting for trust assets and funds goes a long way to avoid disputes, conflict, and unnecessary litigation.
Once all liabilities have been settled, and a complete report or final accounting is completed, final distribution is made.
The responsibility of the trustee does not stop there, however. Even with the distributions, the trustee must keep complete and accurate records of the distribution of the trust assets, including receipts or acknowledgments by the beneficiaries that they have received their distributions.
“Cleaning Up”
Some final and lingering steps for the trustee to take after final distribution include:
- Closing trust accounts
- Obtaining a release from the beneficiaries
Many estate planning lawyers would advise the trustee at this point to retain all trust records for a period of time even after the trust has been closed. It is particularly important to retain all receipts from the beneficiaries confirming final distribution, and the concomitant release that discharges the trustee from any future liability.
These records should be kept and preserved for an appropriate period of time afterwards. It serves as a protection for the trustee, confirming that they have done their fiduciary duties and protecting them from any future claims or liability.
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If you are serving as a trustee for the first time, it is essential that you mitigate any potential personal risk or liability by securing the services of an estate planning lawyer. They will help you in the orderly and efficient way to close a trust after death.