Feb 05, 2024

What Happens to the Trust When I Die?

In many cases, people create trusts not to help themselves but to support their loved ones in the future. So, it’s only natural to question what happens to the trust when the creator is no longer living.

The answer depends on the purpose of the trust. For a trust established to support a loved one with special needs, for instance, the trust can continue to operate for years in accordance with the provisions you established. However, many types of trusts, such as revocable living trusts designed to avoid probate, will change after the creator’s death. In this post, we will review those changes and explain what happens.

Trust Operation Before Death

To understand how trust operation changes after death, it is first helpful to review how the trust operates during the creator’s lifetime. Most people set up their revocable living trusts so that they retain control and use of all their assets. They serve as their own primary trustee, so they make decisions about property management. They also set themselves up as the primary beneficiary so that they can take advantage of the benefits of all the assets in the trust.

The trust document will name a successor trustee and one or more successor beneficiaries, but those individuals will not have a role at this point, unless the trustee becomes incapacitated. 

The trust is revocable, which allows the person who created the trust to change the terms or remove assets from the trust if they so choose. Because the creator has such control over trust assets, the IRS does not treat the trust as a separate entity, and any taxes on earnings are paid through the creator’s personal tax return.

But that all changes when the creator of the trust passes away.

Death or Incapacity Turns a Revocable Trust Irrevocable

The nature of the trust itself generally changes under California law when the creator of the trust passes away or becomes legally incapacitated. The trust becomes irrevocable at that point, which essentially means the terms are set in stone. The person designated as successor trustee takes over management responsibilities and follows instructions in the trust document. Once all assets are distributed in accordance with the trust terms, then the trust is dissolved, although assets may be moved into a new trust.

Responsibilities of a Successor Trustee

If the creator of the trust is still living but incapacitated, then the successor trustee will be responsible for seeing that the creator’s needs are met because that person remains the beneficiary of the trust.

Otherwise, if the successor is taking over after the death of the creator of the trust, the new trustee will have to carry out some responsibilities similar to those fulfilled by the executor of a will. The successor trustee needs to take control of assets, generally by retitling assets in their name as successor trustee. 

The trustee will also need to mail a “change of trustee notice” to the beneficiaries of the trust as well as anyone who would have been an heir under California law. This provides these people with the opportunity to file an action in court if they believe the trust is not legal.

Since the trust becomes irrevocable at the time of death, the new trustee may also need to obtain a tax ID number from the federal government and file a tax return on behalf of the trust. The trustee will need to file a tax return for the deceased person’s final year.

Overall, the two main responsibilities of the new trustee will be:

  • Paying debts left behind by the person who created the trust and
  • Distributing remaining assets to the successor beneficiaries

To accomplish these goals, the new trustee will generally need to inventory the assets in the trust and determine whether the deceased person left assets outside the trust that should be funneled into the trust through the operation of a pour-over will. The new trustee may also need to take steps to invest assets so that they continue to remain productive without incurring unnecessary risk.

In some situations, the duties can be concluded fairly quickly and easily, while in other situations the process can be lengthy and may be confusing. Trustees who are uncertain about their obligations should consult an attorney for advice because mistakes can be costly.

Blacksburg Law Helps with Trust Administration

Trusts are artificial legal creations, and the rules regarding their operation are complex and confusing. There is no shame in asking questions or seeking assistance if you are successor trustee or successor beneficiary.

The team at Blacksburg Law is always ready to help. To learn more about your rights and responsibilities or the operation of a trust, just schedule an appointment. 

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