Using a Trust for Estate Settlement

A big decision within the estate planning process is whether using a will or a trust (or both) makes the most sense for your clients and their beneficiaries.

Probate, the judicial process by which a will is “proven,” is a hassle in many states. Trusts give us an alternative, more private manner by which to distribute the assets of a decedent. Here, we will take a chronological walk through the estate settlement process, including the critical elements of state law and document language that need to be addressed. Estates are all individually controlled by state law, but the fundamental responsibilities are universal.

Probate is not necessarily a bad thing, and may even be sought after for some people, in certain states, and with respect to some assets, but in general, avoiding probate ensures more privacy, costs less and is faster than estate settlement through probate.

It’s important to clarify that this is not a choice at settlement, it is a choice in planning. Using a trust versus a will as your primary dispositive instrument is not just a matter of writing the document; it is an issue of how your assets are titled at the time of death. Generally, wills handle assets in your individual name, and trusts handle assets titled in the name of the trust. There are a number of other forms of ownership, such as joint tenancy, or assets on which you can name a beneficiary that also pass probate free, passing neither through your will nor your trust. The titling of your assets must be properly coordinated with your plan.

Settling an Estate Using a Trust

So, assuming we have chosen trust as our vehicle of choice, had one drafted by an experienced estate planning attorney and properly funded the trust by titling the desired assets in the trust, let’s examine what happens at death. 

Trusts are a form of private settlement, as opposed to wills and the probate process which is a form of public settlement, so the first distinction is the lack of a court hearing to “prove” the will to be valid. A trust should be created and funded during life, so it is already valid and operating, which enables the settlement of the estate to begin right away, without the formalities required by probate laws like contacting all of the people who would receive a share if there were no will. 

These steps in probate can slow down the process and cause unnecessary family friction when there are heirs who are not beneficiaries. In a trust, only the parties to the trust are notified, and there is no public hearing. The trustee, or successor trustee when the trustee is the one who passed away (typical in a revocable trust that becomes irrevocable at death), must consider the acceptance of the role. Being named does not make you the trustee; it effectively nominates you as the trustee. The trustee should quickly assess the documents, assets, and people involved to determine that they can properly fulfill the trustee function. 

Once accepted, the trustee can begin explaining the document to the family and helping them to understand the steps and timing of the estate settlement. There is no set time frame, but assuming the trust terminates at death and distributes all assets, as in the case of a will, one can expect it will take at least six months and, depending on size and complexity, a year or two is not unusual. The team of professionals involved should be defined and roles clarified so there are no misunderstandings. There can be complex legal work and decisions to be made, there are always tax matters to address, and of course, the assets including real estate and investments need to be managed.

Creating a full inventory of the assets is the first step, followed by identifying and getting the date of death values of every asset owned by the trust. 

Just think of everything that you own. Do you know where it is? Do you have a centralized, up to date list of account numbers and locations? Or is that information just stored in your head? Now imagine what someone walking into that scene would experience, having to piece together the full picture. Often, family members and professional advisors can be helpful, but this can be a big job. Investment accounts, bank accounts, real estate, retirement plans (although they generally pass to a named beneficiary, likewise with life insurance and annuities), business ownership, even personal property, as well as debts and credit cards balances. 

The trustee must create a complete picture of the assets and liabilities of the deceased so that they can address the debts, then figure out the net worth at death available to distribute after estate taxes are considered. The trustee must keep detailed records, provide statements to the beneficiaries, and use an unusual form of accounting to do so.

Once the assets are gathered, the trustee must consider two forms of taxation. Every estate or trust is treated as a taxpayer, and so it must file an annual income tax return. In addition, the decedent would have at least their final income tax return to file for income earned until death. Estate taxes affect a very small percentage of the population, but the trustee must determine whether the decedent’s net worth at death exceeds that number and, if so, file an estate tax return. The trust document should provide special language to determine the source of those taxes, whether from the residue of the estate or proportionate from each beneficiaries’ share. 

There are many tax elections that should be considered that may reduce the income or estate tax burden. Tax professionals can be of great value here. There are even choices the beneficiaries can make to affect tax implications, such as whether to accept their inheritance. In some cases the beneficiary might disclaim their interest in favor of the next named beneficiary in the trust, often their children.

During this estate settlement period, the trustee must also comply with all applicable laws, State and Federal, that pertain to the custody, recordkeeping, taxation, accounting, and investment of the assets subject to administration. Just imagine having to check in with the court every time you wanted to take another step in the administration. Professional trustees deal with these matters everyday, and so have all of the systems and checklists in place to make sure that things are done right and done efficiently. Keep in mind that anything not done correctly is the personal responsibility of the trustee.

We have discussed seven areas to address when settling an estate: 

  • Review and acceptance
  • Setting expectations
  • The roles of the team involved
  • Marshaling and managing the assets
  • Handling the income and estate tax reporting
  • Complying with the law
  • Carrying out the document terms notably distributing the assets to the desired beneficiaries

In summary, when settling an estate using a trust, the complexity of the assets and legal and tax compliance still exists, but avoids the direct court supervision and public scrutiny that can exist in the probate process of many states. Private settlement allows the important and challenging work of estate settlement to begin rapidly and proceed undeterred by court oversight. 

Discuss with your clients whether trust settlement may be the appropriate choice for them and their families, and click here to learn more about how Trucendent opens up a network of estate planning experts and corporate trustees to help advisors navigate the estate planning process. 

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