Category Archives: Trust Administration

Creditor’s Claims and Trust Administration

debtsDear Liza: I am the successor trustee of my parents trust.  The have both passed and I was told before I disburse the assets I need to advertise a Notice to Creditors. How long and how many times do I need to advertise?  

Since I don’t know which state you live in, I can only provide you with a very general answer.  In most states, although not California, where I live and practice, if you are administering a trust, there’s no special creditor’s claim process that requires publication. Instead, creditors have a limited period of time in which to make a claim, and after that, it’s just too late. In California, again, that’s one year. In your state, it could be more, you’ll have to find out what the statute of limitations is after a death, you can try typing in “statute of limitations for claims against estate in _____” to your favorite web browser.

If there is a creditor’s claim process, that’s a way to accelerate the discovery and payment of creditors. Usually, that does involve publication that a person has died, and then there’s a specific number of days in which any creditors can make a claim against the trust’s assets (and this is less than the time allowed by that state’s statute of limitations). Once that claim is made, the Trustee has a certain number of days to either pay, or deny that claim. If a creditor fails to make a claim within the required time period, they are then barred, forever after, from making a claim.  This is similar to how creditor’s claims are handled in probate — a notice is given, a time limit runs, there’s a process for paying or contesting a claim, and then a creditor is barred. This is all an attempt to have some finality after a death, so beneficiaries can inherit without the fear of lurking liabilities out there.

As a general matter, you do need to pay the creditors that you know about, so all of the bills that have come due since your parents have died should be paid before you distribute anything from the trust to other beneficiaries. Also, please make sure to pay the taxes first, before any other creditors.  You should also know that secured debts, like a mortgage, do pass with the property that they are secured by. So, for example, if Sam inherits the house, and there’s a mortgage on that house, Sam is going to have to either pay that mortgage off, or get the lender to let him assume that mortgage himself (And that’s up to the lender…sometimes they will do it, sometimes they won’t. That depends on Sam and also on the terms of the mortgage.)

Finally, although you should, of course, pay outstanding credit card bills, you should know that the trust’s beneficiaries are NOT personally liable for such unsecured debts if the estate/trust has insufficient assets to pay those bills. I share this with you because bill collectors often neglect to make it clear that unsecured debts, like credit card debts, do not pass to the beneficiaries.

Your Living Trust can hold an S Corporation

letters-451524_640Dear Liza: My son and I own an S corporation.   Can an S corp be put into a trust?  If not how would an S corp be put into a trust? Yes! You can put your S corporation into your living trust by transferring your ownership of your shares to yourself, as Trustee of your living trust. As you know (but not all of my readers will), an S Corporation is a special kind of corporation, limited to 100 shareholders, in which the profits and losses of the corporation are passed through to the individual shareholders, to be reported on their individual returns.
 Most of my clients who have S corporations are small business people and are the sole shareholders of their S corporations. If that’s the case with you, then you need to get your corporate binder out and follow the formal procedures to reissue those shares to yourself as Trustee. If you have a corporate attorney, then ask that person to help you make sure that you observe the required formalities to transfer the shares.
While you are alive, there’s not a problem with holding the S Corp shares as Trustee. That’s because during your lifetime, your living trust is what’s called a “grantor trust.”  After your death, though, your trust isn’t a “grantor trust” any more.  At that point, the shares can be held by the trust for only two years withhold jeopardizing the S Corporation status for the other shareholders.  For many of my clients, this two year limit is not a problem, because the business won’t continue after the death of the owner.
If you want the trust to hold the shares longer than that,  however, you need to have special S Corporation provisions added to your trust, so that the trust can be a permitted shareholder under the IRS’s regulations–only certain kinds of trusts are allowed to hold stock in S Corps.  Click here for a good summary of these rules.

Should I fire my lawyer?

bad lawyerDear Liza:  My grandmother passed in May 2012 and left my mother and I as equal beneficiaries of her estate.  The lawyer that we’ve been working with hasn’t been responsive to our questions or concerns.   After eight months of working with him, it seems that not much has happened. My mother and I don’t feel that he is giving our case an appropriate amount of attention. Should we fire him? Probably. Certainly if you’re not happy with the care with which you have been treated you should at least have a candid discussion with your attorney about it. If you can’t come to a reasonable resolution of the issues, you absolutely have the right to seek other counsel.  Your attorney is, after all, your attorney–and owes you a duty of loyatly and a duty to communicate adequately and keep you updated on the progress of the trust administration. If you do seek other counsel, you have the right to your client file as well. Good luck.

Transferring a house from a trust

 Dear Liza: My grandfather died in 2008. My mother is the first successor on the trust. We did all the post administration for the trust or so we thought. I recently read that my mother should have filed a deed to get the house placed into her name since that is what the trust called for. We have not done this. My question is the following…My mother wants the house to go to me, her son. What process would we have to do in order to get it from the trust to me? Your grandmother can file the deed she didn’t file after your grandfather died, getting the house into your grandmother’s name, as Trustee of the trust created by your grandfather. Once that’s done, her ability to give that house to you during her lifetime depends upon the terms of the trust your grandfather set up. She may be able to give it to you during her lifetime, in which case you will receive it at the value that it had in 2008, when your grandfather died.  She may only be able to transfer it to you at her death, in which case you will inherit it at the value the house has at her death.  She may not be able to give it to you at all, because, as you said, the terms of your grandfather’s trust became irrevocable at his death. I would advise you to see an estate planning attorney in your state to review your grandfather’s trust and advise your grandmother on the best strategy to accomplish her goals.

As for that mortgage, if you get the property transfer completed, you’ll have to request that the lender assume the loan in your own name, which they may or may not do, that depends on their calculations and your credit history.

Funding subtrusts after the death of the first spouse

Dear Liza: In settling an AB trust I understand that 50% of the estate is to be placed in each of the A and B trusts. However, in our estate our house is worth more than all of the other equity. How can the estate be settled? With percentages of the home? Put the home in which trust?  That’s not a question you can answer in the abstract.  Those decisions get made after the first spouse dies.  First, you can’t know, now, what assets you’ll own then.  Second, in an A/B trust, the assets of the deceased spouse are used to fund a trust, often called a “B” trust or a “Unified Credit Trust,” up to the amount of money that’s excluded from the federal estate tax in the year of the first spouse’s death.  In 2012, that’s $5.12 million, but at the end of this year, that number falls to $1 million, unless Congress enacts new law. So, it’s not always going to “half” of the total trust estate, that will entirely depend upon the tax code in effect at the time your spouse dies. But, to answer part of the question you asked, the B Trust can be funded with a percentage of the house, and often is when there aren’t other assets that can be used to do so.

I Inherited a House, Now What?

Dear Liza: My 90 yr. old mother recently died and I inherited her home, her only significant asset.  I  am preparing the Affidavit-Death of Trustee.  Does this put the title to the house in my name or do I also need a Quitclaim deed?  Do I need to create a new trust of my own or can it be left in the current one as I am a co-trustee? Sorry to hear about your Mom.  You are now engaging in what’s called “Trust Administration.”  The Affidavit Death of Trustee says that you are now the successor Trustee of your mother’s trust. (That means you have the legal authority to act under the trust with respect to the real property.) The next step for you is to then record a Trustee’s Deed transferring the property from that trust to yourself as an individual. (That gets the house to you outright and free of her trust.) If you want to set up a living trust, do that.  Then you’ll transfer the house from your own name to yourself, as Trustee of the new trust by recording a Trust Transfer Deed.  You can’t just leave the house in your mother’s trust, because now that she’s died, that trust is irrevocable and can’t be amended or changed.  Also, as Trustee, you’re just the manager of the assets, not the owner. You can use Nolo’s resources to create your own trust or work with an estate planner, that’s up to you.

Letters documenting Incapacity

Dear Liza: My 91 year old mother had a stroke in April. Her living trust designates my brother as Medical Power of Attorney and myself as Financial POA.   Her lawyer is asking for letters from two doctors stating our mother is mentally incapacitated before he can talk to both of us about her trust.   Why would a lawyer ask for them? Wasn’t the point of the trust to make everything hassle free?  Your mother’s lawyer is asking for letters from two doctors stating that your mother is incapable of managing her own affairs because, most likely, the trust states that you and your brother can act as successor Trustees only upon your mother’s incapacity. The trust probably also states that incapacity is to be determined by two letters from physicians stating, under penalty of perjury, that your mother is incapacitated. Many trusts are drafted this way. The idea is to protect your mother from having her powers as Trustee taken away unless she really can’t manage her own affairs.  Ask the attorney to provide you with letters for the doctors to sign — that shouldn’t be a big deal if, in fact, she isn’t able to manage.

Do I Need a Will and a Trust?

Dear Liza, is it necessary to have both a last will and testament if you have a living trust? Yes, that’s the way it is usually done. There are two main reasons for this.  First, if you have minor children, the Will is where you nominate guardians for them.  But also the Will provides an important way to make sure your trust is the one set of instructions for who gets what and how it’s managed.

 Here’s why: your trust holds the property that you transfer into it during your lifetime. You do this by either recording a deed (for real property) that transfers ownership from you as an individual to you as Trustee, or, in the case of a brokerage or bank account, by filing out paperwork that states that the account is owned by you, as Trustee.  (These are called Change of Title Forms at most institutions; sometimes Trust Account Applications or something similar.) However, most people don’t actually transfer all of their assets into such a trust.  When they die, often there are everyday checking and savings accounts, cars, or other assets outside of that trust.  Sometimes they have simply forgotten to transfer accounts that should have gone into the trust or refinanced a house and taken that house out of the trust in the process, then forgotten to put it back in. So, that’s where the Will comes in–it’s usually a special kind of Will, called a ‘pour-over Will’–and it says that all such property should be poured into the trust/transferred into the trust after a person’s died. That way all of a person’s property will be distributed via the trust.  A note of caution: if too much property is held outside of the trust, you will need a probate proceeding before you can transfer ownership to the trust (the trigger amount varies from state to state). So, don’t rely on that Will to make things work–make sure that your major assets are held by the trust during your lifetime.

Amending or Restating A Living Trust

Hi Liza,  I have a living trust and I’m the trustee in the trust.  I have a will in the trust.  I wanted to make some changes to the will and I’ve been told by my lawyer that I would have to
make another trust if I want to change the people in my will.  If the will doesn’t have to go to probate why can’t I just make the changes in the will and have my designated
trustee distribute my estate after I’m dead?  One of the people in my will has died, one is in a nursing home and two I haven’t heard from in years.  This doesn’t make
any sense to me.  Can you explain this to me? Well, truthfully, now I’m a tiny bit confused. It sounds like you have a trust, and in that trust you leave assets to various people. (I think that’s what having a “will in the trust” means.) Assuming that you are the Grantor of that trust (the person who established it) and it’s a revocable trust, you can certainly amend the trust to reflect your current intentions. It is common that we lose touch with people over the years, or change our minds about what we want to do with our assets over time. To make a small change to an existing document you would have your lawyer draft a trust amendment for you to sign, changing whatever sections of the existing trust needs revising. If you are making a lot of changes, you’d do what’s called a Restatement of Trust, which is like having an all-new trust with all current terms, but with the same name as the old trust, so you don’t need to retitle assets that are already in it. Maybe that’s what your lawyer meant by a “new trust.”

Joint Checking Accounts and Trusts

Dear Liza: My Mother passed in Feb of this year.  She opened a joint account with my Sister, so, should she become incapacitated, my sister could write checks on her behalf and it was opened with the understanding, that should something happen to my mother, the joint checking account should be split with her six other brother’s and sisters.  My sister is claiming the money is now hers to do with what she wants, who is right? This is one of those estate planning situations that come up a lot, and it’s also one where the law is clear, the moral obligations murky. Aged parents often put one child on an account like that, to make it easier to let them take care of their finances. But in making your sister the joint owner of the account, your mother also made her the legal owner of the money now because she is the surviving joint owner.  If your mother had wanted to make absolutely bullet-proof sure that any money in that account was to be split equally among all seven of you, she should have put that account into the trust (assuming that the trust splits everything seven equal ways) or named all seven of you as pay-on-death beneficiaries. But, of course, that’s no solace now. If your sister wants to honor your mother’s wishes, she could do that, but she’s not legally obligated to do so.