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How to Handle a Living Trust after a Death by Mind Map: How to Handle a Living Trust after a Death
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How to Handle a Living Trust after a Death

Getting started

Need accurate list of all assets

Need to know how the asset was titled and the amount

For IRAs, need to know the beneficiary, Decide whether to do an "inherited IRA" or cash it in, Any account over $5,000 is usually done as "inherited IRA", Be careful of tax ramifications of this decision

For Life Insurance - Need to know the beneficiary

CDs, Bank Accounts- Need to know how asset was titled

Real estate- Check titling

Are assets over $2 million?

Yes, then must file Form 706 within 9 months of death

No, then no estate tax return is needed

Is a probate needed?

What causes a probate?, More than $100,000.00 in deceased's own name, Real estate in own name (not trust), No beneficiary on IRA or life insurance

Can a small estate affidavit be used?

If asset in deceased own name was less than $100,000.00 small estate affidavit will work

This is a less expensive option compared to probate

Need the following:

Original death certificates (as many as possible)

Original "pour over" will

Name, address, e-mail and SS# of trustee

Name, addresses, SS#'s, e-mail addresses of trust beneficiaries

"Holding" account

Trustee opens an account to hold $ during trust administration

Interest bearing account, Most trustees open a money market account with checkwriting

Non interest bearing account, If trust assets are low, it can be beneficial to open a non interest bearing account to avoid filing form 1041 (trust tax return)

Holding Account is titled, for example, "Ryan Sammons Trustee of Tom Sammons Living Trust dated 1/1/90" and uses the FEIN number

All assets that are liquidated, and house proceeds, are deposited here

When it's time to distribute, checks are written from the account, but a holdback is left in the account until tax returns are filed. The holdback amount is usually double whatever taxes we think may be due.

Dealing with Assets and Distribution

Most assets are liquidated and the cash put in "holding account"

Stocks, Mutual Funds, Brokerage accounts

Must first be retitled to name of successor trustee before anything can be done. Need a change of ownership form to do this. After retitling, stocks can be sold.

"Basis" or cost is the date of death, so capital gains taxes are minimal

House

Can be sold right away without being retitled

5% is maximum commission

Should be sold "as is"

Often a neighbor will by it "by owner"

"Problem" assets

Savings bonds, Tax is due on interest earned, See web site for a calculator http://www.publicdebt.treas.gov/sav/savcalc.htm

IRAs, Very tricky: If a beneficiary is named then an "inherited" IRA is set up and distributions are over the beneficiary's life expectancy

Annuities, Income tax is due on any gain over what the decease put into the annuity originally

Assets can be distributed "in kind"

This means the asset is not sold, but is distributed out of the trust to beneficiaries

All debts must be paid

File deceased final 1040 tax return

Distribution

Trustee prepares an accounting for the beneficiaries (An accounting is a list of income into the trust and expenses paid out) Beneficiaries have right to approve the accounting.

Trustee can either charge a trustees fee or waive it. "Normal" fee is $1,000 to $5,000. This is "income" to the trustee.

Once all assets are collected, checks are written to each beneficiary and a receipt is signed

"Holdback" The trustee withholds funds to pay income taxes on form 1041 and any other tax due on IRAs or savings bonds

The "holdback" usually double the amount we think will be due

The "holding account" is changed to non-interest bearing after the first distribution is made

Once the 1041 tax return is filed, a small second distribution is made to the beneficiaries and the account is closed.

Taxes

Obtain FEIN for trust

Need death certificate to do this

Instructions for Form 1041- Brutal reading

Can't use deceased SS # anymore

Form 1041 must be filed for trust while income is earned on FEIN

Don't even THINK about doing a 1041 yourself

Hire a CPA- Rod Paquette in Palatine 847-934-8900 is a good one

Determine tax year

2 Choices

Living trust can be taxed as an "estate" and use a fiscal year

Calendar year 1/1-12/31

"Simple" vs. "complex trust"

"Simple trust" distributes all income to beneficiaries (shown by K-1 form), Most trusts are simple trusts if the trust "ends" and distributes to the heirs

"Complex trust" accumulates income in the trust (trust pays tax), This is usually a continuing trust that goes on for years

Beware difference in tax rates

"Complex" trust tax rate- Trust pays tax, Trust tax rates are HIGHER than individual rates, 15% tax $0-$2050, 25% tax $2050-$4850, 28% tax $4850- $7400, 33% tax $7400-$10,050, 35% tax over $10,050

"Simple trust" tax rate- Individual pays at their own rate. Trust issues K-1 form and individual shows the income on 1040 personal return (always lower than trust paying), Individual tax rates are LOWER than trust rates, 10% tax $0-$7550, 15% tax $7551- $30,650, 25% tax $30,651- $74,000

Don't forget to file tax return-This is a common problem (due 3 mo. after end of period you choose)

Goals

Keep beneficiaries informed and don't destroy family relationships

Avoid notices from IRS by filing correct tax returns

Distribute in a timely manner