Living Trusts: You’ve Been Appointed Successor Trustee – Now What?

In the estate planning world, a living trust is considered a powerful and versatile tool. Through it, a person can assign beneficiaries to their wealth and property, and plan ahead to create their own administration process without a probate court watching.

The trustee creates and oversees the trust. The successor trustee is the person the trustee believes is right for the job after they have passed on, and capable enough to distribute all of the trust’s contents as per the trustee’s wishes. It is an honor – and a tough job.

How Living Trusts Work

Similar to a will, a revocable living trust is an estate planning tool. It is used to help people manage their family’s inheritance once they pass away. It is an entity into which you can fund all of your assets and wealth, utilizing a trust agreement.

If you were a trust maker or trustee, you could manage your trust – and all of its contents – without being the direct owner of anything within your trust. This can include accounts, banking instruments, valuables, but also co-owned property, such as your half of the house you own with your spouse.

The trustee has considerable control over the trust, including being able to specify how it should be carved if they pass away. The person to do the carving is then appointed as successor trustee.

Step-By-Step Guide to Being a Successor Trustee

A successor trustee is a trust’s manager after the original trustee, or trust maker, passes away. In most cases where a successor trustee has been appointed, the trustee or trust maker is the decedent, managing their own estate planning process. The successor trustee has the responsibility of adhering to the trustee’s wishes, and distributing the trust’s assets as they saw fit – after ensuring that all of the trustee’s business has been taken care of, including collecting on unpaid debts, and contacting creditors to give them a chance to collect as well. Here is a simple step-by-step guide to what a successor trustee must do once the trustee becomes the decedent.

Managing the Trust’s Assets

The first step to being a successor trustee is understanding the scope of the trust’s contents, and managing it. That means accruing and safeguarding all the paperwork regarding properties such as vehicles and homes, having all the keys to all the relevant properties, keeping vehicles safe and nearby in garages or docked safely at a marina, and more.

A successor trustee is in charge of all the finances and books, the valuables, and the money. The first headache is establishing an inventory of the entire trust, and caring for it. This can include keeping property, such as homes and vehicles, in a clean and cared-for condition.

Communicating With the Executor About Probate

A trust can avoid probate, but not all estates are completely encapsulated within a trust. Some either have both a trust and a will, or have a pour-over will which transfers remaining assets into a trust after a person passes.

If the estate is sizeable enough outside of the trust to require an executor, then it is best to coordinate with the executor to smoothen and streamline the inheritance process.

Paying Taxes

In the state of California, any estate established after January 2005 does not have to pay state estate taxes – but the federal estate tax still exists, charging a high tax rate for any estate with a total value exceeding the estate tax exemption value, which for the year of 2018 is roughly $11.2 million. It is important to note that there is a separate generational-skipping transfer tax, or GST, currently with an exemption of the same size.

Aside from these taxes, the gift tax is also something to watch out for, although it is applicable to individuals, not trusts. The annual exemption for gifts is currently $14,000, and there is no state gift tax in California. Anything given in a year past that amount is subject to a federal gift tax. Assets transferred from a trust to an individual are not subject to the gift tax.

If the estate exceeds the exemption for the estate tax or inheritance tax, then it owes the government money based on the tax rate applicable at the time of the decedent’s passing.

Handling Debt(s)

The successor trustee of a living trust is in charge of all the trust’s finances, including paying any debts the former trustee left behind when they passed on. Creditors are to be informed of a person’s passing, giving them time to lay a claim on the decedent’s estate regarding a past arrangement and debt. Beneficiaries to the estate are not liable for their relative’s debts, but the estate is.

Aside from handling debts, it is also the successor trustee’s job to make sure that any payments still outstanding to the trustee/decedent are collected, and added to the estate. The successor trustee must also manage the trust’s ongoing administrative costs, and depending on the arrangement made between the trustee and the successor trustee, part of the trust’s contents go to the successor trustee as payment for administering the trust.

Distributing the Assets

After everything is said and done, the contents of the trust are ready to be transferred to their rightful beneficiaries. Once all debts have been paid, all outstanding business has been concluded, and once the taxman has come to take his cut (unless the estate is below the maximum federal estate tax exemption value of roughly $11 million per person), it is time to make sure that all the beneficiaries of the trust get what the trust maker or trustee wanted to give them.

If the trust exists not only to transfer property and assets upon death, but to actively hold and manage property and assets for minors, then this is still the last step to successfully doing your job as a successor trustee, but it is a very long and very complicated step.

This is a job that bears a massive responsibility and is often only done by exceptionally trusted individuals – so if you have been appointed as a successor trustee, then consider it a huge honor, and at the same time, prepare yourself for the massive workload, both in the form of paperwork and legwork.