You’ve visited an attorney and created a living trust. Also, you have re-registered all of your assets in the name of the trust to avoid the costs, delays and publicity of probate. Now all your worries are over if you or a spouse dies, right? Not necessarily! Creating and funding a living trust has greatly simplified the process of transferring your estate to your beneficiaries, and there are hundreds of books on this subject. However, there is very little information available on the important steps which must be taken when someone dies. Here are a few common areas of concern based on our experience in this area. This is not a comprehensive list and may differ based on individual circumstances.
Death Certificates – Make sure you order an adequate number of certified copies from the mortuary. In order to re-register assets, you need one copy for each asset (including the home). One death certificate will do for a brokerage account. Also, one certificate is sufficient for mutual funds if they are all within the same family of funds. Some companies will return death certificates to you when the work is completed while others won’t. When the estate settlement process is completed, it is helpful to have some extra certificates, just in case.
Final Income Tax Return – Don’t forget to complete an income tax return for the year of death, especially if the decedent is single. Any salary, dividends, interest and other taxable income earned by the decedent before the assets are changed to a new registration and TIN (Tax Identification Number) must be included in the income tax return.
Valuation of the Estate – It’s a good idea to value all the assets in the estate as of the date of death, including the residence, even if you don’t think you need to file an Estate Tax Return. Don’t wait too long to complete this step because the longer you delay, the harder it is to obtain market values. The new tax cost basis for many assets takes a “step-up” to the value of the asset at the date of death. This will help a surviving spouse or beneficiary to avoid capital gains when assets are subsequently sold. Some assets don’t “step-up”, such as IRAs and other tax deferred accounts. There is also an alternate valuation date exactly 6 months after the date of death which may be used if it is to your advantage. The evaluation process is complicated and it may require the assistance of your financial planner.
New Trust TIN – A living trust is usually revocable, meaning you can change the provisions of the document until a death occurs. At death, a living trust may call for the separation of the assets into two or three trusts. One trust represents the surviving spouse’s assets. The TIN for this trust is usually the social security number of the surviving spouse who will act as trustee. The other trust(s) will require a new TIN. A TIN is obtained by completing Form SS-4 with the IRS. If a friend or family member is acting as trustee of the survivor’s trust, they must obtain a new TIN since the survivor’s social security number cannot be used in this case.
Trust Tax Reporting – Any trust for the benefit of the surviving spouse or other beneficiaries using a TIN (not a social security number) must file an annual Fiduciary Tax Return Form 1041. If the trust retains income, it will pay income tax and trust tax rates. If the trust functions more like a conduit and pays all income to the beneficiaries, the trust won’t owe income taxes.
Re-Registering Assets – When a trustee of a trust dies or resigns, the trust document designates a successor trustee. The assets must be re-registered in the name of the new trustee and a new TIN must be obtained. If a new trust is created, it’s important to develop a strategy which may help to determine which assets belong to the trust. Once again, this is a complicated process with many considerations. I highly recommend you contact your financial advisors for assistance with this step in the process.
Estate Tax Return – When someone dies, an estate tax return is due nine months form the date of death. If the taxable estate of the decedent is less than $5,450,000 (the amount of estate you can pass to heirs without owing any estate tax) you may not need to file Form 706 Estate Tax Return. Be sure to seek the advice of a qualified CPA or other tax professional to determine if Form 706 is necessary.
Even though this may all seem formidable and daunting, remember, the use of a living trust makes the settlement of an estate a smoother and quicker process. Be sure to read the trust document – it will tell you what to do. If the process seems beyond your capability, it’s time to seek the assistance of your advisors. They can help make this difficult time in your life a lot easier.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.