When a death occurs, the survivors are often at a loss as to what to do next. Here are some initial tasks that require attention:
First Steps
One of the first agenda items after a death occurs is to locate the trust and read it carefully. It may have been many years since it had been prepared, and much of the detail may have been forgotten. Most trusts, but not all, will leave all assets to the surviving spouse. But other trusts will make provision for some distributions to other heirs even while the spouse is still living, or may name another trustee. These provisions must be understood before proceeding to implement the trust.
It is also critical to determine what kind of trust you have. Many trusts are A/B trusts, which require special attention after the first death to implement properly. You may be unable to determine what kind of trust you indeed have, in which case, call an estate planning attorney and have him review it promptly.
Transferring Title
Most living trusts name both spouses as co-trustees. After the death of one spouse, it is necessary to transfer assets which appear in both names as co-trustees to the survivor's name as sole trustee (assuming the survivor is named as the sole trustee). Unless this is done, institutions will constantly be requesting two signatures for any transactions because they will be unaware of one trustee's death. To do this, you need a certified death certificate and an abstract of the trust. These documents are then submitted to the various institutions where accounts are held. With regard to real estate, we file an affidavit which is recorded with the county recorder.
I also strongly recommend obtaining appraisals on all real estate owned. The reason for this is to establish a new basis for those assets. Although the property may not be sold for many years after that death, if an appraisal had been done at the time of death, it is much easier to prove to the IRS what the basis actually is.
A/B divisions
If you have an A/B trust, it is essential to properly implement the trust after the death of the first spouse. Failure to do so could cost the family over thousand of dollars in estate taxes, which would be especially frustrating since you had gone to the trouble of setting up a trust to avoid just such an expense.
An A/B trust splits into two shares at the death of the first spouse. This split, however, does not occur automatically. It must be accomplished by physically transferring assets into the two trusts. After we have a complete and accurate inventory of all the assets in the estate, we then decide how to allocate those assets between the two trusts. Property is then identified as being in either one trust or the other. We next set up a procedure to keep track of the assets in each trust. Also, an income tax return is filed for the decedent's trust annually thereafter. If these steps are not taken, then the IRS will not recognize the existence of the trust and the entire estate will be subject to taxation at the death of the surviving spouse.
Disclaimer Trusts
If you have a Disclaimer Trust, then we have nine months after the death of the spouse to decide whether to implement the disclaimer provisions. They are usually implemented if the estate of the surviving spouse is likely to be taxable. If the estate is not taxable, then we don’t need to split it into two shares. However, we still must update the trust and transfer the assets to the surviving spouse, as outlined above.
Filing an Estate Tax Return
Most estate plans are set up so that there is no estate tax at the first death. However, the tax law does require that a federal estate tax return be filed if the gross estate of the decedent exceeds $2,000,000. Thus, if one spouse dies, and his or her half of the estate exceeds that amount, we are required to file a tax return, even though no tax will be due. That return is due within nine months of the date of death.
First steps with A/B trusts
Upon the death one spouse, an A/B trust splits into two shares, so that we can protect up to 4 million dollars from estate tax at the second spouse's death. This division, however, does not occur automatically. Rather, it takes some specific actions on the part of the survivor, which, if not performed properly, will result in the loss of virtually all of the trust tax benefits.
In order to effectively accomplish the division of assets, we must first determine what the assets are and calculate their value. Thus the surviving spouse should prepare an inventory of all assets and liabilities, and establish the value of each asset. Real estate should be appraised by a qualified appraiser.
Allocation of assets between trusts
Once we know exactly what the estate is comprised of, we will then decide how to divide the assets into the A and B shares. Generally, we try to place potentially appreciating assets into the B trust, because the growth in those assets will be protected from estate tax at the second spouse's death. The division must be done carefully, however, since placing some assets into the B, or irrevocable trust, can have adverse consequences to the ultimate heirs. There also may be some property tax disadvantages to placing the home into the B trust.
Once we have decided on an allocation strategy, we then transfer the assets to the respective trusts. In many cases we will do a formal allocation, which involves re-registering each asset so that the title appears in either the A or B trust; in other cases, we will simply do an internal allocation, i.e., charts listing different trust assets as being in either A or B. The internal allocation is easier, cheaper, and less time-consuming, although the formal allocation makes it less likely that the A and B trusts will be commingled because it lends formality and substance to the transfers. The method chosen will depend on the client's wishes and the nature of the assets in the trust. Regardless, it is important that the funding take place quickly, because if a change in value takes place between the date of death and the date of funding, there could be some adverse tax consequences.
Stale Trusts
Occasionally I see a client whose spouse had died years ago, but the division into shares had never taken place, nor had any funding been done. This forces us to trace transactions and assets through many years in which inadequate records had been kept and assets commingled. Sometimes the task is nearly impossible. If so, nearly all the tax benefits of the trust have probably been lost, much to the consternation of the client and his heirs.
Maintenance
After the division has taken place, the A and B trusts must be properly maintained. The surviving spouse should keep good records of the transactions occurring in both trusts. Also, the B trust must file an income tax return each year and must use a separate tax i.d. number. This is true even though the trust may be paying no tax because it is passing all of its income through to the surviving spouse, who reports it on his or her own individual return.
The surviving spouse may be overwhelmed by the administrative details required of an A/B trust, and will need help. Usually the attorney will handle the A/B allocation, and will continue to act as an advisor as to the details that come up in handling the trust. A CPA can prepare the trust income tax returns, and, if necessary, the estate tax returns as well. And a bookkeeper might be appropriate for maintaining trust records. In some cases, the surviving spouse may not want to even act as Trustee, in which case we might consider appointing a professional trustee or co-trustee.
To prepare in advance, have your A/B trust reviewed to ensure that it has been well drafted and is current. A carefully written A/B trust can achieve huge tax savings that will more than compensate for the effort made to implement it properly.
