How do you execute a living trust after the death of the trustee? What is the trustee’s job with the living trust? How do you manage expenses with a living trust?
Q: Before my father died, he and his second wife established a living trust for their house. In the trust document, my stepbrother and I were designated co-trustees. I am a 50% beneficiary and my stepbrother and stepsister are 25% owners each.
In order to file the updated deed. The county required us to have an inspection and to make certain repairs to the property. We have other expenses associated with the property including the annual home insurance premiums and real estate property taxes. We’d like to sell the home this year.
So far, I have footed the bill for almost all of the expenses of owning and maintaining the property. I’d like to know who should pay me back and for which expenses. Who is responsible for paying these expenses – the two trustees (50/50) or the three beneficiaries (50/25/25)?
A: Let’s start with the hidden question in your letter relating to filing the updated deed and the trust that holds ownership to the property.
Setting up a living trust
At one point, your father owned the home in his own name. Sometime later, he set up a living trust. For the living trust to work, your father’s assets would have to change from being held in his name to the name of the trust.
He would have changed his bank and stock accounts from his personal name to the name of his trust. More importantly, he would have had to convey his ownership of the home to the trust. In most places, the transfer of the home should have been a simple task that would have required that he sign a deed to convey his ownership interest in the home into the trust.
Now, in some places, local municipalities may require the payment of a fee in order to do this. Some may even require a home inspection prior to allowing the transfer of the ownership of the home into the trust. The municipality in which the property is located required repairs to the home to meet the requirements of the local municipal building code.
We suspect this is what happened. While alive, your father would have still owned the home. But the home would have been held in his living trust. Once the title to the home was put into the name of the living trust, your father would likely have been both the trustee and the beneficiary of the trust. You and your step-brother were likely named successor trustees. Upon your father’s death, you and your step-brother became co-trustees of the trust. Likewise, your father would no longer be the beneficiary of the trust and you and your two step-siblings became the beneficiaries of the trust.
Duties and responsibilities of a trustee
In your capacity as trustee you act on behalf of the trust. As a beneficiary of the trust, you are one of three owners. The trustee should not be personally liable for the debts and expenses of the trust. Any expenses incurred by the trust should be paid out of the trust assets. So if the trust also has some of your father’s bank accounts, the expenses for the home could be paid out of those accounts.
A well drafted trust agreement should have details about how the trust should be managed and how the trustee should deal with any expenses. Please read over the trust document carefully. To understand what you are expected to do and how and when expenses incurred by the trust are paid and reimbursed.
When a living trust only holds a home, the trustee might pay out money for expenses but the trustee should be reimbursed for those expenses by the owners of the trust. In your case, you should bear 50% of the expenses and your step-siblings should each pay 25%.
Speak to an estate attorney for clarity on living trusts
If you haven’t kept an ongoing list of the expenses you’ve paid on behalf of the trust, we encourage you to create that list right now. Make sure you can document all of the expenses you’re claiming for reimbursement. You can then present a list of the expenses to your step-siblings. Then ask them to reimburse you for their share of the expenses. If they’re unable to give you the cash today. You should be able to subtract those expenses from the proceeds when you sell the property. The net proceeds, minus all expenses including your reimbursements, would then be split among you and your step-siblings.
Of course, there could be complicating factors in your situation. So, consider speaking with the estate attorney who drafted the trust or another estate attorney. The trust may have specific language as to how and when the home may be sold. It may also provide for specific reimbursement to the trustees if they pay out any money to cover expenses for the home. The trust may also provide for some compensation to the trustees for the time they spend on trust affairs.
Here are some FAQs about Living Trusts:
FAQ: What is a living trust?
A living trust is a legal arrangement in which a person (called the “grantor” or “trustor”) transfers their assets to a trust during their lifetime. The grantor typically names themselves as the initial trustee and beneficiary of the trust. That way, they retain control over the assets while they are alive.
The purpose of a living trust is to avoid probate, which is the legal process of distributing a person’s assets after they die. When assets are held in a trust, they do not have to go through probate. That can save beneficiaries time and money. In addition, a living trust can help preserve privacy because the terms of the trust are not a matter of public record.
A living trust can be revocable or irrevocable. A revocable trust can be changed or terminated by the grantor at any time, while an irrevocable trust cannot be changed or terminated without the consent of the beneficiaries.
Overall, a living trust can be a useful estate planning tool for those who want to avoid probate, preserve privacy, and maintain control over their assets during their lifetime. However, it’s important to consult with an attorney or financial advisor to determine whether a living trust is right for your specific situation.
FAQ: What are the pros and cons of a living trust?
There are several pros and cons of a living trust. Some of the main advantages include:
- Avoidance of Probate: As mentioned earlier, a living trust can help you avoid probate, which can be time-consuming and expensive.
- Privacy: A living trust can help keep your financial affairs private since it doesn’t have to go through probate, which is a public process.
- Control: A living trust allows you to retain control over your assets while you’re alive and well, and you can specify how your assets should be distributed after you pass away.
- Flexibility: A living trust can be tailored to meet your specific needs, and you can make changes to it at any time.
- Protection: A living trust can offer protection for your assets from creditors or lawsuits.
Some of the potential disadvantages:
- Cost: It can be more expensive to set up than a will.
- Time-consuming: Creating a living trust can be more time-consuming than creating a will, as you’ll need to transfer your assets into the trust.
- No Tax Advantage: While a living trust can help you avoid probate, it does not offer any tax advantages.
- No Automatic Protection: A living trust won’t protect your assets from creditors or lawsuits unless you take additional steps to do so.
- Mismanagement: If you name the wrong person as trustee, or if the trustee mismanages the trust, it could cause problems for your beneficiaries.
Overall, a living trust can be a useful estate planning tool. It will help you avoid probate, preserve privacy, and maintain control over your assets during your lifetime. However, it’s important to carefully consider the pros and cons of a living trust before paying to set one up.
FAQ: What assets should be included in a living trust?
Generally, most assets that you own should be included in a living trust, with a few exceptions:
- Real estate: This includes your primary residence, rental properties, vacation homes, and any other real estate you own.
- Bank accounts: All bank accounts, including checking and savings accounts, should be included in the trust.
- Investment accounts: Any investment accounts, including brokerage accounts, mutual funds, and retirement accounts, should be included.
- Business interests: If you own a business, you can include it in the trust.
- Personal property: This includes items like jewelry, art, furniture, and other personal possessions.
FAQ: Assets that could be excluded from a living trust
- Life insurance: You can name beneficiaries for your life insurance policies, so they don’t need to be included in the trust.
- Cars and other vehicles: These assets can usually be transferred outside of the trust.
- Household items: While you can include household items in the trust, it’s usually not necessary or practical to do so.
- Debts: Debts owed to you, such as promissory notes, can be included in the trust, but debts that you owe should not be.
- Payable-on-death accounts: These accounts can be transferred outside of the trust by naming beneficiaries.
It’s important to keep in mind that every situation is unique. What works for one person may not work for another. Consult with an attorney or financial advisor to determine which assets should be included or excluded from your living trust.
What are the costs associated with a living trust?
The costs associated with a living trust can vary depending on a number of factors, such as where you live, the complexity of your estate plan, and whether you hire an attorney or use an online service to complete the work. Here are some of the potential costs you may encounter:
- Attorney’s fees: Attorneys might charge several thousand dollars, depending on the complexity of your estate plan.
- Online services: You can use an online service for a lower cost than hiring an attorney. That cost typically ranges from a few hundred dollars to $1,000.
- Filing fees: Depending on your state, you may need to pay filing fees to transfer assets into the trust.
- Asset transfer fees: If you have a lot of assets to transfer into the trust, you may need to pay fees to transfer them. These fees might include real estate transfer fees or fees for updating beneficiary designations on financial accounts.
- Trustee fees: If you name a professional trustee to manage the trust, they may charge a fee for their services.
It’s important to carefully consider the costs associated with a living trust and determine whether the benefits outweigh the expenses. While a living trust can be more expensive than a will upfront, it can potentially money in the long run by avoiding probate. Consult with an attorney or financial advisor to determine the best course of action for your specific situation.