Trust termination is the complex process of transferring assets left in the trust upon a triggering event. Often times the triggering event is the death of the grantor of a revocable trust. Due to the myriad of situations that are present with trusts, the termination of a trust will be different with each situation. I have outlined a typical list of what will happen when a trust is terminated.
Initial correspondence with trustee, letter to file will with probate court, letter requesting death certificates, letter to post office notifying them of death, letter to social security notifying them of death, and letter to beneficiary.
Creditor correspondence and notification.
Asset organization and inventory.
Real Estate Valuation and Correspondence.
Inventory to determine new tax basis of assets.
Disclaimer – if beneficiary chooses to disclaim some or all of assets.
Testamentary Trust – Documents required to fund any trusts which are to be funded from the revocable trust. Includes SS-4, Application for Employer Identification Number, Form 56, and Notice Concerning Fiduciary Relationship.
Transfer of Assets.
Often times the benefits of estate planning are trumpeted because of the cost savings of avoiding probate. Unfortunately, the costs of terminating a trust are often ignored. Depending on the size of the estate, the costs of creating an estate plan AND terminating the trust should be weighed against the costs of probating an estate in determining how complex the estate plan should be.
It must thereafter be determined if a will is necessary. Often times the deceased person has titled all of his assets as Joint Tenants with Right of Survivorship. This means there is a co-owner to the assets and the co-owner will automatically assume 100% ownership of the assets at the death of the decedent. If this is the case, the surviving co-owner generally must provide only a death certificate to the custodian of the asset(s) to retitle them in the name of the surviving co-owner.
If there was no will and the assets were not titled as JTWROS, it must thereafter be determined if the assets were titled in the name of a trust where the deceased person was the grantor of the trust. If they were, termination of the trust is necessary.
If there was no will, assets were not titled as JTWROS, and there was no trust, a few factors come into play next that determine the status of the assets left by the deceased person. Was the deceased married? Has anyone survived the deceased? Does the deceased have siblings or parents still alive? Thereafter, the state of Pennsylvania has enacted statutes which direct the distribution of assets of the decedent according to who is surviving the decedent (often referred to as per stripes).
Probate is the process of proving the will has been executed correctly and the person creating the will was of sound mind and undue influence. Thus, the will must be produced to the register of wills along with any other related papers in the county where the decedent had his last family or principal residence. Other related papers may include papers incorporated by reference in the will, old wills or codicils, etc.
Typically the process begins by determining IF someone had a will. Hopefully this question will be easily answered. Assuming there is one, I have laid out a typical scenario. Please keep in mind that events aren’t always typical and there will always be deviations from the course.
A funeral will generally be held for the deceased person. The person who expects to be named as a personal representative (usually named in the will) might pay for the funeral and expect to be reimbursed for costs associated with the funeral as long as they are reasonable in light of the decedent’s assets and his station in life.
Probate of Will begins.
Obtain Letters of Administration. The Letters of Administration is where the personal representative named in the will obtains letters of administration. The Letters of Administration are necessary so parties involved (banks, financial institutions, title companies, etc) are informed of who has legal status to act on behalf of the decedents estate.
Advertising of Letters of Administration.
Gathering of assets and information to include contents of safe deposit boxes, investments, homes, tax returns, debts. etc. Hopefully these were outlined in the will.
Administration of Estate – paying creditors, paying administrator of estate, notifying utility companies, social security, etc.
Filing of inventory of estate with register of wills.
Pennsylvania Inheritance Tax – if filed within 3 months of death, a 5% discount will be applied to the tax return. Otherwise, the tax return must be filed within 9 months. A 6 month extension may be requested.
Pennsylvania Estate Tax – generally must be filed within 9 months of decedent’s death.
Pennsylvania Income Tax – return is due on the same date that it would have been due had the decedent lived to the end of his taxable year.
Federal Inheritance Tax – generally must be filed with 9 months of the date of death. This is a tax on the transfer of assets and two different dates may apply for when assessing the valuation of the assets for income tax purposes.
Federal Individual Tax Return – the return is due on the same date that it would have been due had the decedent lived to the end of his taxable year.
Accounting of Administration of Estate. May be filed at least four months after letters of administration have been granted.
Retitling property into the trust is a very important part of your estate plan. Without retitling the assets properly into the trust you will not be able to avoid probate if this is one of your goals. In addition if property is not titled correctly your estate plan may not function correctly. For example if you intend for a certain account to be distributed through the trust however it was still owned in joint name when you pass away that property will not be distributed pursuant to the trust and will instead pass directly to the joint owner of the account. We feel that the retitling of property is so important that we devoted an entire section of your estate planning to the retitling process.
As mentioned before the Revocable Living Trust is only a part of your estate plan. You will still need a will, which is generally a Pour Over Will which acts as a safety net to pour anything that was not properly titled into the trust. Also a Power of Attorney is still a very important document as it allows continued planning if you become incapacitated. It will also allow for the Power of Attorney to continue to fund the trust if it is only partially funding when you become incapacitated. Finally documents for health care decision such as the Health Care Proxy and/or the Living Will are still important documents, as they are needed in to handle your health care type decisions.
The Grantor in this case is you, it is the person who sets up the trust. It is generally also the person who funds the trust. The Trustee is the person who is responsible for administering the trust, investing the assets and handling any of the administrative duties which need to be performed. Finally the Beneficiary is the person who benefits from the trust. This is the best position to be in with any type of trust. Normally a Revocable Living Trust is set up such that you take all three of these duties. You are the person who sets up the trust, you are the trustee who administers the trust during your lifetime and you are the one who is paid the income and benefits as a beneficiary of the trust during your lifetime.
Upon your death your trust will become irrevocable and is no longer able to be amended or changed. All of the assets that were in your trust will still be considered in your estate for tax purposes and the Trustee or Successor Trustee if you were still the Trustee at the time of your death will then take over duties and distribute the assets according to your particular estate plan. Please note the Trustee may also be responsible for some miscellaneous such as insuring that a final tax return is prepared and upon distribution of the trust that a final accounting has been done. It is a good idea for the Trustee at the time to contact your attorney to ensure that all things are properly concluded at your death.
Generally to amend or change your Revocable Living Trust or to revoke it you must have proper papers prepared to reflect any changes. If you decide that you want to change or revoke your trust you should get in touch with your attorney in order to make the changes or to properly revoke it.
During your lifetime and as long as you are the trustee and managing the trust all of the items which you place into the trust will be taxed using your social security number, therefore you will not see any change at all tax wise. All income will be reported on your normal income tax return as it was before you set up the trust. Also note the trust will not have an effect on estate or gift taxes as when you pass away any assets which are in the trust will be considered in your taxable estate for estate tax purposes. However proper planning with your Revocable Living Trust will allow you to minimize your estate taxes especially between a married couple taking advantage of the exemptions allowed by law.
One of the disadvantages of the Revocable Living Trust is that any expenses which you incur are done so immediately. The expenses are not deferred until your death, as is the case in probate. In addition by properly funding the trust there may be incurred expenses for retitling of assets depending on your situation. Finally there may also be fees for a Trustee who is allowed a commission for managing the trust. Please note however these fees are generally waived and not taking because normally the trustee is a family member who is going to be an ultimate beneficiary of the trust.
The use of a Revocable Living Trust allows for property to be managed uninterrupted by incapacity. Through proper planning and funding of a Revocable Living Trust if you were to become incompetent your Successor Trustee will be able to step in and manage all your financial affairs for any items that are in the trust. By doing this planning you can avoid the painful and very expensive process of having a guardian appointed if you were to become incapacitated. Another major benefit of the Revocable Living Trust is that it avoids probate. Please note that by doing a Revocable Living Trust you will not avoid all costs, as you will still have to pay legal fees for the drafting of the trust and other incidental expenses. However the use of the trust will allow you to avoid much of the time delays and aggravations which are associated with the probate process. Further if you have property in other states than where you reside it will also allow you to avoid probate in those states. Finally some people like that a Revocable Living Trust provides privacy versus the probate process.
During your lifetime your Revocable Living Trust will pay all of income made to you. In addition it allows for you to use any principle that is needed or requested. Upon your death the Revocable Living Trust will distribute pursuant to your distribution plan in a manner similar to your will. As previously mentioned that there are several advantages of a Revocable Living Trust versus a will.
One of the major benefits of having a Revocable Living Trust is allowing you to avoid probate. Also it will allow you to seamlessly manage your assets if you become incapacitated. Please note however that the Revocable Living Trust does not replace your will, although it will act similar to a will and distribute the property pursuant to your wishes. Any good estate plan including a Revocable Living Trust will include the use of a Pour Over Will which will pour any assets which have not been titled into the trust into in upon your death. More information about the benefits of a Revocable Living Trust will be discussed later and for more detail of a Pour Over Will please see your section regarding the use of a Pour Over Will.
A trust is a multifunctional instrument used for several purposes. To use a metaphor, it is like an intelligent cardboard box; you tell it what to do and it does it for everything you put inside. It is different from a will because a will provides a direction for the planned distribution of assets upon death. Upon death, those assets must get re-titled to whomever you directed them to. A trust is different because it can provide a direction for the planned distribution of assets and provides for the re-titling of those assets into the trust immediately. Thus, because the assets are already in the trust, the trust can transfer the assets upon the triggering of some event. Because the person creating the trust has already proved that was his intention (to put the assets in the trust) he does not have to prove the contents of the trust (like a will). Thus, there is no probate. In addition, a trust can be created for other uses such as a special needs trust or income only trust.
The trust can be either a revocable or irrevocable trust. A revocable trust means that the person who created the trust (grantor) holds a discretionary interest in the trust after it is created. A discretionary interest means the grantor can direct how he would like the assets in the trust be invested/gifted/spent until the triggering event (which is usually death). An irrevocable trust means the grantor is giving up control and has no discretionary interest until the triggering event occurs. You’re probably asking yourself ‘why in the world would I want an irrevocable trust?’ Well, in the world of estate planning and Medicaid Planning, there are plenty of reasons that make common sense.
Of ten there are different types of trusts created for different purposes. To boil the reason of why you would have a revocable trust versus an irrevocable trust into one sentence is almost impossible. However, most people will have an irrevocable trust created when they are trying to keep the benefits those assets give them without disqualifying themselves from receiving benefits those same assets will prevent them from having. Huh? To illustrate, there two kinds of trusts I will explain in more detail under Special Needs Trust and Income Only Trust.
Trusts can have other valuable uses as well. Often, revocable trusts are created as part of an estate plan that minimizes the impact of inheritance and/or estate taxes levied by the Federal Government. Revocable trusts can also be created to prevent the probate of property owned in various states. Probating assets is generally undesirable because it is a public process that can be result in litigation. Instead, the property will be owned within the trust and the transfer of the property can take place by proof (death certificate and certificate of authority) of the triggering event (usually death) as specified in the trust.
Special Needs Trusts
In essence, a Special Needs Trust is an instrument created to protect the assets of someone who is disabled and is/will be receiving public assistance. By placing the assets in this trust, the disabled person can still receive the benefits of those assets and still maintain eligibility for public assistance.
The special needs trust is usually created by one of two persons. In the first instance, the parents of a disabled child (usually called third party special needs trust) might incorporate a special needs trust into their estate plan that automatically places the inheritance their disabled child would receive into the special needs trust. In the second instance, the disabled person might create the special needs trust themselves upon receiving a gift, inheritance, or personal injury award that might other otherwise disqualify them from receiving public assistance.
The special needs trust is an irrevocable trust, so the creator has no control over it and the disabled person has no discretionary control. Instead, a trustee has discretionary control over the assets and must use sound fiduciary duty to utilize assets in the trust when they are necessary. Because the benefactor of the trust is disabled, they are usually on some type of public assistance that they would normally be disqualified from receiving if they had control over assets. By placing the assets in an irrevocable trust, the child or disabled person retains the benefits of the trust without disqualifying themselves from public assistance.
A special needs trust works great for Medicaid Planning purposes because the beneficiary is not considered to own the assets in the trust. Thus, it is usually not a disqualifying event for Medicaid eligibility purposes.
A power of attorney (POA) is a document that gives a person, typically called the agent, power to make decisions on behalf of the person creating the power. There are two types of powers of attorney: a regular power of attorney and a durable power of attorney.
A regular power of attorney can be implemented giving the power designated as the agent the power to make decision for the person creating the power of attorney. The decisions are usually financially related and involve either direct power to make cash decisions or the power to make a financial decision that is not cash related such as a house signing, car signing, etc. This type of power of attorney becomes ineffective if the person who grants the powers becomes unable to make decisions for themselves or the person dies (with limited exceptions). To grant this type of POA, a person must make a durable POA.
A durable power of attorney remains in effect even if the person granting the power becomes mentally incapacitated. In this case, the person who becomes mentally incapacitated will usually grant the agent the power to make financial and medical decisions. The medical decisions granted may include limited medical procedures but should not grant the power to make life sustaining procedures. Those powers are strictly reserved by the person who makes a living will for themselves. The durable power of attorney ends when the person who grants the power dies (with limited exceptions).
A “living will” is an instrument that provides for life sustaining procedures to be administered to a person. Pennsylvania was the last state to enact legislation which allowed for a living will when it enacted the Advance Directive for Health Care Act in 1992.
In Pennsylvania, specific meaning is given by the statute that triggers the operation of the living will. Those conditions include the fact that a person must be declared incompetent and is either in a terminal condition or permanent state of unconsciousness. A doctor must certify that a person is in this condition and obtain a second opinion as to those facts. A living will must specifically state clear and convincing evidence of the intention of the patient in regards to refusal of treatment.
A will is an instrument used to plan for the distribution of your assets at the time of your death. A will is an important form of estate planning that can range from simple to complicated. A properly designed will at a minimum should include arrangements for how to pay for your funeral, who should be named as your executor/executrix, what assets you have, and who should be entitled to receive those assets.
A will has some advantages and disadvantages. The main advantage to a will is the rather simple form that it takes; it is a piece of paper, that when properly executed, will give others a game plan to follow with your assets upon your death. It is also relatively inexpensive to make.
The main disadvantage to a will is the fact that it can be expensive to probate. A will must be probated to prove the intentions of the person creating the will (testator) were spelled out in the trust. In Pennsylvania, attorney’s usually charge a commission (upon approval by the Orphan’s court) to probate an estate. This fee usually ends up costing more than the price of creating a trust, which will eliminate the need for probating an estate. Another disadvantage is the likelihood of a will contest stemming from an error in executing the will. Executing the will is fancy way of simply saying “will formation.” In Pennsylvania, the person creating the will must not be under undue influence form a third party when creating the will. Often times one or more persons will claim the testator was under an undue influence by a third party and the resulting will was not the made with the true intentions of the testator. This could result in a will contest, delay distribution of assets to the heirs of the will, and cause the costs of the probate to significantly increase.
Lastly, other factors could make a will a poor choice for estate planning. This might be the case if a person holds property in several states. In Southeastern Pennsylvania, for instance, many people own shore property in New Jersey, Delaware, and Maryland. If a will is used for estate planning purposes, the will must admitted for probate in all states the property is owned in if the will is used as an instrument to distribute that property. This is obviously prohibitive because of the cost and time it takes to probate a will in another state.
Generally, they lose all rights and have no obligations. They have no right of contact with the child, cannot obtain information about the child and have no obligation to support the child. However, there are “open adoptions” in which parents may by agreement retain some rights to contact with the child and sharing of information about the child.
An unfit parent is one who has failed to have regular contact with a child or to contribute to his or her support. A parent is also unfit if he or she has been abusive or has otherwise failed to provide adequate care for the child.
A divorce does not affect the legality of the adoption. The stepparent continues to have all of the rights and responsibilities as the biological parent, including a right to seek custody and a duty to support the child.
A stepparent adoption is one in which a child’s biological parent marries someone who wishes to adopt the biological parent’s child and is able to do so because the other biological parent consents or because consent is unnecessary. If a biological parent does not consent to the adoption, the child cannot be adopted unless a court first finds that the biological parent is unfit. If a biological parent is found unfit, that persons parental rights can be terminated and a child can be adopted.
In most states, court adoption records are sealed and can only be opened by court order. However, Pennsylvania requires that certain non-identifying information, such as the medical history of the biological family, be made available to the adoptive parents at the time of the adoption.
Grandparents are able to file a petition for partial custody or visitation. They may petition when a parent of the child has died, where the parents of the child have been separated for six months or more, or when divorce proceedings have commenced, or when the child has lived with the grandparents for 12 months or more and subsequently been removed from the home by his or her parents. Grandparents may also seek primary physical custody of the grandchild under very limited circumstances.
When parents are unable to communicate regarding the day-to-day needs of a child, the court can require individual counseling for each parent, counseling for the child or require the parties to attend co-parenting counseling sessions to ensure that they are able to learn to communicate, if only, when dealing with the child.
Before an individual may remove a child from his or her jurisdiction, that person needs to obtain the consent of the other parent or court approval. In order to obtain court approval, that parent must file a relocation petition and prove several factors such as whether the move will be in the best interest of the child, whether that party is moving simply to deny the other party access to the child, and whether or not reasonable alternate custody can be given to the non-relocating party.
If an individual relocates without the other parent’s consent or court approval, that party risks the court denying the relocation or making the child return to the jurisdiction pending a full hearing on the matter, which could take several months. This can be extremely burdensome on the party who has relocated since he or she may have already secured a new residence or enrolled the child in a new school.
The court may award shared custody based on four criteria. First, both parents must be capable of making child-rearing decisions and willing to provide care and love to the child. Second, both parents must be willing to have continued and active involvement in the child’s life. Third, the child must find both parents as sources for love and security, and last, there must be at least a minimal amount of cooperation between the mother and father.
The basis in which courts award custody is often complicated. They take into account numerous factors in deciding custody and consider all relevant factors that could affect a child’s well-being. Who the primary caretaker has been, where would siblings be raised together, the fitness of the parents and past misconduct and mental illness of the parents are just some of the factors used.
Legal custody: The legal right to make major decisions affecting the best interest of a minor child, including medical, religious and educational decisions.
Physical custody: The actual physical possession and control of the minor child.
Partial custody: The right to have the child away from the custodial parent for a certain period of time.
Shared custody: An order awarding shared legal or shared physical custody or both of a minor child in a way to assure the child’s frequent and continuing contact with both parents. Shared custody need not be equal in time split between homes of parents.
Visitation: The right to visit the minor child. This does not include the right to remove a child from the custodial parent’s control.
Temporary custody: An order awarding physical possession of a child pending the final determination of custody.
Sole custody: An order awarding sole custody to one parent only when it is in the best interest of the child.