WHAT IS LIVING TRUST ADMINISTRATION?

When the grantor (the person who created the trust) dies, certain steps must be taken to comply with state law, to preserve the federal estate tax exclusion amount, and to change title to assets. This is called “trust administration,” and the complexity of the administration depends on the number and type of assets, their total value, and whether the trust includes tax planning provisions.

WHAT STEPS SHOULD BE TAKEN FOR ALL GRANTORS WHO DIE?

The decedent’s will must be filed with the county clerk, and a statement must be filed with the county assessor stating whether the decedent owned real property. Major assets must be appraised and an inventory must be prepared. If the estate is more than $2 million (if death occurs in 2008), or $3.5 million (if death occurs in 2009) a federal estate tax return must be filed. Income tax returns also must be filed for the estate and for the decedent. If the trust became all or partially irrevocable as a result of the death, the decedent’s heirs and trust beneficiaries must be notified of that fact and given an opportunity to request copies of the trust.

WHAT SHOULD BE DONE IF THE GRANTOR HAD AN EXEMPTION TRUST?

The purpose of an exemption trust (also called by many other names, such as bypass trust or credit shelter trust) is to reduce or eliminate the federal estate tax. To create the exemption trust, the surviving spouse must take all of the steps described above, and also transfer certain assets to the exemption trust. This is an irrevocable trust and the surviving spouse will also have to file additional income tax returns and accounting to ensure that the exemption trust will meet state and federal requirements.

WHAT MAY HAPPEN IF AN EXEMPTION TRUST IS NOT ADMINISTERED?

If the surviving spouse does nothing to administer the trust after the death of the first spouse, the exemption trust will not exist and will therefore provide no tax reduction benefit to the estate. As a result, the couple’s estate will pay higher estate taxes. The exemption trust must be properly funded, and other procedures must be followed, such as filing income tax returns, or the trust will be included in the surviving spouse’s estate for federal estate tax purposes, raising the federal estate taxes for the estate.