TRUSTS – DUTY TO ACCOUNT TO BENEFICIARIES & TYPES OF ACCOUNTING
By: David L. Crockett, Attorney, CPA
Types of Accounting: Trust accounting may be (1) Informal; (2) Formal (non-court) according to Probate Code §16063 format; or (3) Court accounting according to Probate Code §1060 et. seq. requirements. The trust accounting is to be prepared by the Trustee and/or under his/her authorization.
TRUST ACCOUNTING LAWSUIT/PETITION PROCEDURES
By: David L. Crockett, Attorney, CPA
Trust terminology basics. A trust is created by a written document known as a declaration of trust, and is then funded by transfer of money into trust bank accounts and/or deeding or transferring of properties to the trust. The creator of the trust is known as the “Trustor” or the “Settlor.” Trusts are usually prepared by attorneys because each trust is custom for the situation and there are many types of trusts. The persons who are to receive money and property out of the trust are known as the “Beneficiaries. The person or institution that takes care of the money and property of the trust is the “trustee”. The trustee is bound by law to follow the directions contained in the declaration of trust. Trusts are not supervised by the court system and are not registered with the state government upon formation. Trusts are essentially private contracts between the trustors, the trustees and the beneficiaries. There are laws written into the California probate code that control the governance of trust matters.
AN APPRAISAL IS NEEDED UPON DEATH OF A PROPERTY OWNER. A routine part of trust administration or probate administration is to obtain an appraisal of each property owned. This is for income tax reasons. Because the income tax basis is increased “stepped up” upon death to fair market value an appraisal is needed to prove the exact date of death value. A licensed appraiser is needed to do this. A realtor’s letter of value opinion is not sufficient. There are licensed residential appraisers and licensed commercial property appraisers. Aside from tax purposes, an appraisal is also useful to determine actual value to help to deciding what to do with a property.
INCOME TAX “BASIS” CONCEPT. Under our system of federal and state income tax, if the property is sold before death for more than what was pay for it then there is a capital gain. There are special rates which apply to capital gains depending upon one’s tax bracket. To compute capital gains, you subtract the income tax basis of the property from the net selling price. The income tax “basis” is what was paid for the property in the first place minus any depreciation and adding any expenditures for capital improvements.
DEATH AFFECTS THE BASIS. The basis of property acquired from a deceased person’s probate estate or trust is generally it’s “fair market value” on the date of the decedent’s death. Thus, the children who inherit a property from their parents through a trust or through a probate proceeding will have a date of death income tax basis. This is known as the step-up in basis at death. An appraisal is necessary to legally prove the date of death value.
SORT OUT WHAT NEEDS TO BE FILED. A routine part of trust administration or probate administration is for the Probate Executor or the Successor Trustee of a living trust to sort out the income tax situation. First, you have to determine if the individual income tax return filings of the deceased are up to date. Individual tax returns, form 1040 federal and form 540 state are due each April 15 for the previous year. Thus, 2016 returns were due on April 15, 2017 and so on. It is the responsibility of the Executor or Successor Trustee to make sure the proper returns are filed.
INDIVIDUAL RETURNS FOR THE YEAR OF DEATH. Individual income tax returns are due for the year in which a person dies, even if they do not live until the end of the year. Thus, if a person dies on October 10, 2016 for example, the normal individual returns for 2016 would have been due April 15, 2017. The due date can be extended 6 months by filing extension request forms by April 15. The returns filed should check the box “final return” and state the date of death of the deceased. If you forget to check the box of it being a final return, then the IRS will keep sending you letters in later years asking for returns to be filed.
FIDUCIARY RETURNS FOR THE YEAR OF DEATH. In addition to the individual tax returns, fiduciary income tax returns, forms 1041 federal and 541 for the state are due if the estate or trust has income received after the death of the person involved. (If the income is below the filing limit for that year the fiduciary returns may not be due but there may be reasons to file them anyway so the trust has a complete filing history.) Thus, in the above example of a person who died on October 10, 2016, there would need to be fiduciary tax returns filed to report the income received from October 10 until December 31, 2016. Those returns would be due April 15, 2017 but can be extended 5 months until September 15 if extension application forms are filed by April 15. This situation typically occurs where the trust or estate has income earning assets such as bank accounts or stock market accounts or rental properties.
TRUST DISTRIBUTIONS
(“When do I get my money?”)
By: David L. Crockett, Attorney, Certified Public Accountant
Typical situation. An elderly mom with two adult children, Sally & John, passes away with a house full of nice personal belongings (furniture, antiques, crystal and jewelry). Sister Sally lives with mom or in the same town and brother John lives 500 miles away. When mom passes, Sally notifies John but it takes him a couple of days to get into town for the funeral. Meanwhile, Sally picks through the personal belongings and takes for herself what she wants and doesn’t tell John about it.
What actually should be done but rarely happens. A Upon a death, the law requires that the deceased person’s personal property as well as money and real property be inventoried and accounted for. Whether it is a probate situation or a living trust situation (i.e. no probate because of there being a trust in place), somebody needs to pay immediate attention to the personal property within a day or two. It is a sad fact of life that I and nearly all other estate attorneys have observed that personal property often disappears without any trace unless steps are taken to preserve it. In the ideal situation, the entire house including the personal property is photographed immediately and then detailed lists are made, room by room, of what is there. Then, a personal property appraiser is hired to make a detailed listing of everything and appraise the values. Few people realize it, but there are professional appraisers. One resource is the American Society of Appraisers which can be found at http://www.appraisers.org/Disciplines/Personal-Property
What can be done to recover missing personal property? The short answer to this is that very little if anything can be done. This is the classic case of once the horse is out of the barn the remedies are few an ineffective. Theoretically, as in the example above, brother John can file a probate court petition against sister Sally but it is up to John and John’s attorneys to prove that Sally took the items in question. Unless there are photographs or written evidence created very close to the mom’s passing, John can’t produce evidence to prove (a) what the missing items were and/or (b) that mom still owned them at her death or (c) that Sally took the missing items. If John files against Sally she will typically deny any knowledge of anything. If it were money missing, then bank records can be subpoenaed to prove what money was taken and whose account it went into. Not so with personal property, unless the items are of significant value or are put up for sale in something observable such as Craig’s list. Because mom’s personal property is not typically on people’s minds in mom’s last days, not a lot of care or record keeping is done to keep track of what there is.
A father dies without a will leaving an estate of $100,000. Under the laws of intestate succession which apply because there is no will, his 4 children are to receive equal shares of the estate which would be $25,000 each. However, during the 10 years leading up to his death, the father had transferred $20,000 cash in total to his son Johnny thus creating a pre-death transfer. There was no documentation stating whether the $20,000 was a gift or a loan or an advancement against Johnny share of the father’s estate.
Probate Asset Inventory & Collecting – If a person passes away leaving money or property there may need to be a probate court administration of the estate. If there is a living trust and all of the deceased person’s assets have been placed into the living trust prior to death, there is no need for a probate court administration and the procedures discussed in this article would not be applicable to a living trust situation. The point of a probate court administration is to get somebody appointed as the administrator or executor of the estate (also known as the personal representative) who has authority of the court to handle to inventory and handle the money and property and accounts of the deceased person. Upon appointment by the court, the administrator will obtain a form signed by the court entitled letters of administration. The personal representative will then take the letters of administration over to all banking and securities institutions and have the accounts transferred out of the name of the deceased and into the name of the personal representative.
If a person passes away leaving money or property there may need to be a probate court administration of the estate. If there is a living trust and all of the deceased person’s assets have been placed into the living trust prior to death, there is no need for a probate court administration and the procedures discussed in this article would not be applicable to a living trust situation. The point of a probate court administration is to get somebody appointed as the administrator or executor of the estate (also known as the personal representative) who has authority of the court to handle the money and property and accounts of the deceased person. The personal representative is also responsible for paying the debts and taxes before the estate is distributed out to the heirs.
Up until 1997 a person could legally change his or her estate plan and the people previously benefited did not have any legal way to find out what the situation was. Before the law was changed to require disclosure as it is now, the state legislature committee reviewing the proposed legislation was presented with a case of a 90-year-old man who met the “love of his life” on a bar stool and married her three months later.
Orange County Estate Planning Lawyer Blog