What You Need to Know to Avoid Unintended Liabilities
A Successor Trustee must be aware of his or her responsibilities after death of the Grantor. The Trust may have been created to avoid probate, ease administration, or protect family assets. Many times it sets unrealistic expectations as to what occurs at the death of the Grantor. Trustees may assume that the division and distribution of the Trust is “automatic” or that it alleviates the need for any post-death tasks. However, this could not be further from the truth. The Successor Trustee will likely need the assistance of legal counsel, a CPA, and financial advisor to complete final tasks before terminating the Trust. Skipping steps, not following the Trust’s directions, or ignoring trust law could unintentionally make the trustee liable for mismanagement of the trust. Here are just a few issues a Successor Trustee should be aware.
The Successor Trustee should carefully review the Trust document to determine how the decedent’s final expenses will be paid. Paying an expense in which the Trustee is not permitted could open up the Successor Trustee to liability to the beneficiaries. For example, Indiana law requires most creditors to follow a precise process through the court system in order to be paid on their claim. Letting the creditor skip this statutory required process could open the Trustee up to liability.
If the trust was a Grantor Trust, the taxation of trust assets will change significantly upon the death of the Grantor. Most often a new tax identification number for the trust will need to be obtained. The Trustee must also be aware of the income tax ramification of any IRAs payable to the Trustee at the death of the decedent. A misstep here could cost the beneficiary of the trust and the blame will be placed directly on the Trustee.
If the Successor Trustee’s duties began upon the death of the decedent, it’s the Trustee’s responsibility to notify various institutions. All institutions in which the trust has assets must be sent notification and proof that he or she is now the acting Trustee.
Review the trust document to determine what kind of accounting the Successor Trustee must deliver to the beneficiaries. The accounting should demonstrate how the Trustee spent trust money, what assets the Trustee obtained, and the disbursements of trust assets. It is important for the Trustee to be aware of their accounting responsibilities. While Indiana Trust Law provides for a statute of limitations for beneficiaries to object to the way the Trustee administered the Trust, this statute of limitations period does not start until a proper accounting is delivered to the beneficiaries.
Indiana Trust Law requires that each beneficiary receive a prorated share of each trust asset. The trust document may modify this default rule, but the Successor Trustee must know how to distribute assets to the beneficiaries. In addition, the Successor Trustee will be responsible for ensuring any trusts for the remainder beneficiaries are established before making distribution.
The deceased’s affairs may require other tasks to be completed. For example, the decedent’s final income tax return will need to be filed. In rare circumstances, a death tax return may also be required. It is typically also a good rule of thumb to file the decedent’s Last Will and Testament with the Court even if a probate estate will not be opened.
The Successor Trustee should not overlook his or her responsibilities upon the death of the Grantor of the Trust. Following the Trust’s instructions and consulting appropriate professionals is the best method to maintain family harmony and avoid unintended liability claims.