"Transitions for Family Trusts"
Published in the Hokubei Mainichi, Aug. 1, 2008
It’s easy to find consumer finance articles that explain why to place a household’s assets in a family trust. The reasons are widely known: to avoid court probate proceedings and possibly estate tax, and to maintain financial continuity despite a death in the family.
It’s harder to find popular articles about maintaining trusts once they’re created. With such an imbalance of public information, you might easily think a trust could operate forever by itself. In fact, trusts are finite, if long-lived, entities, and they need maintenance, known formally as trust administration.
This article is the first in a series explaining some basics of California trust administration to readers of the Hokubei.
After a close family member such as a spouse or parent passes away, it is important to contact a lawyer as soon as possible. Executors and trustees must fulfill certain duties according to a timetable.
If the executor or trustee fails to give notice to beneficiaries, file tax returns, or meet other essential deadlines, the delay can give beneficiaries a right to complain in court or may increase tax liability.
Here are a few examples of deadlines to meet after a death — but be warned that these aren’t the only deadlines. In particular, this list doesn’t address the varying federal tax deadlines, which can change according to the estate’s size and characteristics.
• The trustee or executor is required to lodge the deceased person’s will with the Superior Court within 30 days of a death.
• Within 60 days of the death, a trustee must send a specific notice to all beneficiaries and heirs. Failure to meet the 60-day deadline can enlarge the time window in which a named beneficiary or potential heir may dispute provisions of the estate plan. Such delays can complicate the inheritance process.
• It’s always worth checking if a deceased person who received long-term care, especially in a nursing home, might have received Medi-Cal benefits. Although Medi-Cal is often viewed as a poverty program, middle-class people who own their own homes may sometimes receive Medi-Cal benefits for long-term care.
In such situations, Medi-Cal staff must be notified of the death within 90 days so they can decide whether it is appropriate to make a claim against the estate for the cost of the deceased person’s care.
• Preliminary real estate transfer papers should be filed with county assessors within 150 days of the death or 45 days after written request from the assessor’s office. Where appropriate, heirs or trustees should additionally file for the valuable parent-child reassessment exclusion.
Passed as Proposition 58 on the November 1986 ballot, this exclusion allows children who inherit certain property from their parents to continue paying property taxes based on the same assessed value as before — even if Proposition 13 froze that value many years ago.
It’s important to accomplish the property transfer and get the parent-child exclusion (if any) approved before the county automatically reassesses the property at current market rate. Otherwise, heirs can receive a nasty bill several thousand dollars higher than necessary.
Fortunately for heirs, though, it is still possible to seek the exclusion retroactively, even after paying an increased tax bill. A claim for reassessment exclusion for transfer between parent and child is timely if it is filed within three years after the date of purchase or transfer, or prior to the transfer of real property to a third party, whichever is earlier.
A claim form is also timely if it is filed within six months after the date the assessor’s office mails a notice of supplemental or escape assessment.
• If a trust for married people was designed to split into two parts at the first spouse’s death, assets may need to be divided between the two trusts in time to meet the nine-month disclaimer deadline (we’ll discuss this more in a later article).
Generally, California law makes trustees responsible for careful management of money and property. This includes filing and paying taxes as necessary, protecting the inheritances of future beneficiaries, maintaining records, keeping beneficiaries informed, and closely supervising any staff who may work on the trust such as accountants or investment managers.
When a trustee dies or otherwise stops serving, the remaining trustee(s) must change trust paperwork and titles held by the trust to reflect the fact.
It can take a surprising amount of work to follow financial institutions’ procedures to change over the trustees’ names on investment accounts, insurance policies, bank accounts, etc. This work becomes especially important when one or more of the trust’s original creators pass away.
These tips are just a start on our introduction to this complex area. We’ll be contributing future articles on topics that include trust administration upon the death of a spouse, dividing assets when a death causes a trust to split into two parts, and preserving tax advantages for inheritors of real estate and investments.
The Law Offices of Laurie Shigekuni
San Francisco Office
2555 Ocean Avenue
San Francisco, CA 94132