A grantor establishes a trust to ensure that beneficiaries receive the assets placed in the trust. However, not all trusts are the same. The most significant difference is whether it is revocable or irrevocable. For a revocable trust, what happens after the grantor dies is a relatively straightforward process. The same cannot be said for an irrevocable trust. Several factors come into play that define what happens to an irrevocable trust when the grantor dies.
What is an Irrevocable Trust?
As the name suggests, the grantor of an irrevocable trust cannot change or cancel the terms of the trust after all parties involved have signed off on the deal. When a grantor creates an irrevocable trust, the grantor gives up complete control of the assets named in the trust. Despite the inflexible nature of an irrevocable trust, it remains a popular way to protect the assets of heirs while delivering tax advantages.
The trustee managing the trust pays the taxes generated by the trust. Irrevocable trusts help the grantor lower or avoid estate taxes.
What Happens When the Grantor Dies?
When the grantor of an irrevocable trusts dies, the person named successor trustee in the Declaration of Trust assumes control of the trust. The new trustee distributes the assets placed in the trust to the proper beneficiaries. After the grantor of an irrevocable trust dies, the trust continues to exist until the successor trustee distributes all the assets.
The successor trustee is also responsible for managing the assets left to a minor, with the assets going into the child's sub-trust. A sub-trust survives until the child beneficiary reaches the age when the child is allowed to receive the property without the supervision of the successor trustee.
After a grantor dies, the successor of the irrevocable trust has the following additional responsibilities:
- Inform every beneficiary of the trust's existence
- Receive an appraisal of the assets placed in the trust
- Distribute trust assets to the beneficiaries
- Prepare an Affidavit of Assumption of Duties
- Submit former grantor's final income tax return
What If There is More
Than One Successor Trustee?
If more than one person is designated as a successor trustee, each named successor trustee must work together to fulfill the obligations required to end the trust. The trust document might require the successor trustees to agree on taking a course of action or allow each successor trustee to act independently from the remaining successor trustees.
Why Is It Important to Receive an Appraisal?
The successor trustee is responsible for getting an appraisal of the assets held in the irrevocable trust. Receiving an appraisal is essential for two reasons.
First, the beneficiaries who inherit the assets receive a new tax basis for the assets, which is the market value at the grantor's death. The market value allows the beneficiaries to determine tax obligations accurately. Second, the successor trustee must file the deceased's final tax return, which is calculated by determining the fair market value of the remaining assets.
How is Property Transferred to the Beneficiaries?
After the grantor of an irrevocable trust dies, the successor trustee must transfer the assets to the designated beneficiaries. The procedure for transferring the property in an irrevocable trust depends on the type of property listed in the trust. Typically, the successor trustee must present the grantor's death certificate and a copy of the document that established the trust.
To learn more about what happens to an irrevocable trust when the grantor dies, schedule a free consultation with an estate planning attorney at the Cloud Peak Law Group.