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Question: What Happens to a Revocable Trust When the Grantor Dies?

My mother recently passed away. She had a revocable trust. What happens now?

Response:

The answer depends to some extent on what the trust holds — bank accounts, investments, real estate — and whether the trust will continue or terminated upon your mother’s death. But let’s assume that the trust has a bank account and an investment account and that it provides that they will now be distributed to you and your siblings.

The first question is whether your mother was the sole trustee or whether you or someone else was a co-trustee or not. If there are new trustees, they will have to take whatever steps the financial institutions require to add their names to the accounts.

The bank or investment firm may also require that the trust obtain a tax identification number. No doubt your mother used her own Social Security number for the accounts. Once she passed away, the trust became irrevocable (although it probably still has “revocable” in its name). Irrevocable trusts are supposed to have their own tax identification numbers and file an annual 1041 tax return. But if you will be distributing the trust assets quickly you may be able to avoid this step.

Once the trustee or trustees are in place, they can liquidate any investments and begin making distributions to the beneficiaries. There will be little or no capital gains resulting in the sale of shares of stock due to the step-up in basis that occurs upon the death of an owner. This applies to the death of a grantor of a revocable trust as well.

It usually makes sense to hold off on distributing all the trust assets until you are certain that all estate debts and expenses have been paid. These may include attorney and accountant fees. In terms of accountant fees, if you did obtain a tax identification number you will have to file a 1041 return for the trust. Hopefully if everything moves smoothly you will only have to do this for a single year.

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