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Question:

What is the process (“best”, if more than one) for accounting for and dissolving a revocable living trust upon death of the surviving parent (as the primary trustee). The trust was under her SSN but we have generated an EIN from the IRS website and are in the process of valuing the equities, all of which are titled under the trust. Understanding all trusts can be different, is there a checklist of actions which the successor trustee should follow?

Response:

I assume the trust investments are held an investment firm. They will likely require you to relist them in the new tax identification (EIN) number. At that time, they should adjust the tax basis for the investments to the value upon your mother’s date of death. Then, you and your beneficiaries have a choice to make, whether to liquidate the investments or divide them and distribute the actual investments. Our usual advice is to simply liquidate them and distribute the cash since this is usually much easier and there’s unlikely to be significant capital gains to the adjustment (step-up) in tax basis upon your mother’s death. In addition, these days the fees for selling stocks and other investments are quite small.

However, sometimes beneficiaries have strong feelings about receiving the actual investments or, due to market conditions and delays in the process, the investment values may have increased significantly since the date of death. This could mean that their liquidation would, in fact, produce large capital gains. If for either or both of these reasons you and the trust beneficiaries decide to divvy up the investments rather than liquidate them, the easiest way to do this is for each beneficiary to open an investment account at the firm where the trust investments are housed. Once these are open, the firm can easily divide up and distribute the investments to the separate accounts. Unfortunately, we’ve seen the process delayed when one beneficiary does not set up such an account, holding up the process for everyone and often leading to increased expenses in accounting and legal fees. So, if you’re considering not liquidating the investments, evaluate how cooperative you expect all the beneficiaries to be.

Finally, don’t distribute everything immediately. Hold back a small closing reserve to cover any expected or unexpected costs, such as accounting and legal fees. Usually we wait a year to make sure everything is absolutely completed and then distribute any remaining funds in the closing reserve.

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What are Trust Accounts or Accountings? How Will Parents’ Trust be Taxed Upon Liquidation and Distribution? What Can Attorney Trustees Charge for Closing Out a Trust?