When is It Safe to Make a Final Distribution from My Mother’s Trust?
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Question:
I am the trustee for my mother’s irrevocable trust. She passed in 2020. All the assets in the trust have been distributed to the four beneficiaries. The only asset remaining is a checking account. The final trust taxes were filed at the end of 2022. If there is an IRS audit which requires additional taxes to be paid, who pays those taxes? The beneficiaries? The reason I am asking is that I would like to close the account and distribute the remaining funds to the four beneficiaries
Response:
Finally closing out trusts or estates can be a bit nerve wracking because you can never be certain a new charge doesn’t appear. As you have done, we usually hold back a small “closing reserve” to cover unanticipated expenses or charges. But when is it safe finally to close out that account? All states have a deadline for bringing claims against estates, either measured from when the probate estate was opened or from the date of death of the decedent. In my state of Massachusetts, claims must be made against the estate within a year from the death. However, this only applies to debts the decedent may have owed during their life. It does not cover claims that might arise during the estate or trust administration, such as legal and accounting fees, or taxes.
To answer your immediate question, yes, all the beneficiaries should contribute equally if there are future costs. We often ask beneficiaries to sign a release which includes a commitment to contribute their pro rata share should such charges come up. However, whether or not you get such a commitment, it could be difficult to get everyone to contribute. On the other hand, though we always try to get this commitment, I don’t think we’ve ever had to try to enforce it. IRS audits are very rare. Given that it’s been three years since your mother passed away, I think you’re pretty safe distributing the balance of the account whether or not you get a written commitment that the beneficiaries contribute to any future costs that may arise. It’s safe to make a final distribution from a trust or estate when the statute of limitations for claims has passed, all tax returns have been filed, and estate and trust bills paid.
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Why is having the beneficiary in the estate of … rather than in a trust?
Jane,
I’m not exactly sure what your question is, but it raises the issue of nomenclature: What’s the difference between a “beneficiary” and an “heir?” While the the two terms are often used interchangeably, heirs are technically those people who an inherit from a probate estate. If the person who died, the “decedent,” had a will, then the “heirs” are the people who are named in the will to receive their property. If the decedent did not have a will and died “intestate,” then the heirs are the next of kin, the closest relatives who would take the estate under the state’s intestacy rules.
“Beneficiaries” are the people or entities (trusts or charities) who inherit property in other ways, often through trusts or through beneficiary designations on retirement plans, insurance policies and payment on death (POD) accounts.
I hope this answers your question.
Harry