If you are the administrator for an estate with a living trust, your duties include settling the trust. Knowing how to properly settle a living trust is essential. There are commonly used methods to ensure proper settlement of a living trust.
A living trust is a type of estate used to avoid most probate issues and filings. This does speed up the settlement of the estate, but does not create an instant way to distribute assets to the beneficiaries of the estate. To settle a living trust the person who was granted administration of the estate must make certain decisions at the correct time and in the correct order. As with all types of estates, to settle a living trust the trust administrator should acquire the service of a lawyer who handles estates.
Making Initial Distributions from a Living Trust
When it comes time to settle an estate that is governed by a living trust, the trust administrator must make the decision of where the initial distributions will go. This step is important because it will determine if the living trust has enough assets to pay for all expenses and distributions. Because of this fact, the initial distribution of property is delayed until all expenses for the estate are paid first. This will include estate taxes, income taxes, capital gains tax, creditor obligations, legal fees, administration costs and other costs. If the trust administrator set aside funds to cover the costs when setting up the living trust, this step will go smoothly.
Paying Taxes and Creditors from an Estate
Paying taxes from the estate should be the first distribution to start settlement of a living trust. This will include the estate taxes, which are a percentage of the estate value as determined by the IRS; income taxes, which should have been paid yearly and include any income from property, stock dividends or bank accounts. This is where the process becomes lengthy. The trust administrator needs to wait for acknowledgment by taxing authorities of payments before proceeding with any further disbursement other than creditors. It can take months for everyone to respond with an authorization to continue.
Paying creditors is the next step in settlement of a living trust. To settle a living trust public notice must be given that the estate is being dispersed and any claims against the estate must be presented within a certain time period. This is usually accomplished by publication in the legal notice section of the classifieds of newspapers. Creditors are persons or organizations which are owed payment by the estate. Usually the public notice gives a time limit of 30 days from the date of publication for payment requests to be submitted. After the time limit has passed, the trust administrator must verify each claim as to the amount due and the fact that it is legal; this is mainly accomplished by comparing creditor claims against accounts and files held by the estate. Once the claim is verified as being valid, the claim is paid out of the living trust as part of the settlement.
Up until this point, no beneficiaries should have received any portion of the settlement of the living trust. The reason for this is that if more money is owed than first expected the trust must liquidate assets to finish payments due from the estate. This fact may diminish assets previously assigned to beneficiaries. After all claims from creditors and the taxes have been paid out, disbursement of the trust assets can continue as scheduled.
The Time Frame to Settle a Living Trust
The time frame to settle a living trust varies with each estate. It can take a year to quickly distribute assets if the estate has no specific schedules in place. It can take many years if the guidelines of the living trust stipulate that certain assets or beneficiaries cannot be dealt with until a certain amount of time or other requirements have passed. Beneficiaries who are minor children may be required to reach adult age, or finish college or other prerequisites before being allowed to take control of their assigned assets.
There also may be disagreements between beneficiaries which could also slow down the process. These disputes will also need to be settled before final disbursement can be achieved. Living trusts can take a shorter amount of time compared to other types of estates such as wills.
References: Estate Plan Center
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How to Manage Living Trusts From Beginning to End
This series provides information about managing a living trust from beginning to end. Topics range from setting up the trust to settling or terminating the trust.
- How to Set Up a Living Trust
- How to Settle a Living Trust
- How to Terminate a Living Trust