If you are serving as the trustee of a trust, you may be faced with beneficiaries who, understandably, want to know what their distribution from the trust will be, and when they will receive their share. Unfortunately, that answer may not be readily apparent in the days and weeks after the death of the grantor of the trust, and making distributions too soon can cause problems for both beneficiaries and the trustee of a trust.
Making distributions from a trust after the grantor’s death is not as simple as dividing trust assets like a pie and handing slices out to however many beneficiaries there happen to be. As with a probate estate, any legitimate debts owed by the deceased (decedent) or the trust itself must be paid before beneficiaries can receive their share. This is critical: if these liabilities are not paid before distributions, you, as trustee, could become personally liable for them. You could also be placed in the position of having to go back to the beneficiaries and try to get some of their distributions back in order to pay trust and non-trust liabilities. Obviously, neither of these are desirable.
What Are Trust and Non-trust Liabilities?
As trustee, you are responsible for paying both trust and non-trust liabilities. Trust liabilities are any expenses associated with the trust itself, such as insurance costs and legal fees. Non-trust liabilities are those debts of the decedent that would ordinarily have been paid out of the trust, including consumer debts, medical debts, burial expenses, and most taxes.
The sooner you can identify and resolve all legitimate expenses and debts, the sooner you can evaluate what each beneficiary’s share of the trust is likely to be, make distributions, and wind down the trust. Below are some strategies to help you confirm that you have dealt with all liabilities that are your responsibility as trustee and avoid conflict with creditors or beneficiaries.
Keep Accurate Trust Records
As a trustee, one of your duties is to keep accurate records of not only trust income but trust expenditures. Doing so is not only important for beneficiaries’ sake, but for your own. Diligently keeping records of transactions, due dates, and communications with creditors on behalf of the trust allows you to demonstrate that you are fulfilling all your obligations—including the obligation to pay all legitimate trust and non-trust liabilities.
You may have noticed the references to “legitimate” debts or liabilities. What does that mean? Simply put, just because someone makes a claim against a trust does not necessarily mean that they are entitled to payment from the trust. Paying a debt that is not legitimate decreases the beneficiaries’ distribution from the trust, and could make you personally liable to the beneficiaries for the shortfall.
If this all sounds daunting, remember that an experienced trust administration attorney can help with your recordkeeping obligations or take them off your plate altogether.
Obtain Tax Assessments as Early as Possible
As trustee, you are obligated to pay tax obligations of the trust and decedent, including income tax, estate tax, and others. It is a good practice to file the necessary tax forms to confirm tax assessments at the earliest possible date; your trust administration attorney can advise you on how to proceed.
You will almost certainly want to file the final individual income tax form for the deceased, even if you are not required to file and even if no tax is owed. The reason to file is that doing so is the only way to get any refund that the deceased may have been due, or claim any refundable tax credits to which they may have been entitled.
Promptly Notify Creditors of the Death
Most states require administrators of an estate or trust to notify creditors of the death of a debtor. Those states that do not require creditors to be notified typically shorten the available period for a creditor to make claims against the estate or trust if notification is made.
While you could theoretically wait until the end of the allowed “window” to notify creditors of a death, you should give notice as soon as possible. For known creditors in Michigan (or those of which you reasonably should know), direct notice is required; for unknown creditors, publication of the death in a legal newspaper is sufficient. Creditors have four months from the date of publication or one month from the date they received actual notice in which to present a claim. Creditors’ claims against the estate or trust are barred if not made within that window, so the sooner the window opens, the sooner it closes. As long as notice was properly given, you won’t need to worry about creditors’ claims cropping up after distributions were made.
Communicate Effectively With Beneficiaries—in Both Directions
Another of your duties as trustee is to keep trust beneficiaries informed, including providing them with inventories of trust assets, accountings of trust income and expenditures, and any other reports required by the trust document or by law.
To protect yourself from potential breach of trust actions, you should go one step further than simply notifying beneficiaries of information regarding the trust. You should also require a written confirmation from them that they have read, reviewed, and approved these materials, including accountings of any liabilities and payments. Most beneficiaries will readily comply, if not because they are interested in the materials, then because they are eager to receive their distributions. Your trust administration attorney can prepare confirmations for the beneficiaries’ signature.
To learn more about strategies for handling debts as a trustee in Michigan, please contact Estate Planning & Elder Law Services to schedule a consultation.