The Living Trust Myth

by Matthew Grech | Apr 13, 2015 | Article |

There are many misconceptions about law and its application, and the area of Trust Administration is no exception. Specifically, there is a common held belief that the administration of living trusts is simple and free of expenses. Unfortunately, this is not the case. In fact, most successor trustees need professional help to carry out their fiduciary responsibilities, which often comes as a shock to both the successor trustee and the beneficiaries.

A successor trustee's responsibilities are many, and while it is not practical to list all of them here, it is helpful to list a few of the more common ones. To begin with, title to all trust assets must be changed to remove the name of the deceased trustee. For example, upon creating a living trust it is common for people to transfer title of their homes into the name of the trust. Therefore, in the case of a single person trust, when that person passes away (the "decedent"), it is the successor trustee's responsibility to prepare and record the decedent's death certificate with an affidavit death of trustee to remove the decedent's name from the deed to the decedent's home. Further, there is also property and transfer tax paperwork that also must be submitted with the deed in order to avoid property reassessment and transfer taxes.

Next, the successor trustee should also have the decedent's real property and securities appraised in order to establish a new cost basis, which has a direct impact on the amount of capital gains taxes, if any, which will be owed upon the sale of a specific asset. For example, it is often the case that a parent purchased her home several decades ago for a fraction of its worth today. In our example, let's say that the purchase price was $15,000.00 (the costs basis). Flash forward to the year 2015 and that home is now worth $700,000.00.

Under normal circumstances, if mom decides to sell her house she will owe capital gains taxes on the appreciation, which in this case is $685,000.00 ($700,000.00 - $15,000.00). However, as the law currently stands, upon a person's death the basis of the home can be stepped-up to its value as of the owner's date of death, which, in many cases, virtually eliminates capital gains taxes for that particular asset. In our example, if, when mom passed away, her home was appraised at $700,000.00, and was sold for that amount then the estate was successful in avoiding paying capital gains taxes on $685,000.00 in appreciable gain. And as a reminder, the way to establish the stepped-up basis is by obtaining a date of death appraisal.

Once again, the mere existence of the trust does not relieve the successor trustee of her administrative duties, but rather forms the basis for those duties, which include, but are not limited to, administering the trust, dealing impartially with beneficiaries, avoiding conflicts of interest, and taking control of and preserving trust property. A successor trustee's failure to comply with these, and/or the many other, fiduciary duties can expose him to potential liability, which is why it is so important that people obtain professional guidance when fulfilling their administrative duties as successor trustees.

It is important to note that the foregoing should not turn people off of the idea of having a living trust. Remember, that assets held in a trust are not subject to the jurisdiction of the probate court, which often takes nine to 15 months to complete, not to mention that attorney's probate fees are almost always more expensive than fees for a trust administration.

If you have further questions about estate planning or administration, please contact Grech Legal at (650) 743-2548 or [email protected] for a free consultation.