Death of a Parent & Living Trust
Being on the receiving end of a living trust when a parent dies can be a bit overwhelming. Since living trusts can be modified and rewritten repeatedly when revocable, the affected party, whether executor or beneficiary, can find him or herself a bit surprised on how the process actually works.
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Living Trust Defined
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A living trust, also known as a revocable trust, represents a person's private wishes of property distribution through a legal entity while he or she is alive. This approach compared to a basic will is commonly used since it avoids probate court and related legal costs after death. When a parent creates a revocable trust prior to death, they retain the ability to constantly modify it or add to the legal document prior to death. Upon death, however, the once-revocable trust becomes automatically irrevocable and cannot be changed legally except by a court.
Legal Requirements
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A parent's death with a trust usually highlights the differences between normal probate proceedings and a trust execution. The trust distribution process has no requirement to be handled publicly or in court. It is a private affair created and executed prior to death. As a result, a party who thinks they could be a beneficiary (as opposed to a named one) cannot find out what other beneficiaries received independently if the trust kept the matter private.
Certain property requirements remain the same whether in trust or via a will. This includes bonding of the executor, insurance coverage over real property such as a house, and detail reporting of assets included in the trust. Finally, a court still retains jurisdiction over trusts, so regardless of what the parent wanted to keep private a court can still legally open a trust up for review.
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Upon Death
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The unique aspect of a trust is triggered by the death of the trust owner. When a parent dies, the trust executor will be activated to begin the distribution process as specified in the trust terms. Again, there is no requirement for the court to be involved at all. Named beneficiaries, regardless of the distribution itself, are noticed and entitled to a full copy of the trust agreement.
Those assets not included in the living trust prior to a parent's death are not included after the fact. The disposition of excluded assets fall back to what any existing will says, otherwise the court decides the distribution.
If a living trust has the creating owner parent as the named trustee (the person managing the trust), then the executor and/or survivors need to check to see who was named as the backup trustee. This is routinely recommended to make sure the trust, once it becomes irrevocable on death, is managed correctly.
Tax Effect
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Despite common assumptions of being more than just probate and privacy protection, living trusts fail to provide any kind of sheltering from taxes. So if a parent dies, the beneficiaries of the trust are still required to report assets gained as income. If only cash, the tax reporting is fairly straightforward and reported as monetary income. If the assets are non-cash, then the property will need to be legally assessed for proper tax documentation and values reported to the IRS.
A Will May Still Exist
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Keep in mind just because a parent dies with a trust doesn't mean a will was never in place. In fact, many times a will still exists and was never canceled, even though a trust was created after the fact. Unless proactively canceled, remaining wills must be treated as being legally in effect and would still be required to go through probate.
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