Strategies for Identifying, Settling, and Reporting Trust and Nontrust Liabilities

In the course of a trust administration, beneficiaries primarily want to know what will be distributed to them and when it will be distributed. Attorneys who represent trustees, however, must prevent trust distributions until the proper time—that is, until all liabilities have been paid or reasonably accounted for with a reserve. Otherwise, a trustee may face personal liability and need to seek indemnity from beneficiaries who may have already spent the funds distributed to them. In a postdeath administration, there may be trust and nontrust liabilities (or the decedent’s liabilities), including the decedent’s debts and various taxes. In addition, a trustee must pay the expenses of the administration or reserve funds for payment of those expenses. 

Limit Creditors’ Claims Periods

A trustee must first identify and settle a decedent’s debts to accurately evaluate the assets available for distribution to beneficiaries. This process typically involves providing notice to known creditors, such as credit card companies, healthcare providers, mortgage companies, and other lenders or providers of credit or services to the decedent, in the course of a probate proceeding or another statutorily defined process. 

In addition, a form of notice must usually be published in a local newspaper to give unknown creditors an opportunity to file a claim with the decedent’s estate or trust. Claims not filed within the limitations period—which may be shortened in a probate proceeding or by statutory means, or may be the default period after the decedent’s death—will be barred. For any claim filed, the trustee should confirm the amount due and then work to pay, negotiate, object to, or otherwise resolve or dispose of the claim. 

Finally, once all claims have been settled, the trustee should obtain written confirmation of satisfaction from each creditor. In some limited circumstances, a liability will not be paid during the initial trust administration process because it is intended to pass with a specific asset distributed to a beneficiary, such as a mortgage that will pass with the real estate securing it. For these special cases, the trustee must typically coordinate with the lender to obtain written approval of and consent to the transfer. 

Request Prompt Assessment of Taxes

The trustee must pay all remaining income, estate, and other tax liabilities of the decedent and the decedent’s estate to properly assess the assets remaining for distribution to beneficiaries. The most common tax filing involved in postdeath administrations includes the decedent’s final individual income tax return (Form 1040) and any required returns not filed for preceding years. Even if not otherwise required, an individual income tax return must be filed to obtain a refund if one is due to the decedent for taxes withheld from salaries, wages, pensions, or annuities; estimated taxes paid; or other credits that result in a refund. 

In addition, the trustee is typically required to file fiduciary income tax returns (Form 1041) for the estate and trust. There are many ways the trustee can accomplish this filing depending on the unique circumstances of the administration. Finally, the trustee may also need to file final or late gift tax returns for the decedent, federal and state estate tax returns for the decedent’s estate, and state inheritance tax returns for certain transfers to beneficiaries of the estate. The Internal Revenue Service (IRS) has statutory limitations periods to charge any additional tax due. However, a trustee may request a more timely assessment of tax as well as a discharge from personal liability for certain taxes and in certain circumstances by filing various other tax forms.

Get a “Read Receipt” Prior to Making Distributions

Prior to making a final distribution to a beneficiary, the trustee should obtain written confirmations from each beneficiary that the beneficiary has received, reviewed, and approved any trust inventory, required trust accountings, and reports or other disclosures provided in lieu of or in addition to accountings. These confirmations will commence the running of any statutory limitations period within which a beneficiary must bring an action for breach of trust. 

Any report provided to a beneficiary should include the nature and amount of any liabilities and taxes, as well as the status of payment by the trustee. In addition, in exchange for any distribution, the trustee should require each beneficiary to sign a receipt, release, and refunding agreement that generally includes the following information and provisions: 

• Details of the distribution (e.g., specific dollar amount, specific asset or portion of an asset, specific portion of the residuary, etc.); whether the distribution is an advancement, partial distribution, or final distribution; and whether the distribution or any part of it is subject to a liability 
• Whether there was an estate tax filing required and, if so, whether the examination of the estate tax return is closed
• Whether a reserve has been determined for the payment of remaining expenses and, if so, the amount held in reserve as of the effective date of the agreement
• The beneficiary’s agreement to indemnify the trustee in the trustee’s fiduciary capacity from all liabilities and expenses (including legal fees and costs incurred in defending against claims or enforcing the trustee’s rights under the agreement) that may arise from the trustee’s distribution to the beneficiary
• The number of years the trustee has to seek indemnity from the beneficiary and the beneficiary’s consent to that time period
• Other important acknowledgments and agreements 

Track Liabilities Systematically

As detailed above, the settlement of trust and nontrust liabilities is an essential part of the trustee’s process leading up to final distributions. The trustee should devise a system to carefully track liabilities and communications with creditors. Wealth Tracx^®, WealthCounsel’s trust administration solution, helps attorneys and their staff members track trust and nontrust liabilities as well as the steps required to satisfy them. It also provides batched generation of correspondence and forms for this purpose. Users can generate letters to creditors for all existing liabilities with one click and apply certain settings across all open letters for greater efficiency. Users can also generate a report of trust, nontrust, and all liabilities to provide to fiduciary clients, accountants, and beneficiaries.

Similarly, the trustee must devise a plan or tickler system for preparing appropriate tax forms and meeting tax filing deadlines. Wealth Tracx offers this key functionality in multiple ways: Users can set due dates for filing tax forms, taking required minimum distributions from retirement accounts, and other custom items as needed. Some due dates can be automatically calculated based on the decedent’s date of death if the user chooses. In addition, users can set due dates for any task or document within the application. Until a due date is marked resolved or a task is marked complete, the home page will display an at-a-glance overview of overdue tasks or dates, tasks and dates due soon, and urgent notes across all administration matters of the practice. Once the user enters a particular matter, the snapshot view changes to show only urgent notes and tasks or dates that are overdue or due soon for that administration. Users who take advantage of the snapshot notification system can more easily provide diligent and timely legal services during the administration process.

Finally, it is essential to set expectations for and regularly communicate status updates to beneficiaries in a postdeath trust administration. In Wealth Tracx, users can generate dozens of letters to beneficiaries regarding the progress of the administration, the status of tax filings and other important tasks, and the documents relating to the distribution process.