What happens to a trust after the grantor dies?
What happens to a trust after the Grantor dies
After the Grantor (or creator of a trust) dies, usually one of two things happens depending on the structure of your trust.
AFTER DEATH OF GRANTOR FOR SIMPLE TRUSTS
In a simple trust structure, the death of the Grantor generally triggers a termination event - meaning the trustee is directed to distribute all assets out of the trust to the beneficiaries as instructed by the Grantor. However, before making any distributions, the trustee has to first make sure all the debts and taxes owed by the Grantor (or the Grantor’s estate) have been paid.
For older clients who have already paid off most, if not all, of their debts (e.g., mortgage, car loans, student loans, etc.) - the trustee may want to wait a few months for the Grantor’s final bills to come in and the trustee can then pay them off accordingly. In a situation where an executor or personal representative has been appointed (generally, only applicable if the Grantor had assets outside of the trust that for some reason went through probate), the trustee should coordinate with the executor to make sure final distributions are not made until the estate has been settled (in some states the creditor’s statute of limitations varies, so you may need to wait up to a full year depending on your jurisdiction before being able to make final distributions from the trust).
Once the trustee is confident that there are no outstanding obligations with respect to the Grantor or his/her estate, the trustee can then distribute assets from the trust to the Grantor’s beneficiaries - usually their spouse and children in a simple trust structure. Most trustees (especially when it’s someone other than the surviving spouse) will have the beneficiaries sign a release, receipt, and refund statement to ensure that the beneficiaries understand and confirm that they’ve been given proper notice of the trust's assets (an inventory), have had the opportunity to hire independent counsel to review the trust document, and are satisfied with the distribution plan and amounts calculated by the trustee.
Assuming the beneficiaries all consent, the trustee then makes the final distribution to wind down the trust. If no executor or personal representative has been appointed by the Grantor’s estate, then the trustee should also work with the Grantor’s CPA or tax preparer to ensure all final tax returns have been filed appropriately as well.
AFTER THE DEATH OF THE GRANTOR FOR COMPLEX TRUSTS
In a more complex structure, which many clients tend to create as they accumulate more assets and as their family situation becomes more dynamic, the trust structure tends to involve additional sub-trusts, which also tend to be known as “continuing trusts.”
In states, like Massachusetts, these trusts are common for because of state related estate taxes, but even in states like New Hampshire that do not have an estate tax, you will also see these continuing trusts used for asset protection purposes.
Let me give you some examples on continuing trusts:
Continuing trust for surviving spouse. In this trust structure, upon the death of the first spouse (the Grantor), the surviving spouse’s share is held in trust for the remainder of their lifetime, primarily (if not solely) for the benefit of the surviving spouse. Depending on how the trust is structured, this may allow the Grantor to ensure that the share left for the benefit of the surviving spouse isn’t subject to estate taxes upon the surviving spouse’s death. It also protects the Grantor against something called “remarriage risk” where the Grantor wants to make sure that even though the assets are intended for the surviving spouse, the assets will never go to a surviving spouse’s new significant other (or that new significant other’s family). In other words, you ensure your assets will ultimately go to your children or other beneficiaries you specified in your trust document after your spouse passes.
Continuing trust for minor children. In virtually any trust I draft, there is default language about what happens if a beneficiary (child or grandchild) receives a share from the trust, but is still a minor. In such scenario, most clients will specify that the trustee may continue to manage the assets for the benefit of that beneficiary (health, education, maintenance, and support) and then when that beneficiary gets older (for example, age 25) then the remaining assets (if any) can be distributed outright to the beneficiary. This has the two-fold effect of making sure the money held in trust is properly managed and distributed to or for the benefit of the child, while also protecting the assets from certain creditors. Although the level of protection can vary depending on how much or how little discretion you give the trustee, as a general rule, trust assets have higher creditor protection while they are in the trust as opposed to when they are in the hand of the beneficiary (i.e., after the assets have been distributed outright to the beneficiary). For that reason, you’ll often see clients push out the age of distribution beyond age 18 (when they could legally receive such assets outright) and many clients will go one step further and split up or stagger the distribution dates - for example, one-third distribution at age 25, one-half of the remainder at age 30, and all of the remainder at age 35.
Continuing trust for disabled or special needs children. This one is a more nuanced version of #2, in that the trustee generally is authorized to supplement but not supplant a child’s needs for the remainder of the child’s lifetime. You often see this type of continuing trust used when the child is receiving or may be likely to receive government benefits at some point in the future. This type of trust is becoming more common as more clients grow concerned about whether their autistic child will be able to or may need government benefits down the road, and they want to be sure that such benefits won’t be interrupted when the child receives his/her inheritance.
Continuing trusts for creditor/divorce protection. This is similar to the continuing trust mentioned in #2, but goes a bit further in terms of asset protection. In other words, clients will often use this type of continuing trust for a child who they believe may be in a rocky relationship and just want to be sure that the inheritance they give that child would never get caught up in a divorce settlement arrangement. In other words, they want to be sure that money goes to their son or daughter, and not their daughter-in-law or son-in-law. A similar trust structure can also be used for clients who are concerned about their child’s financial responsibility (especially if the child has a history of making bad decisions or has a substance abuse or gambling issue). The basic idea for these trusts is that the trustee has broad discretion to make distributions to or for the benefit of the child (to ensure the child’s creditors can’t force a distribution).
Inevitably with complex trusts, as was the case with simple trusts, there will be a final termination event - whether it’s the death of the surviving spouse, the child reaching a certain age, or a risk no longer being applicable - that would allow the trustee to dissolve the trust and complete the fulfillment of the Grantor’s wishes.
If you have questions or concerns about what happens to your trust after you are gone, or if you would like me to create a trust for you, then click the link below to schedule a call with me today. I’m always happy to help!
