#27 | What Happens To My Trust When I Die?

Many of our listeners have established a trust for their assets upon passing. And while nobody wants to think about their mortality, today I explain what happens to that trust when you pass.

The first thing that happens is that your living revocable trust becomes an irrevocable trust, and your successor trustee is now in charge of it. Also, the trust will need its own tax ID number and have a return filed for it and any of its income for as long as the trust remains intact. In the event of the passing of a spouse, the surviving spouse or trustee will need to file separate returns for themselves and the trust. I also explain how the estate tax exemption can come into play here.

It’s imperative to designate a contingent successor trustee. What if your spouse passes or can’t successfully administer the trust? You’ll want to have someone appointed who can step in.

Bruce explains some of the pros and cons of trusts. Trust taxable income hits the highest 35% tax bracket. But income distributed to beneficiaries is taxed at their personal tax rates. And while there’s a cost to maintaining a trust, assets in a trust are some of the most protected in our tax code.

For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management:.

Call the Prescott office at (928) 778-7666 or ourScottsdale office at (480) 994-7342.

To listen to more Protecting & Preserving Wealth podcast episodes, click here.

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Bruce Hosler is the founder and principal of Hosler Wealth Management, LLC., which has offices in Prescott and Scottsdale, Arizona. As an Enrolled Agent, CERTIFIED FINANCIAL PLANNER™ professional, and Certified Private Wealth Advisor (CPWA®), Bruce brings a multifaceted approach to advanced financial and tax planning. He is recognized as a prominent financial professional with over 27 years of experience and a seven-time consecutive *Forbes Best-In-State Wealth Advisor in Arizona. Bruce recently authored the book MOVING TO TAX-FREE™ Strategies For Creating Tax-Free Retirement Income And Tax-Free Lifetime Legacy Income For Your Children. www.movingtotaxfree.com.

In the Protecting & Preserving Wealth podcast, Bruce and his guests discuss current financial topics and provide timely answers for our listeners.
If you have a topic of interest, please let us know by emailing info@hoslerwm.com. We welcome your suggestions.

*2018-2024 Forbes Best In State Wealth Advisors, created by SHOOK Research. Presented in April 2024 based on data gathered from June 2022 to June 2023. 23,876 were considered, 8,507 advisors were recognized. Not indicative of advisor’s future performance. Your experience may vary. For more information, please visit.

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Jon “Jag” Gay: Welcome to the Protecting & Preserving Wealth Podcast. I’m joined by our host, Bruce Hosler. I am Jon Jag Gay. Intrigued by our subject today, Bruce, what happens to my trust when I die?

Bruce Hosler: Jon, thanks for joining me today. I don’t think any of us like to consider our mortality. And even though we don’t want to leave a mess for our spouse or our children, subconsciously, we all tend to avoid talking about what will happen after we die.

Jon: Totally agree with you. None of us like to plan for our eventual death, but I think a lot of our listeners will have an interest in listening today to what you have to say about what happens to their trust after they die.

Bruce: The first thing that I want to let our listeners know is that the moment that they die, their living trust changes from a revocable living trust to an irrevocable trust.

Jon: Important to define terms. What do you mean by that?

Bruce: It means from that moment on, their living trust no longer exists as a grantor trust as it did before their death. They are no longer the trustee if they were the trustee, but now their spouse or child or whomever they have designated as their successor trustee is now the trustee of the trust. And that means that trustee is the manager. And it means that the income of the trust will now have to be reported separately from the deceased client’s personal 1040, and the trust will have to file its own tax return on a form 1041.

Jon: Yikes, it sounds like that can get complicated real fast.

Bruce: I’m not sure that complicated is the right word. It does mean that the old way of doing things has to change dramatically when a person dies with a trust. That is why I want to talk to our listeners today to help prepare them for the moment of truth when one of them dies. The survivor needs to be aware that they cannot just continue to run things the same way they did before their spouse died.

Jon: And dealing with this specific situation is probably something that our listeners don’t have a lot of experience with, Bruce. What are some of the things you want to share today to help them understand more about their revocable living trusts?

Bruce: The first thing people should consider is that their living trust generally will become its own standalone entity, at least for half of it at the passing of the first spouse.

Jon: Half of it meaning if one of the two spouses passes, got it, okay.

Bruce: Half of their estate, yes.

Jon: All right, so standalone entity, what do you mean by that?

Bruce: It means that we need to secure a new tax ID number for the new irrevocable trust, that is the revocable trust converts to an irrevocable trust at the passing of the first spouse.

Jon: Okay, why do they need a tax ID number for?

Bruce: Because the decedent’s trust, the person that died, will now have to recognize the income on their half of the estate and pay taxes potentially separate from the surviving spouse. So, she will now have to have two tax returns prepared each year. One for her income and then another one for the income of the irrevocable trust that represents the half of the trust that belonged to her deceased husband.

Jon: So, I wanna make sure I’m understanding this right, Bruce. So, if the couple was married, filing jointly, that’s one tax return. One spouse passes, the surviving spouse can’t file jointly. It’s separate for her and then for the trust as its own entity. Do I have that right?

Bruce: Well, for one year, she continues to file. That’s a benefit. She gets to file joint for the rest of that year. So there’s some cool things we can do with that. But that’s the last year she files jointly. And then after that, now she has to file single. There’s consequences for that because the tax rates are not as friendly of her filing single. And so that’s a big deal, that whole change. But she does have to have a separate return for the irrevocable trust after her husband passes away.

Jon: And then who does sign the tax return for the trust?

Bruce: So that would be the trustee of the trust. And that will still most likely be the surviving spouse, but it may not be. Maybe it’s a third party or one of the children.

Jon: Okay, what advantages do the revocable living trust provide to the family at this point after the decedent has passed?

Bruce: Jon, there are a number of benefits. First, it will allow the spouses each to use their respective estate tax exemption of 12.9 million per person. So if they have an estate over 12.9 million, they get to use their full exemption. If one dies first, the unused portion of the lifetime exemption amount can then be used with portability to allow the surviving spouse to use up the rest of that exemption amount that was not used by their deceased spouse.

Jon: All right, what are other issues when one of the two spouses passes away?

Bruce: The year of death will likely require the surviving spouse to file both the personal tax return and then a part year return for the new irrevocable trust. So, we will need a copy of the death certificate to start submitting claims to the various custodians of asset accounts, insurance companies, retirement account custodians, the social security, long-term care companies, banks, brokerage accounts, and pension funds.

Jon: So, who is it that’s responsible to contact all these companies and make sure that the beneficiaries of the trust are either paid or receive the benefits of those accounts?

Bruce: Jon, this is truly a moment of truth. This is the point in time where the successor trustee begins to administrate the trust. Now, what that means is, is that the trust will have language in it as to what the grantor of the trust wanted to have happen when they die. For example, maybe they wanted their beneficiaries to receive some money immediately and then wanted them to receive some other monies later when they achieved a certain age, perhaps older than 25 or 35, whatever. So, the trustee has to administer all of these instructions, collect all of the funds, have them all retitled into the new irrevocable trust.

Jon: So is the successor trustee the spouse or is that someone else like one of the children?

Bruce: Jon, that depends on the age of the couple at the first death and on the abilities and competencies of the surviving spouse. Really, when you consider this moment in time, you can see how very important it is to name both a successor trustee and a contingent successor trustee. So think of a married couple. They form a trust together. They’re both trustees. One of their spouses die. Maybe the spouse is not competent. So, now we have a successor trustee that’s named and if they’re unwilling or unable, then you have a contingent.

So, you’re naming a couple levels of trustees here. So imagine if the surviving spouse is elderly, maybe he or she is not capable of successfully administering the trust. Having a contingent successor trustee ready and waiting in the wings to step in and help the family out becomes very important at this moment of truth.

Jon: Got it. Bruce, you mentioned earlier about two tax returns being filed. Is that just the first year or does the tax return have to be filed every year for the trust?

Bruce: When a trust grantor dies, their trust changes from a disregarded entity, which is what you have for a revocable living trust, to now a standalone entity, which must have its own tax return, its own tax ID number and must file a tax return every year going forward until it’s finally terminated. For the trust to be terminated, all of the corpus or the assets of the trust will need to be distributed to the beneficiaries. Then the trust can be terminated and a final trust return filed.

Jon: You’re leading me to an interesting question here, Bruce. Are there pros and cons to having a trust continue on for many years after you die versus just being terminated a year or two after the passing?

Bruce: There are both pros and cons to a trust existing for years after the grantor dies for certain. First, let’s look at the cons. The biggest is that the trust taxable income is subject to trust tax rates that hit the highest brackets of 35% at just $14,450 in a year.

Jon: Wow, okay.

Bruce: So it’s very low. Fortunately, if all of the income in the trust is distributed to the beneficiaries each year, then the beneficiaries can recognize the income at their personal income tax rates. And the trust receives a DNI or distributable net income tax deduction for all of the benefits it pays out to beneficiaries. So married couples don’t bump into the highest tax bracket for individual taxes until their income is over $693,000.

So this is a big benefit for beneficiaries of an irrevocable trust that the assets inside of the trust are asset protected. In fact, there are some of the most asset protected assets available anywhere in the tax code. They’re protected from creditors, bankruptcy, and even from a divorce. So, if parents want to provide divorce protection to their children, leaving them income from their trust after they die, this is one of the best ways they can do that. And certainly the cost to maintain the trust each year by having to file a trust tax return is a negative, as well as any legal fees that may be needed to maintain the trust over the years. So, we have a number of clients that are both surviving spouses and surviving children that are beneficiaries of irrevocable trusts. They benefit from the trust and the income from the trust that it provides. And I think all of them would say that the trust is a very good thing.

Jon: Bruce, this has been a great conversation today. I’m sure some of our listeners may have questions or want to learn more about their trust or if they should even have one. What are the best ways for our listeners to contact you and your team at Hosler Wealth Management?

Bruce: They can reach us at https://hoslerwm.com at the website or on the phone number in Prescott, (928) 778-7666, or in Scottsdale, (480) 994-7342.

Jon: Great information as always today. Bruce, we’ll talk to you again in a couple of weeks.

Bruce: Thanks, Jon.

Jon: Securities and advisory services offered through Commonwealth Financial Network, member of FINRA/SIPC, a registered investment advisor. Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

Any tax advice contained in this communication, including any attachments, is not intended or written to be used and cannot be used for the purpose of, 1) avoiding federal or state tax penalties or, 2) promoting marketing or recommending to another party any transaction or matter addressed herein. The accuracy, completeness, and timeliness of the information contained in this podcast cannot be guaranteed. Accordingly, Hosler Wealth Management LLC does not warranty, guarantee, or make any representations, or assume any liability with regard to financial results based on the use of the information in this podcast.


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