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Trust Law/Level III · Family trusts/3.1 The living trust/Lesson 7

When the settlor dies: administration step by step

The practical steps for winding down a family trust after the settlor’s death

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Get the trust’s EIN directly from the IRS online, free; never pay a third-party site. Catch: once the trust becomes irrevocable it needs that EIN and must file Form 1041 for any year with gross income of $600 or more.
  2. Consider the §645 election on Form 8855 to treat the trust as part of the estate for income tax; where no Form 706 is required, it lasts two years after death. Catch: file it by the due date, with extensions, of the first Form 1041.
  3. Sell inherited assets against date-of-death value: IRC §1014 resets basis, so appraisals made early can cut capital gains tax to little or nothing. Catch: basis can step down too, and IRAs get no new basis.
  4. Distribute promptly where the terms allow: distributions carry taxable income out to beneficiaries (IRC §661), and payments in the first 65 days of a year can count for the prior year (§663(b)). Catch: reserve first for debts, expenses and taxes (UTC §505).
  5. Send the UTC §813 notices within 60 days of accepting and of the trust becoming irrevocable; a letter costs little and heads off costly disputes. Catch: states vary in timing and content, so check the governing state’s statute.

MaterialsThe signed trust document and any amendments or restatementsThe settlor’s will and any codicils (if applicable)A list of all assets currently held in the trust’s nameCopies of recent bank statements and brokerage reports for those assets

Wonder

  1. What happens to the cost basis of stocks or real estate when the settlor dies?
  2. How long do I have to notify the beneficiaries that I am now acting as trustee?
  3. Who pays the trust’s debts if there is not enough cash left in the account?

Explore

  1. When the settlor of a revocable living trust dies, the trust usually becomes irrevocable. The successor trustee named in the document may accept or decline the role; under Uniform Trust Code §701, acceptance can happen by following the method in the trust or simply by taking control of trust property or acting as trustee. Once they accept, the trustee owes fiduciary duties to the beneficiaries. A sensible first step is to read the whole trust document to understand the powers it grants and any limits on distributions or management.
  2. Before banks, brokerage firms and title companies will deal with a successor trustee, they usually want proof of death and proof of authority. Certified copies of the death certificate come from the vital records office of the state or county where the death occurred. Many institutions keep a copy, so several are often needed; the number varies. Institutions may also ask for the trust document or a shorter certification of trust (Uniform Trust Code §1013) showing the trustee’s powers. Until they are satisfied, they may refuse transactions.
  3. Once a revocable trust becomes irrevocable, the IRS says it needs its own Employer Identification Number (EIN), even though the settlor’s Social Security number was used during life. The trust becomes a separate taxpayer. The EIN is used for trust bank accounts, trust tax returns and reporting income earned after the death. In some cases a trustee can elect to treat the trust as part of the settlor’s estate for income tax (Internal Revenue Code §645); a tax adviser can explain whether that applies.
  4. The trustee lists every trust asset as of the date of death, such as real estate, investments and cash. Under Internal Revenue Code §1014, property acquired from a person who has died, including property in a revocable trust, generally takes a tax basis equal to its fair market value at death. If the asset is later sold, capital gain is usually measured from that value, not from what the settlor paid. Basis can go down as well as up, and some items, such as an IRA, get no new basis. Appraisals help document values.
  5. Under Uniform Trust Code §813, in states that adopted it, a trustee must notify qualified beneficiaries within 60 days after accepting the trusteeship, giving the trustee’s name, address and telephone number. Within 60 days after learning that a revocable trust has become irrevocable, the trustee must also tell them that the trust exists, who the settlor was, and that they have the right to request a copy of the trust instrument and to receive trustee’s reports. Many states changed these rules, and others have their own statutes with different timing.
  6. Debts, expenses and taxes generally come before distributions. Under Uniform Trust Code §505, a revocable trust’s property can be reached for the settlor’s debts and funeral and estate expenses if the probate estate is not enough. The settlor’s final Form 1040 reports income up to the date of death. The trust files Form 1041 for any year with gross income of $600 or more or any taxable income. A federal estate tax return may be needed if the estate exceeds the basic exclusion ($13.99 million in 2025, $15 million in 2026). Then the trustee distributes, accounts and closes the trust; timelines vary.

Key facts

  • A revocable living trust usually becomes irrevocable when the settlor dies.
  • The IRS says a revocable trust that becomes irrevocable needs its own Employer Identification Number (EIN).
  • Under Internal Revenue Code §1014, trust assets generally take a basis equal to fair market value at the date of death; this can be a step down as well as a step up.
  • Under Uniform Trust Code §813, a trustee must notify qualified beneficiaries within 60 days of accepting and within 60 days of learning the trust has become irrevocable; states vary.
  • The settlor’s final Form 1040 reports income from the start of the tax year to the date of death.
  • Debts, expenses and taxes are generally paid before distributions; under Uniform Trust Code §505, trust property can be reached for the settlor’s debts if the probate estate is not enough.

Exercise nine, six, three, one

9CollectList up to 9 tasks a successor trustee may face after a settlor dies (many trusts need fewer), such as getting death certificates, applying for an EIN, valuing a house, notifying beneficiaries, paying bills, filing tax returns and distributing property.
6ClusterSort the tasks into 6 categories: accepting the role, proof and authority, tax identification and returns, inventory and values, informing beneficiaries, and paying and distributing.
3DistillReduce the 6 categories to 3 groups: tasks a family trustee could handle alone, tasks that may need an appraiser or tax adviser, and tasks with legal deadlines.
1CrystallizeWrite 1 sentence naming the task you think would be hardest in your family’s situation, and why.

Fact check

Dates, figures and claims checked against the published sources listed below.

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