What Happens When a Revocable Trust Ceases?

by Wayne Thomas
A trust ceases when all of the debts are paid and the assets are distributed.

A trust ceases when all of the debts are paid and the assets are distributed.

Jupiterimages/BananaStock/Getty Images

Revocable trusts are often used as estate planning tools. Unlike wills, the administration of trusts after death can usually be done without going to probate court. Once the creditors and taxes are paid, any remaining trust assets are distributed according to the trust creator's instructions. However, state laws vary as to what is required to wind up a revocable trust, which can affect how long the process will take.

Overview of Revocable Trust

A revocable trust is a document created by a settlor, sometimes called the grantor or trustor. The settlor can name himself as the trustee, overseeing the trust's administration and assets during his lifetime. He may also name a successor trustee to administer the trust upon his death. It is the responsibility of the successor trustee to wind up all trust matters before any of the remaining trust property can be distributed to the beneficiaries. Some states require the trustee to close the trust in a reasonable amount of time, which is not a hard and fast rule, taking into account the many administrative responsibilities required of the trustee.

Notice

Notice to the beneficiaries of a revocable trust is generally not required when the trust is revoked or modified during the settlor's life. However, some states require a successor trustee to give notice to beneficiaries upon the death of the settlor. This is to make sure beneficiaries are kept informed during the administration process; the law often includes a deadline for filing any objections. California, for example, requires notice to be provided within 60 days of the settlor's death to known beneficiaries and bars them from contesting the trustee's administration of the trust 120 days after receiving that notice.

Winding Up

The trustee must pay certain administrative expenses and taxes before trust assets can be distributed to beneficiaries. Administration expenses are deducted from the estate and typically include costs associated with locating, inventorying and appraising the trust's assets. The trustee is entitled to reasonable compensation for his efforts in administrating the estate; outstanding debts and taxes of the trust must also be paid, including estate taxes and income taxes. This requires the trustee to file federal tax returns, and state tax returns depending on the state. Some states do not require notification to the decedent's creditors, but notification helps avoid future claims against the trust, trustee or beneficiaries.

Final Steps

Once all trust property has been located and inventoried, and all debts and taxes have been paid, the trustee prepares a final distribution plan. The distribution plan itemizes trust assets and specifies how they will be transferred to beneficiaries according to the wishes of the settlor, as set forth by the terms of the trust. This might require the trustee to sell physical assets for cash or make certain investments. After the plan is completed, the final step is to actually distribute the property according to the plan. If real estate or automobiles are involved, this often requires the preparation of deeds and other transfer documents. Once all of the assets are transferred, the trust effectively ceases.