Navigating Trust Longevity and Inherited Property Issues | Q&A #4

How Long Can a Trust Remain Open?

First up is a question from our first Q&A video. “My parent’s trust has run its course, how long can I keep the trust open, and how can I benefit from it in the future? Can I keep it going to somehow benefit me in anyway?”

These are the best types of questions to ask an attorney because I get to give the best answer, “It depends.” This all depends on the terms of the trust and the state with jurisdiction over the trust. Generally, a trust will have to end at some point and should not be held open longer than designed or intended to.

Doing so carries administrative overhead that must be addressed, the trust may now have to file a tax return and pay taxes on any income not distributed to the beneficiaries within that year.

Additionally, if there is income and even where such has been distributed to the beneficiaries, the trust will need to file a tax return and send each beneficiary a Schedule K-1 to include on their own tax return. This is so that beneficiaries can pay whatever taxes are due on their personal return at their personal rate, rather than the trust paying at a higher trust tax rate.

Keeping the trust open means the trustee is also on the hook for all of their trustee duties, including the duty to account. Any and all beneficiaries would be entitled to an accounting of the trust each year, along with trust records at any point in time upon reasonable request.

Going further, if the trust does not have language specifying assets must remain in trust for a period of time, then any beneficiary due an inheritance can demand a distribution and back that demand up with a – say it with me now – lawsuit.

They would sue the trustee to force a distribution of the trust estate. And, like I illuded to before, I’ve seen this exact scenario occur multiple times and blow up into litigation. I won’t go into details, but I am currently involved on the peripherals of a case where we have an informal agreement not to distribute and waive accountings, only for a beneficiary a decade later decide they want a payout instead.

Finally, if the concern is asset protection, then absent some language in the trust requiring assets to be held in trust for a period of time, creditors of beneficiaries may still be able to collect against the debtor beneficiary by collecting from their portion of the trust.

In essence, pulling from that beneficiary's share of the inheritance even though the funds are still in the trust.

Again, all of this depends on the terms of the trust and the controlling law. It depends…

Learn more: What Accounts Should be in Trust, How to Title them, & FDIC Insurance | Q&A #1

Renting out a Dead Person’s Property

The next question is interesting because you see it when people try to bury their heads in the sand when it comes to getting title straightened out on a deceased person’s property. To summarize, the commenter’s grandparents have both passed away many years ago, both properties in still in their names, yet aunt has been renting out one of the properties and maybe pocketing the income.

Based on the limited facts on hand, the aunt should not really be renting the property out. It is creating a potential mess of a situation. Where is the income from the rent being reported? Who is paying the taxes on that income? Is the aunt keeping the rental income to herself or is she sharing with equally with her siblings? Who is paying the property taxes? Etc.

Essentially, those properties belong to the estates of the grandparents (or more precisely, the second grandparent to pass away). Probate needs to be done to transfer the properties to the heirs, with the most likely scenario being equal among their children. This means the aunt only has a partial interest as one of the commenter’s parents would also have an interest. Any rental income produced during this time would also be part of their estate and thus included in this distribution.

Plus, if any of the commenter’s aunts or uncles passed away – or even their parent and the commenter is not an only child – then now we have even more people with only fractions of an interest in real property, essentially requiring it to be sold or else you’re putting grandchildren on title for something small like 1/8 of an interest in the properties.

Without more detail, I would say this is potentially a very messy situation. Probate property within a reasonable time after someone's death. Don't stick renters in property where the title holders are dead.

Learn more: How to Settle an Estate in California | When is Probate Required?

Estate planning involves numerous intricate details. While this overview answers some common queries, remember that it's a broad field. Always stay informed and consider professional guidance to address specific concerns.

Learn more: Gift Taxes in 2024: What's Changing?

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