Page 76 - Successor Trustee Handbook

CHAPTER 20

TERMINATION OF THE TRUST

The time at which the Trust, or a share of the Trust held for a specific beneficiary, is
terminated and how this termination takes place are dependent on the terms of the Trust
document. For example, it may provide that, at a certain age, a beneficiary receives a
portion of his or her share “outright”, meaning that the titles to assets are transferred into
his or her name or cash assets are directly given to him or her. Alternatively, the Trust may
provide that the timing of final distribution and termination of the Trust is up to the
discretion of the Trustee. Also, the Trust may alternatively
provide that distributions are made into a new trust (or “sub-trust”) for the beneficiary,
rather than directly to the beneficiary. Finally, the Trust terms may not indicate to whom,
when, and how final distributions of the Trust are to occur, but rather give a third-party
(such as the current or previous beneficiary) a “Power of Appointment” to determine these,
which must be exercised through an outside legal document. The Trustee may need to find
out if any such document exists and then follow the terms of that exercise of that “Power of
Appointment”. (See the Chapter, “Making Distributions to the Beneficiaries”).

Prior to the final distributions to the beneficiaries and the termination of the Trust, you as
Trustee should withhold a reasonable amount as a “reserve” for the payment of the
following: creditor claims that may yet be filed if the statute of limitations has not yet
ended; and any possible outstanding real property, income, estate or inheritance taxes. If
the Trustor was not in business, and at least a year has lapsed since the Trustor’s death, it is
likely that no further creditors will present claims and therefore there may be no need for a
reserve for creditor purposes (or for only a very small reserve). With respect to potential
taxes, you should consider having your accountant file a request for “tax releases”
wherever possible to do so, so that the taxing authorities will release you, at an early date,
from the personal liability for the real property, income, estate and inheritance taxes. Early
tax releases may avoid the need to maintain a large reserve; however, the request for tax
clearance may sometimes spark the audit of a return that may have otherwise been
accepted without audit. In the case of a federal estate tax return (Form 706), since almost
all these returns involving the payment of tax are audited, a “prompt audit” may be
requested, in which case the IRS must audit the return or provide you with a final closing
letter within 18 months. It is usually best to maintain a reserve projected by the attorney
and/or accountant who prepared the Form 706, until such time as you receive a final
closing letter. Other potential tax exposure should also be estimated in order to determine
the amount of the reserve. If the reserve is relatively small (less than about $10,000), it
should be placed in a non-interest bearing account so that additional income tax returns
will not be required to be filed following distribution of the bulk of the estate. If the reserve
is larger, it may need to be placed in an interest-bearing account and final income tax
returns for the Trust will need to be filed after the reserve is distributed.

73