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Trust administration refers to the trustees’ management of trust property according to the trust document’s terms and to benefit the beneficiaries after the settlor’s death. When a person dies, her/his financial affairs need to be settled and the property distributed to the heirs. Although this process may sound straightforward, even easy, it is not. It is wise and recommended to work with an attorney to help facilitate the process for the trustees.
Estate and Trust Administration is settling the estate of a decedent. The person responsible for handling the estate and/or trust has duties to the heirs, beneficiaries, and creditors of the estate.
The Will or trust document establishes the rules for distributing the assets to the beneficiaries. If a person dies without a Will or trust, state law controls distributions.
In Maryland, the person responsible for administering a probate estate is called the personal representative. Trusts are administered by a trustee. In either case, the person charged with administering the estate must make sure any taxes are paid and other bona fide creditors satisfied. The possible death taxes for Maryland decedents are (1) the Maryland estate tax, (2) the federal estate tax, and (3) the Maryland inheritance tax. Other creditors may be credit card providers, medical expenses and mortgages and other items.
Trust administration begins with mandatory notice to all beneficiaries and the settlors’ heirs. After receiving notice, the beneficiary has a certain amount of days, depending on the jurisdiction, to file a trust contest. If no contest is filed within the period, the beneficiary may surrender his or her ability to file it.
If the trust holds real property, the next step is to bestow title in the successor trustee to ensure that the property will be handled according to the settlor’s wishes. An affidavit ought to be recorded with a certified copy of the death certificate against each real property held in living trust. This process transfers the property’s title from the deceased settlor to the new trustees. A change of ownership form is typically recorded simultaneously with the affidavit. If the trust transfers real property from parents or children by any means exempt from property tax reassessment, the trustee must complete the proper exemption form. An attorney is recommended to help prepare these documents.
Once the real property has been handled, the trustee will need to ascertain all other trust assets, such as bank and investment accounts, and transfer the title of those assets into the trustee’s name as the successor trustee. The trustee needs to first acquire the trust’s federal tax identification number so any income earned from the accounts in the name of the trust is correctly reported to the IRS.
The successor trustee must pay the settlor’s debts and satisfy his or her liabilities. Taxes can be complicated because both estate and income taxes may be owed if the estate is sufficiently large. To assess whether it is necessary to file a federal estate tax return for the settlor, the trustee needs to calculate the value of the decedent’s estate. If the value exceeds the exemption amount, the trustee must file the federal estate tax return form. It is highly recommended to work with an attorney to determine whether a federal estate tax return is necessary.
Most jurisdictions require that the trustee keep a detailed accounting of the trust. This involves using trust funds to wind up the decedent’s affairs, overseeing all trust activity, including deposits and distributions, and reviewing the document to determine the appropriate mode of accounting. The trustee should meet with an attorney at the onset of the administration process to assess the extent of his or her accounting obligation.
Once all assets have been collected, the debts paid, the tax returns filed, and liabilities fulfilled, the trustee should distribute the remaining trust assets. The trust document will order how the trust assets should be dispersed among the beneficiaries.
The Maryland estate administration lawyers at Altman Associates have helped many fiduciaries navigate estate and trust administration successfully.
The individual responsible for this process is called a fiduciary. If the fiduciary is named under a will, the fiduciary is called the personal representative (also commonly known as an executor/executrix in other jurisdictions). If the fiduciary is appointed over a trust, the fiduciary is called a trustee. “Being a fiduciary for a trust or estate is an honor but it comes with serious obligations to those interested in the estate — both beneficiaries and creditors.
The fiduciary’s main obligation in estate administration is to preserve the deceased individual’s assets. Therefore, a decedent’s home and possessions should be secured. Mail should be collected and processed. The decedent’s papers should be gathered. Even papers that may not seem “relevant” can become useful to the administrative process. During this process, the fiduciary should keep detailed records so all expenses for the administration of the estate, including all funeral and burial costs, are paid properly out of the estate or reimbursed to the individuals who covered the expenses.
The Orphans’ Court appoints the personal representative by granting that individual “letters of administration.” If the decedent died with a will, the document generally names the personal representative and the person named is generally appointed by the court. The person named in the will as personal representative has the highest priority to be appointed as fiduciary of the estate under Maryland law. If there is no will, or the will fails to name a personal representative who can serve, Maryland statutory law sets out the priority of those entitled to be a personal representative.
To open a probate estate, the person entitled to be named personal representative files a petition for probate with the Register of Wills in the county where the decedent had her domicile or had most of her property if not domiciled in Maryland at the time of death. Once the letters of administration are issued, the personal representative has authority to stand in the shoes of the decedent to wind up the decedent’s affairs.
Unlike appointing a personal representative in a probate proceeding, which requires the oversight of the probate court, a trusteeship is controlled by a trust and most often without court involvement. One reason revocable trusts are used rather than wills is to avoid involvement of the probate process at death.
The Maryland probate court (or Orphans’ Court) does not have jurisdiction over non-probate arrangements. If a question arises about a person representative’s conduct, these issues will go before the Orphans’ Court, and if a question arises about non-probate arrangements, those issues are resolved in the Circuit Court. The separate procedures governing probate and non-probate property transmittal at death can cause confusion amplified by ambiguous messaging by some promoters of revocable trusts. Although a revocable trust is a very useful estate planning tool and can provide clients with great benefits, it does not automatically allow you to avoid estate or inheritance taxes.
Once the personal representative has been appointed, the fiduciary can marshal assets. Marshaling Assets is learning what assets are included in the estate and retitling those assets into the name of the fiduciary estate.
The personal representative establishes the value of all assets and with paying all the lawful debts. In addition, the personal representative must file information about assets passing outside of the formal probate estate. One purpose of this reporting is to ensure inheritance taxes are properly collected.
The trustee for a revocable trust is responsible for the property under his control. Although the formal oversight performed by the Register of Will or Orphans’ Court does not apply to a trust, the trustee is still required to account for the value of the property and the trust’s financial activity. The Maryland Trust Act governs the duties of the trustee and the rights of the trust beneficiaries.
A fiduciary generally must satisfy the debts enforceable against a fiduciary estate. Under the probate system, creditors of the decedent have 6 months from the decedent’s date of death to file a claim against the probate estate. Secured creditors, however, may rely on the mortgage or other security instrument for payment. It is now common practice for secured creditors to file a protective claim.
A fiduciary estate is generally subject to several taxes, 1) the Maryland inheritance tax, 2) the Maryland estate tax, 3) the federal estate tax and 4) the Maryland and federal income taxes. If the estate is large enough to be taxable for federal tax purposes, the personal representative files a federal tax return and arranges for the payment of any tax due. This tax return must be submitted nine months from death. If the estate assets earn interest during the period of administration, a federal income tax return and a Maryland income tax return for the fiduciary estate will likely be required. The personal representative is also charged to file the decedent’s last personal income tax return.
Potential death taxes need to be addressed in any Maryland estate or trust administration after the death of the testator. If the potential taxes apply, the personal representative of the probate estate must take care of the issue promptly. Failure to assure that any tax due is paid may lead to a tax lien that will cloud the title of estate and trust assets.
A Maryland estate may be subject to three death taxes whether the transfer of property takes place in the probate court or outside the probate court 1) the Maryland inheritance tax, 2) the Maryland estate tax, and 3) the federal estate tax.
Maryland is one of only a few states with an inheritance tax. The Maryland inheritance tax rate is 10% of the value of the gift. It is only imposed on collateral heirs like a niece, nephew or friend. Heirs, such as parents, grandparents, children, stepchildren, children’s spouses, brothers or sisters, are not currently taxed.
Because the inheritance tax is a tax for the privilege of receiving property, the tax is due from the recipient, unless otherwise directed by the governing document. For example, if the governing document directs a specific bequest of $20,000 to a niece, and the document pays the inheritance tax like defined by law, the niece receives $18,000, the net value of the gift and inheritance tax.
We have summarized the Maryland estate administration process, however you will likely have specific questions and concerns to address.
For over 25 years, the law firm of Altman & Associates has concentrated on the law of estates and trusts planning – including helping hundreds of clients with estate and trust administration in Maryland, D.C. and Virginia.
Our Maryland estate administration attorneys and staff have the experience, training, and knowledge to guide clients through the process to ensure that Maryland estates and trusts are administered properly. To schedule a consultation, call 301-468-3220 or contact our Rockville office.