What Happens to a Trust When a Trustee Dies in New York

A trust does not end just because a trustee dies. What happens to a trust when a trustee dies? The assets are transferred to the successor trustee, as provided under the trust agreement. What if there is no successor trustee? The beneficiaries or any interested person may petition the court to appoint a successor trustee.

What is a trust?

A trust is an agreement executed by the grantor, transferring assets to the trustee who manages and administers such property for the benefit of the designated beneficiaries. In living trusts, the grantor is also the trustee and the beneficiary. When the grantor-trustee-beneficiary dies, the trust assets are transferred to the successor trustee named in the trust agreement, who then manages it for the benefit of the successor beneficiaries. Trusts are a popular estate planning tool to avoid probate, minimize taxes, and manage and distribute wealth for a long time after death.

Who is a trustee?

A trustee is a person appointed by the grantor to own, hold, and manage the properties of the trust. In the trust document, the grantor usually appoints a trustee and several successor trustees, just in case a trustee dies, becomes incapacitated, resigns, is disqualified, or can no longer serve as trustee. Sometimes, however, the trust document does not provide for many successor trustees, especially when the trust document provides for multiple generations. At one point then, there is no more successor trustee to serve. A trust does not fail, however, due to the absence of a successor trustee.

What happens when the trustee dies?

When the trustee dies, the successor trustee has the obligation to transfer the property to himself. Usually, this requires the submission of the original death certificate of the trustee and an affidavit of death of the trustee. In this affidavit, the successor trustee states under oath that the previous trustee has died, that the previous trustee owned property, and that he is the named successor trustee in the trust document. This would allow the county recorder (in cases of real property) or the bank (in cases of bank accounts) to allow the transfer of property to the successor trustee.

If the trustee who died is also the grantor, then the trust becomes irrevocable. Income from the trust can no longer be reported using the deceased grantor-trustee’s social security number. The successor trustee would need to get a tax identification number for the trust. In addition, the successor trustee needs to file some tax returns that report any income of the grantor prior to death. It is best for the successor trustee to consult with an accountant since properties will need to be appraised as well.

What happens when there is no qualified successor trustee provided in the trust agreement

When there is no more successor trustee provided in the trust agreement, any interested person (i.e., beneficiary) may petition the court to appoint a successor trustee. In New York, this procedure is governed by SCPA § 1502. Under this provision, the court may appoint a successor trustee when there are no other trustees able to act or succeed and it is still necessary to execute the trust. The court, however, will not appoint a trustee if such appointment will contravene the express terms of the trust.

If you would like to execute a trust agreement, you need an affidavit of death, or you need help in transferring properties to yourself as successor trustee, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].

The Successor Trustee's First Steps

When a trustee dies and the successor takes over, several immediate steps are critical:

• Locate the trust document. The original trust instrument and any amendments must be located, typically in the deceased trustee's files.
• Obtain the death certificate. Multiple certified copies will be needed for various transfers.
• Prepare and record an Affidavit of Successor Trustee. This document, recorded with property records for real estate or provided to financial institutions for accounts, establishes the successor's authority.
• Notify the trust beneficiaries. Letting the beneficiaries know about the transition and the successor trustee's identity.
• Inventory the trust assets. Determining what the trust holds and where the assets are located.
• Secure the assets. Taking control of bank accounts, brokerage accounts, real estate, and other property.

The transition period is a critical time. Assets that go unsecured during the transition can be lost, depleted, or claimed by parties without legitimate rights.

The Affidavit of Successor Trustee

The Affidavit of Successor Trustee is the primary document used to establish the successor's authority. It typically includes:

• Identification of the trust by name and date.
• Identification of the original trustee and confirmation of their death.
• Reference to the trust document's provisions for succession.
• Identification of the successor trustee and confirmation of their acceptance.
• A statement that the trust is currently in effect.
• The successor's affirmation of their authority to act.

The affidavit is typically notarized and recorded against real estate held in the trust. Banks and brokerage firms often require their own forms in addition to the recorded affidavit.

The Difference Between Revocable and Irrevocable Trusts

The death of the trustee has different implications depending on the type of trust:

Revocable living trusts. Typically the grantor is also the original trustee. When the grantor-trustee dies, the trust becomes irrevocable (because there is no longer a grantor to revoke it). The successor trustee takes over and administers the trust according to its terms.

Irrevocable trusts with the grantor as trustee. Less common, but when it happens, the grantor's death does not change the trust's irrevocable status. The successor trustee simply takes over.

Irrevocable trusts with a non-grantor trustee. The trustee's death does not affect the trust's status or terms. The successor trustee takes over and continues administration.

Trusts with multiple co-trustees. If one co-trustee dies, the surviving co-trustee(s) continue to serve. A successor may be appointed if the trust requires a specific number of trustees.

Tax Identification Number Changes

The deceased trustee's social security number can no longer be used as the trust's tax identification number. The successor trustee must:

• Apply for a new Employer Identification Number (EIN) for the trust if the trust does not already have one.
• File any final returns due using the deceased's SSN for income earned before death.
• Begin using the new EIN for income earned by the trust going forward.
• Notify financial institutions of the new EIN so 1099 forms are issued correctly.

The EIN application is straightforward and can usually be completed online through the IRS. Once obtained, the new number must be communicated to banks, brokerage firms, and other payers of income to the trust.

Tax Returns for the Year of Death

Multiple tax returns may be required when a grantor-trustee dies:

• Final personal income tax return. Federal Form 1040 and New York IT-201 covering income from January 1 to the date of death.
• Initial trust income tax return. Federal Form 1041 and New York IT-205 covering income earned by the trust from the date of death forward.
• Federal estate tax return. Form 706 if the gross estate exceeds the federal threshold (currently around $13.61 million).
• New York estate tax return. ET-706 if the gross estate exceeds the New York threshold (currently around $6.94 million).
• Gift tax returns. If gifts were made during the deceased's life that were not previously reported.

The successor trustee is generally responsible for filing the trust-related returns and may be responsible for the deceased's final personal return depending on the family situation. Coordination with the deceased's executor and accountant is important.

Trust Property Valuation at Death

Trust property generally receives a step-up in basis to fair market value at the date of death of the grantor for assets held in revocable trusts. The successor trustee should obtain appraisals or other valuations as of the date of death for:

• Real estate.
• Closely held business interests.
• Artwork, jewelry, and other personal property.
• Marketable securities (date-of-death values are easily obtained from brokers).

These valuations establish the basis for the trust's records going forward. Capital gains on later sales are measured against the stepped-up basis, which is often substantially higher than the original cost.

Successor Trustee's Ongoing Duties

After the initial transition, the successor trustee assumes the same duties as the original trustee:

• Investment of trust assets according to the prudent investor standard.
• Distribution to beneficiaries according to the trust's terms.
• Periodic accounting to beneficiaries.
• Filing of trust tax returns annually.
• Maintenance of trust records.
• Communication with beneficiaries about material matters.
• Treatment of similarly situated beneficiaries impartially.

The successor trustee's responsibilities are fiduciary in nature and carry potential personal liability for mistakes. Engaging counsel and adopting routine administrative practices reduces this exposure.

Court Appointment of Successor Trustees

When no successor trustee is named or all named successors are unable or unwilling to serve, the court can appoint a successor under SCPA § 1502. The procedure involves:

• Filing a petition by any interested party (typically a beneficiary).
• Notice to all interested parties.
• A hearing if the appointment is contested.
• Court appointment of a qualified individual or institution as trustee.

Court-appointed trustees are typically professional fiduciaries, attorneys, or institutional trustees rather than family members. The court considers the candidate's qualifications, the trust's needs, and any preferences expressed by the beneficiaries.