A living trust is a legal document that describes how the assets of a trust's owner will be divided after death. This division usually is a two-step process that occurs after the death of each spouse, but the particulars can vary depending on the trust structure. Trustees are legally obligated to distribute assets to beneficiaries according to the written instructions of the trust.
Death of First Spouse
If a trust was created by a couple, there typically isn't a distribution to beneficiaries after the death of the first spouse. Most living trusts divide into two subtrusts, known as a bypass trust and a survivor's trust. According to estate planning attorney Denis Clifford, this is primarily a way to minimize state and federal estate taxes, as the assets of the first decedent are divided into the bypass trust and kept out of the survivor's estate when the second spouse dies. However, these trusts, also known as "AB trusts," also are used for planning purposes, especially in the case of a second marriage.
After the death of the second spouse, or the single owner of a living trust, the successor trustee inherits the responsibility of managing and distributing the trust assets. The successor trustee is a person named in the trust documents for that purpose.
The first order of business for a successor trustee is to take an inventory of the assets in the trust and their values, according to California estate attorney Michael S. Harms. If no other source has been established to pay the bills of the trust, creditors must be paid out of trust assets by the successor trustee.
Before the estate assets can be divided among beneficiaries, the successor trustee must distribute items that have been specifically enumerated in the trust documents. For example, one beneficiary might be listed as receiving a specific piece of jewelry, while another might have the rights to a coin collection.
After specific bequests are handled, a trustee will divide the remaining assets according to the trust instructions. Often, this is a percentage distribution, such as 50-50 for two beneficiaries, or 25 percent each for four recipients.
To help prevent disputes, Harms recommends that trustees prepare a distribution plan and have it signed by beneficiaries before any assets are delivered.
In some cases, trust assets simply will be liquidated and distributed to beneficiaries according to trust percentages. Other times, assets of equal value might be distributed rather than split. For example, if an estate includes a home worth $400,000 and other assets worth $400,000, the trustee may award the house to one beneficiary and the remaining assets to the other, if there are two equal beneficiaries.