What Happens to an Irrevocable Trust When the Grantor Dies?

What Happens to an Irrevocable Trust When the Grantor Dies

Irrevocable trusts offer attractive benefits from tax avoidance to caring for a child with special needs. But after the trust creator’s death, beneficiaries may wonder what’s next. What happens to an irrevocable trust when the grantor dies? Here’s a basic overview explaining what to expect after the death of a loved one who created an irrevocable trust.

What is an Irrevocable Trust?

An irrevocable trust is a trust the creator (or “grantor”) cannot change or revoke. When the grantor places assets into an irrevocable trust, they give up control of those assets. The trustee manages the assets from that point on. Once created, an irrevocable trust cannot be easily changed or terminated.

While an irrevocable trust lacks the control and flexibility offered by a revocable trust, it also offers many benefits that a revocable trust cannot provide. Different types of irrevocable trusts may be used for:

  • Asset protection from creditors or lawsuits
  • Reducing estate and other tax exposure
  • Providing for a disabled child
  • Supporting meaningful causes like nonprofits

Some of the most popular types of irrevocable trusts in California include:

  • Irrevocable Life Insurance Trusts (ILITs)
  • Irrevocable Defective Grantor Trusts (IDGTs)
  • Charitable Remainder Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs)
  • Special Needs Trusts 
  • Grantor-Retained Annuity Trusts (GRATs)

After the grantor’s death, revocable living trusts also become irrevocable.

Trustee Duties After Grantor Dies

When the grantor dies, the person named as the successor trustee is responsible for administering the trust. The successor trustee should seek the advice of an experienced trust administration attorney to help guide them through the trust administration and make sure they follow all legal requirements. 

First, the new trustee needs to obtain the trust and any other estate planning documents, plus certified copies of the grantor’s death certificate from the coroner’s office. Some of the successor trustee’s responsibilities during the trust administration include the following tasks: 

Sending notices to the beneficiaries and heirs: Within 60 days of the grantor’s death or 60 days from the date they took over as trustee, the trustee must send a notice to each beneficiary and heir including basic information about the trust and informing them of their right to request a copy of the trust agreement.

Notifying and negotiating with creditors: The trustee must send notice of the trust administration to potential creditors, allowing them a set amount of time to make claims for any outstanding debts the grantor may have owed. If a claim is made, the trustee must negotiate with the creditor to settle the debt.

Taking inventory of trust assets: The trustee must inventory all trust assets, including real estate, personal property, bank accounts, and investments.

Valuation of assets: The trustee must determine the fair market value of assets, securing professional appraisals if necessary. 

Handling taxes: The trustee must file the grantor’s final income tax return and an estate tax return if needed. Any taxes owed should be paid or held in reserve for future payment before assets are distributed to the trust beneficiaries.

Distributing Assets: Once all debts and taxes are settled, the trustee will distribute assets to beneficiaries as directed by the terms of the trust.

Possible Continued Management: If the trust assets are not fully distributed, the successor trustee would be responsible for investing those assets to generate income for the trust. Under these circumstances, the trustee must provide beneficiaries with an annual formal accounting as long as the trust remains open. Beneficiaries can also request reasonable financial information at any time.

Managing Sub-Trust for Minors: If the trust leaves assets to a minor child, those assets would become a sub-trust dedicated to the child’s health, education, maintenance, and support. The successor trustee would manage the sub-trust until the beneficiary turns 18.

How to Dissolve an Irrevocable Trust After Death

Irrevocable trusts cannot easily be changed while the grantor is still alive. But after the grantor’s death, the California Probate Code allows an irrevocable trust to be modified or terminated in two specific situations. 

#1: The Beneficiaries All Agree

Under California Probate Code §15403, if all the beneficiaries agree, they can petition the court to modify or terminate the trust. The court would need to determine that the reason for modification or termination outweighs the purposes of the trust. 

#2: The Court Orders It

Under California Probate Code §15409, a trustee or beneficiary can request that the court modify or terminate a trust if unforeseen events occur and the current trust terms would defeat or impair the trust’s intended purpose. This is called the “change in circumstances” doctrine.  

An example would be if a beneficiary became disabled and would lose access to government benefits unless the trust was converted to a Special Needs Trust. 

How Long Can an Irrevocable Trust Remain Open After Death?

After death, can an irrevocable trust remain open forever? California’s “Rule Against Perpetuities” prevents a trust from remaining in effect indefinitely. Under this rule, an interest in an irrevocable trust must terminate 21 years after the death of the last potential living beneficiary or 90 years after the trust was created. 

However, very few trusts remain open this long since most trusts direct the trust assets to be distributed and the trust terminated after the grantor’s death.

Can an Irrevocable Trust Be Contested?

Yes, a beneficiary or heir can contest a trust when there is a valid reason. A few common reasons trusts may be contested include:

  • Mental Incompetence: The settlor was mentally incompetent when they created or updated their trust. 
  • Undue Influence: Someone influenced the grantor to create or change a trust for their own personal gain. 
  • Forgery: The signature on the trust document was forged by someone other than the grantor. 
  • Defective Document: The grantor didn’t follow the required legal procedures for drafting or signing the trust document.
  • Multiple Documents: Multiple trusts exist, calling into question which trust reflects the decedent’s actual last wishes.

If you are considering contesting a trust, consult an experienced trust litigation lawyer for advice on the strength of your position and secure appropriate legal representation before moving forward.

If you have any questions about what happens to an irrevocable trust when the grantor dies, feel free to contact our law firm.

Law Offices of Daniel A. Hunt

The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.