How to Liquidate Trust Assets of a Decedent

When the settlor, or creator, of a living trust dies, your duty as trustee is to carry out the settlor's wishes. In most cases, you will have to pay any taxes and debts the trust owes, liquidate the trust, and distribute the assets to the beneficiaries according to the settlor's instructions. You must use your best judgment to make decisions, and make them with the best interests of the beneficiaries in mind. You don't have to liquidate trust assets to distribute them, though you might have to do so in order to pay some of the trust bills.

Figure out whether the trust has to file an income tax return. You'll need to file a 1041 estate-tax return if the trust has taxable income. If the decedent has an executor to distribute assets that weren't placed in the living trust, report the tax information to the executor, who will handle the tax returns.

Settle any debts the trust owes, such as mortgage payments or brokerage fees. If the trust does not have enough cash to pay the debts or the taxes, you have the authority, as trustee, to liquidate the trust's assets by selling them off until you can pay the debts. If the estate can't pay off the decedent's creditors, they may demand payment from the trust as well.

Transfer the remaining assets in the trust to the designated beneficiaries. You can do this without liquidating the assets simply by transferring each asset into the appropriate beneficiary's name. For example, you'd transfer real estate by signing a deed in your capacity as trustee, transferring legal title to the beneficiary.

Dissolve the trust. Most state trust codes will dissolve the trust and end your responsibilities as trustee once all the assets have been distributed to the beneficiaries.

Warnings

  • Beneficiaries may ask you to distribute the contents of the trust as soon as the law allows. Do not do so until you're certain that the trust retains enough income to pay any taxes or debts; otherwise, you could find yourself liable for any taxes the trust can't pay. Part of your duty as trustee is to treat all beneficiaries fairly and impartially. Even if you are a beneficiary, you can't favor your financial interests over those of the other beneficiaries.