How to Pay Remaindermen when Terminating a Trust
When terminating a trust, any assets left after the final income distributions and the payment of all necessary expenses go to the remaindermen. Remaindermen are individuals or organizations named by the trust instrument to receive the remaining property after the trust’s income interest ends. When dividing the assets between multiple remaindermen, be sure that each receives property equal in value to his or her proportionate share.
Your allocation of trust assets among the remaindermen needs to be equitable, but you’re not required to give each remainderman a proportionate piece of every asset. The starting point for the division of trust principal is the value of the assets on the trust’s termination date.
Certain assets are difficult to divide, but these assets don’t have to be sold to ensure that everyone gets an exactly proportionate share of every type of property. All that matters is that each receives property equal to his proportionate share. The allocation of the total value of all the assets must be exactly proportionate to the shares called for in the trust instrument (which may be unequal shares).
Transferring assets to the remaindermen can be complicated. Cash can be disposed of by writing a check, but property may be transferred to the remaindermen in the following ways:
Stocks and bonds (publicly traded): Notify the broker of the transfer by signing stock assignments to transfer ownership to the remaindermen. If you’re holding stock certificates in the name of the trust, you must deliver the certificates with stock assignments, to each of the companies, who then reregister the stock in the name of the remainderman.
Stocks and bonds (privately held): Contact the companies directly. They’re probably already aware of the transfer, and they’ll provide you with the necessary documents to effect the change.
Real estate: Draft a new deed, transferring title to the remainderman. Then record the new deed with the county, city, or town where the property is located. You may want to consult an attorney to draft and record the new deed.
Partnership interests: Contact the general partner with the name and federal tax identification number or Social Security Number of the new partner.
Royalty interests: If the trust has interests in natural resource leases, notify the manager of the change in ownership. If the royalties derive from intellectual property, such as music or books, provide the publisher with the information he or she requires to change the ownership interest.
Promissory notes or mortgages held by the trust: Trusts often lend money to a beneficiary or remainderman and evidence this loan by either a promissory note or a mortgage. If the promissory note has the trust as the lender and the remainder interest as the borrower, no transfer is required. Subtract the outstanding loan amount from the total amount payable to that remainderman.
If the loan was made to a third party, draft a new note and change the name of the lender, referencing the old note, and restating the terms. As with the real estate transfer, you may want to have an attorney’s assistance. If you’re dealing with a mortgage, the attorney should record the new mortgage and file a mortgage discharge for the old.
When dividing the assets, don’t guess at the worth of hard-to-value assets, such as real estate or business interests — obtain a professional appraisal as of the termination date.
If you can simply give the hard-to-value asset proportionately to the remaindermen and they all agree, a formal appraisal isn’t necessary.