I recently had the privilege of serving as one of the Sacramento Bee’s experts for the “Ask the Expert” column by Claudia Buck, Personal Finance columnist. The following Q & A, based on an answer I wrote that was posted online at www.sacbee.com/personalfinanceblog, deals with a topic that comes up regularly in my practice and may be a situation you have faced: how long, after the death of the settlor, can the assets remain in the trust before distribution to the trust beneficiaries must be made?

Q:  “Is there any harm in leaving a house titled in a trust name after a person is deceased? All other assets have been disbursed, the house is a rental and the rent is split evenly (after expenses) among the siblings, each claim the income and expenses on our individual tax returns, is that okay?”  

A: Unless the trust terms state otherwise, a trust cannot continue indefinitely.  The trustee is required to follow the terms of the trust, which may require that the house be sold or distributed to the beneficiaries.  If the trustee fails to do this, a beneficiary could sue him or her for breach of duty.

There are also expenses involved in keeping a trust going.  Unless the trust waives them, annual accountings are required, and the trustee may be entitled to compensation.  Further, the trust has to file a yearly income tax return.

Even if these requirements do not cause you concern, you will find the situation becomes quite complicated if any beneficiary dies or becomes incapacitated, or decides he or she wants to sell his or her portion of the property.

For example, if you inherited the property from your parents, you can eliminate or minimize property tax reassessment under CA law using the parent-child exclusion. (Note: If this is the case and the paperwork to document this exclusion has not yet been filed, you should consult with experienced counsel to be sure this step is handled properly). But if one of the children then dies before the property is ever in the child’s name, you will face a more complicated situation with the county assessor if the property is distributed from the trust to someone other than a child.

To avoid these complications, I would distribute the rental to the beneficiaries in accordance with the terms of the trust. Then the co-owners could create a tenancy-in-common agreement to document their agreement as to how bills will be paid and net proceeds distributed.

Remember to maintain insurance for the property; and each owner should make sure that his or her interest in the property is covered by his or her own estate planning documents.

If the trust has not been filing an income tax return and you and your siblings have been claiming the income and expenses on your individual returns, I recommend that you consult with an attorney or your CPA regarding the filing requirements for trusts.