My mother has a living trust that leaves her house to her two grandchildren and the rest to her four children. Two years ago, she went into a care home and acting as Trustee, I took over all the bills, including a second on the house, taxes, etc., because her income is only enough to cover her care. If she was to die today, how would I settle the trust and be compensated for the thousands of dollars I've paid from my own money when her only real asset, other than a small IRA, is the house? The grandchildren do not want to sell the house. The house is currently being rented by one of the grandchildren but the rent and any sold assets, such as her car, are paying down my mother's old debt and home repairs/ improvements. Thank you for your time.
M., Rio Linda
A: One of the obligations of a trustee is to pay all of the debts of the deceased settlor before the assets of the trust pass to the beneficiaries. While it is very generous of you to do so, you should know that, as a trustee, you are under no personal obligation to pay any expenses relating to your mother's assets, such as maintaining her residence. If you voluntarily decide to continue to do so, the law provides that, at your mother's death, her debts are to be paid in the following order: debts owing to the United States or the State of California (such as taxes), administration expenses (such as your fees for acting as trustee), mortgage obligations on a residence, funeral expenses, expenses of last illness, family allowance (a court order must be obtained for this expense), wage claims of any persons employed by your mother, and general debts. Reimbursement to you for the expenses you have paid would fall into the category of general debts.
Once the nature of the debts is determined, then you must consider the order in which the assets of the trust may be used to satisfy the debts. Given the information you have provided, the property that goes to you and your three siblings would be used first to pay her debts. If that property is insufficient, then the equity in the house would be used to pay those debts. While the grandchildren may not wish to sell the house, neither can they succeed to ownership of the house if your mother's debts have not been paid. One way for them to keep the house and still ensure that your mother's debts are paid is to refinance the house in their own names, taking out sufficient cash to pay those debts. If they are not able to do this, then you have authority as trustee to sell the house to pay those debts. While this is likely the least desirable result, it must be remembered that creditors are entitled to be repaid for debts incurred by the settlor during the settlor's lifetime.