Trustees must be chosen to administer a trust. In a testamentary trust, a person other than the executor is occasionally chosen, conferring different rights and obligations to the executor and to the trustee. A trustee, however, will remain until all the assets are ultimately distributed. Note that trustees do not assume their duties until the assets are distributed to the trust. Testators or grantors should select trustees whom they believe will exercise strong, fair, compassionate, and independent judgment.
Suggestions include a bank, attorney, accountant, spouse, child, close friend, cousin, nephew, or other trusted relative. Whoever is chosen must be fiscally astute, and the primary beneficiaries should have comfort in the selection. Furthermore, multiple trustees can be designated to provide for divergent interests to be represented. If an even number of trustees is selected, there should be a built-in mechanism for tie breaking.
Occasionally some trustees are given extra votes to provide a limited mechanism for control. Trustees and executors are entitled to statutory fees, even if no such fee is stipulated in the trust documents. If there is a desire not to pay fees, this should be specifically stated.
Similarly, trustees and executors may or may not have to obtain a fidelity bond, depending on the will or trust; thus, any desire to forego obtaining fidelity bonds must likewise be stated in the document establishing the trust. Such bonds are obtained from insurance or bonding companies and ensure the truthfulness and performance of the executor and trustee.
Irrevocable trusts that are not grantor trusts or living trusts are taxed on undistributed income at the trust tax rate schedule. Such trusts that distribute income to beneficiaries receive a deduction for the distributions, and the beneficiaries pay the tax on their individual income tax returns.
Income Tax Return for Estates and Trusts; beneficiaries are provided with a Form K-1 to report the income distributed to them. Note that trust tax rates and income ranges are more compressed than individual rates. Long-term capital gains are usually not considered income that can be distributed, so the trust is taxed on this income. The trustee can make certain elections beyond the scope of this article to have the beneficiaries pay the tax on that income.
This should be discussed carefully before such elections are made. A trust must use a calendar year for reporting, unless the trust is created under a will or is a living trust and an election is made using IRS Form , Election to Treat a Qualified Revocable Trust as Part of an Estate. When a fiscal year is permitted, the trust can elect to use a fiscal year that ends in any month through the month before the anniversary of the month of death.
For example, if a grantor dies in June, the trust can elect to use a fiscal year ending in any month up until the following May. Filing requirements and exemptions also apply to trusts and estates. The instructions spell out the filing requirements, and trustees must be aware of this.
For these purposes, two general categories of trusts apply: simple trusts and complex trusts. A simple trust is one that distributes all of its income currently; no charitable contributions are permitted, and amounts allocated to the corpus are not distributed.
A complex trust is a trust that does not qualify as a simple trust. Estates, on the other hand, can make distributions as the executor determines for as long as the estate is kept open. Income retained in the trust or estate is taxed at the trust tax rates.
Any power not so given cannot be exercised, with certain narrow exceptions. A trustee has very broad powers not only to control the distributions in amount and timing, but also to invest the principal. A trustee can also have the power to invade principal to make a distribution to a particular beneficiary to the exclusion of other beneficiaries. Some trusts contain provisions where the trustee can make uneven distributions to people in the same class of beneficiaries; this is called a sprinkling power.
Some of the children or grandchildren may be very wealthy, while others may be less so. A trustee with a sprinkling power can arbitrarily make distributions to the poorer children while distributing nothing to the wealthier children. This can create conflict, especially since in many instances these are subjective decisions. A person nominated as a trustee should be aware of this, as well as the potential for conflict, before accepting the role and responsibilities of trustee.
When this occurs, the trustee should try to have the grantor prepare a letter or description of when this power may be exercised. A trustee can also make payments on behalf of a beneficiary rather than making such payments directly to the beneficiary e. A potential trustee or executor should make sure she knows what she is getting into before accepting this responsibility. The authors have heard many stories of executors and trustees overstepping their bounds by self-dealing, paying themselves exorbitant fees, making terrible investment decisions, generally disregarding the responsibilities they have assumed, or engaging in illegal actions.
Below are tips to ensure the reliability of trustees and executors and to protect the beneficiaries:. It is impossible to protect against every situation, but setting up a sound plan should deter most people from dishonest actions. Incompetent or inappropriate actions usually happen when the grantor picks the wrong person.
Personal Finance. Your Practice. Popular Courses. Business Essentials Guide to Mergers and Acquisitions. Business Business Essentials. What Is a Third-Party Distributor? Key Takeaways A third-party distributor is an institution that sells or distributes mutual funds to investors for fund management companies.
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Learn What an Investment Company Is An investment company is a corporation or trust engaged in the business of investing the pooled capital of investors in financial securities.
Partner Links. Related Articles. House Brands. Investopedia is part of the Dotdash publishing family. Beneficiaries may agree that the best route of action is to sell the property and divide the proceeds equally among them.
If a beneficiary is residing in the property, they may be able to work out an agreement with the other beneficiaries in which the property will transfer to them, but the other beneficiaries will receive an increased share of the other trust assets. Because trustees can generally sell trust property without first consulting with beneficiaries, it is recommended for beneficiaries to voice their desires early in the administration process to avoid real property they want to inherit from being sold.
Forcing the sale of jointly owned property through a partition lawsuit has the potential to get complicated, so it is best to file partition lawsuits with help from a probate attorney. If trustees have reached a point where they can start making distributions of trust funds to beneficiaries , that means they have successfully settled the trust and are at the final stage of the administration process. This is not the time for them to get lazy or negligent, as trust distributions should be made in a timely manner, and in accordance with the terms of the trust and state laws; otherwise, the trustee could be held personally liable.
Distribution of trust assets to beneficiaries can take a variety of forms. Trusts can be straightforward and easy to distribute, or complex and complicated to distribute. Factors playing a role in how assets will be distributed include:. Most of the time, the terms of a trust direct the trustee to distribute percentages of trust assets to beneficiaries. Steps trustees should follow when making trust fund distributions to beneficiaries include:.
It is impossible to distribute percentages of trust assets without first knowing the value of the trust as a whole. To determine this, trustees should consult with professionals e. Once trustees know what the trust and its assets are worth, it is advisable for them to meet with beneficiaries to determine how to proceed.
An arrangement like this would eliminate the need for the trustee to sell either piece of property. If the beneficiaries would rather sell the property and divide the proceeds, the trustee can move forward with facilitating the sale.
As previously mentioned, extra steps and additional documentation may be required to transfer certain kinds of trust property to beneficiaries. Every state has different laws regarding property transfers, so if trustees are unsure about the steps required for making a legal transfer of trust property to a beneficiary , it is crucial they solicit the help of a trust lawyer.
There will always be some trust assets that are not specifically designated to beneficiaries. The main takeaway for beneficiaries and trustees is that it is wise to have an experienced probate lawyer on hand in case any questions or concerns arise about trust distributions. If the trust distribution was made from trust income, beneficiaries may have to pay income taxes on it, while distributions of principal generally pass tax-free.
If the trust distribution was made from a combination of trust principal and trust income, beneficiaries may have to pay taxes on the portion of the distribution that was income. Using that form, the beneficiary can determine how much of their distribution to claim as taxable income when filing their taxes. Are you concerned the trustee is not making trust fund distributions to beneficiaries in a timely fashion?
Our beneficiary representation lawyers are standing by to help. We provide counsel to both beneficiaries and trustees about distributions of trust funds after death. Schedule a free consultation to learn more! Stay up to date with what is happening in the exciting world of probate law through our quarterly newsletters. They provide insight into the latest probate developments, discuss some of the more interesting cases Keystone attorneys have worked on, and provide updates about our firm.
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