A successful trustee must balance the many complex considerations involved in trust administration. It includes assessing one’s capabilities, understanding legal obligations, and financial management skills.
In addition, trustees must also evaluate their ability to handle emotional issues that may arise between beneficiaries or within the family. In these instances, seeking professional guidance or co-trusteeship with a professional fiduciary is an appropriate solution.
Tax savings
Trust administration in California, allows trustees to take advantage of numerous tax savings opportunities. Many people set up trusts to exclude assets from their taxable estates, thus reducing their tax liability. However, the income taxes imposed on trusts are often more complex than those imposed on single taxpayers. Beneficiaries need to understand these tax rules.
For example, some states tax trusts as resident trusts based on where the beneficiaries reside. In these situations, limiting distributions can reduce state income taxes for the beneficiary.
In addition, the trustees need to settle all outstanding debts and liabilities promptly. This step can prevent creditors from pursuing claims against the trust or trustees in the future. It can also help shield you as a trustee from personal liability for such claims by the beneficiaries. Lastly, allocating expenses properly according to IRS regulation allows for greater deductions on Schedule K-1 at the trust’s termination. It can result in significant tax savings for beneficiaries. This is one area where it can pay to have a knowledgeable attorney assist you with the trust administration.
Asset protection
Some clients may choose to protect assets from creditors in various ways. Asset protection plans can include jointly-held property under the tenants by entirety coverage, trusts, corporations, and limited liability companies. Attorneys frequently incorporate these structures into estate planning for their clients. However, effective asset protection must begin before a claim or liability arises.
During the trust administration process, trustees should carefully review the trust’s provisions for any debts and expenses that must be settled before making distributions to beneficiaries. Creditors can file a claim for outstanding debts and fees against the estate. The successor trustee must resolve claims and pay taxes before making final distributions.
The trustees may need to invest additional funds and liquidate certain assets to make the necessary distributions. This process can take months, depending on the trust document’s specific instructions and the assets’ state. Trustees need to communicate clearly with beneficiaries and set an estimated time frame for completion of the trust.
Family Legacy
Trust administration involves winding up the decedent’s affairs, overseeing all trust activity, and determining how funds should be distributed to beneficiaries. Sometimes, the trustee must file a comprehensive trust accounting with the court. At the beginning of the administration process, trustees should seek legal counsel to determine their obligation to provide a complete trust accounting. Failure to do so could result in claims by beneficiaries or other creditors against the estate.
In many cases, the trustee may be responsible for settling any existing debts, taxes, or other financial obligations before distributing assets to the beneficiaries. The trustee must obtain consent from the beneficiaries before issuing any checks, which will protect the trustee against future beneficiary claims.
Preserving family wealth and achieving long-term legacy goals requires trust.
Investment management
A diverse group of individuals and organizations utilizes investment management services. They can help investors accomplish their financial goals by selecting and managing a portfolio of securities (like stocks, bonds, and cash) that suit their needs and risk tolerance.
Depending on the trust provisions, assets may be divided into sub-trusts for beneficiaries or allocated to multiple individuals. In these cases, an “administrative” trust must be created for accounting purposes. A bank account should be set up in the name of this new entity, and all expenses should be recorded.
One of the most important responsibilities of trustees is making distributions to beneficiaries. It must be done carefully only after the trustee understands all outstanding debts, costs, and obligations. Trustees must be sure they are acting within their powers and are not violating any fiduciary duties. Effective communication and professional assistance can help trustees avoid costly liability claims. It is particularly crucial when trustees handle disputes among beneficiaries or interested parties.
Tax planning
Trust administration often offers tax planning opportunities for beneficiaries. Trustees must report all income and expenditures to government agencies. They can also work with an attorney, accountant, or investment adviser to develop a tax-efficient strategy that meets the family’s goals and complies with applicable law.
For instance, if the trust calls for the sale of real estate, it may take months to market the property, find a buyer, and close the transaction. In this case, the trustee should consider the state income tax impact of the investment as part of the analysis.
Moreover, if the deceased person has debts and liabilities, the successor trustee should settle them during trust administration. It will prevent future creditor claims against the trust assets and protect the trustee from personal harm.
