Can The Impact Of Adverse Tax Consequences Of Trusts Be Reduced?
The main income tax consequence of having a beneficial interest in a trust is that the trust income tax rate is extremely high compared to the individual federal income tax rate. After approximately $10,000, the trust income tax rate reaches 40 percent of the income received in the year. The main purpose of tax reduction for trusts is that the distributions from the trusts to the beneficiary are a tax deduction for the trust. For example, if the trust receives $10,000 in income and distributes $10,000 of income to the beneficiary, then the adjusted income for tax purposes is going to be zero, which means that no tax would be owed. The trust would then issue the beneficiary a K1 statement for them to report on their IRS form 1040 for the trust for that year. This means that the income tax ramifications of income generated from trust assets can be passed to the beneficiary at his or her tax rate.
Can A Trustee Ever Mix Trust Assets With His Or Her Own?
A trustee can mix trust assets with his or her own, but this is almost always a horrible idea. There is a general principle that a trustee cannot comingle assets (which means to mix personal assets with trust assets). This becomes a problem due to the reporting requirements owed to the beneficiary and can make it difficult to determine whose money belongs to whom. If trust assets are mixed with personal assets that belong to a trustee who did not create the trust, then something has gone wrong with the trust administration and problems are likely to occur in the future.
Can A Trustee Seek Help From Professionals To Guide Them On The Administration Of The Trust?
A trustee can always seek professionals to help guide them through the administration of a trust. However, assistance may not be necessary for simple trusts that involve beneficiaries who get along very well with the trustee, so long as the trustee is sufficiently savvy to perform the work needed. In most cases, a trustee will need to have an attorney give them the lay of the land insofar as what they will need to do. My law firm provides trustees with a manual that contains detailed instructions about their responsibilities.
If a trustee decides after an initial appointment with an attorney that they do not need any further assistance, then they are free to take it from there. If a case involves large or multiple types of assets, complicated investments, or complicated businesses, then the trustee will need to utilize more professionals. Due to the complexity of tracking all transactions, a CPA will commonly be used for accounting and completion of the IRS form 1041 for the trust. If the dollar amount is large enough, then a certified financial planner can help make investment decisions consistent with the prudent investor rule. Simply put, the easier the family situation and the fewer assets involved, the less one will need to rely on professionals.
How And When Is The Trustee Compensated?
A trustee is typically compensated pursuant to Florida law, which means that they are entitled to reasonable compensation under the circumstances, which is a very vague standard. The grantor who creates the trust can set a certain compensation schedule for the trustee, as well as state which family members are (or are not) entitled to compensation. If, according to the trust, the trustee is not entitled to compensation, then that may result in a situation where no one will serve to do the job because they will not be compensated.
Defining reasonable compensation under different circumstances will very much depend on the complexity of the trust, the types of assets it holds, the total value of those assets, the number of family members involved, and the complexity of the terms of the trust. Oftentimes, the compensation that goes to a trustee will be extremely high during the year that the grantor passes away as compared to the compensation for maintenance of the trust in the years following. The compensation that goes to a trustee can also be increased due to difficult beneficiaries or beneficiaries who are constantly requesting money and distributions despite the requests being contrary to the terms of the trust. There are many variables that will affect the compensation level of the trustee, but ultimately what is judged is what is reasonable based upon the market of other paid trustees.
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