What Is A Purely Discretionary Trust?
A purely discretionary trust allows a trustee to use their own personal judgement about when and when not to give the money to a beneficiary. A purely discretionary trust could be written in such a way that a trustee has the sole discretion to make a distribution to the trust, which could mean that the trustee decides to never distribute money to the beneficiary. A purely discretionary trust without any standards could present problems for certain beneficiaries. However, this type of trust could be amended by the creator to provide additional instructions in terms of when to make a distribution to a beneficiary. Rather than using terminology such as the HEMS standard to give the trustee a broad range of discretion, these instructions should be very sophisticated and specific.
What Is A Spendthrift Trust?
A spendthrift trust contains a spendthrift provision which states that the beneficiary of a trust cannot encumber voluntarily or involuntarily his or her interest in the trust. In other words, it means that the beneficiary cannot use the trust as collateral to obtain a loan under the terms of the trust. Since the beneficiary cannot use his or her beneficiary interests as collateral for a loan, the beneficiary’s interests in trusts cannot be subject to involuntary transfer by means of garnishment, execution, bankruptcy, or any other form of liquidation for a creditor’s claim. Having a spendthrift provision in a trust prevents a beneficiary from squandering his or her inheritance by, for example, using it as collateral for an early payout or losing the funds due to events such as a car accident, bankruptcy, or divorce.
What Does It Mean That A Trustee Must Act By A Prudent Investment Standard?
A prudent investment standard for a trustee relates to the trustee’s duty to provide care and maintain trust investments. This means that a trustee must manage investments in a way that a prudent person would manage investments. In other words, the trustee should not look to invest in wildly volatile or speculative investments or fall for investment schemes promising an exorbitant rate of return outside normal investment standards. The prudent investor utilizes investment standards to get a return on investments, but not to seek investments that could completely be wiped out because of their speculative nature. In addition, a prudent investor must properly investigate the investment instruments and evaluate them before making a purchase.
What Information Must The Trustee Update The Beneficiaries On During The Trust Administration?
During the trust administration, the trustee must keep the beneficiaries reasonably informed about the trust business. More specifically, the trustee must give the beneficiaries a copy of the trust, and all of the information concerning the initial trust assets and inventory upon the trustee’s acceptance as the trustee. The trustee must give accountings to the beneficiaries annually, and should give sufficient notice to the beneficiaries concerning any major trust transactions so that the trustee would have the opportunity to handle objections before certain actions are taken. In many instances, that is not required by law, but as a professional standard, a trustee should keep beneficiaries updated on major transactions, such as the sale of primary assets of the trust or dealings with highly personal family trust assets. Ensuring that this is done will work to prevent potential future misunderstandings.
Are All Trusts Taxable At Both The State And Federal Level?
Not all trusts are taxable on the federal level, and the state of Florida does not tax trusts on a state level. The trust taxation on a federal level can vary based on the circumstances. If someone is creating their own revocable living trust and using their social security number to create accounts under the name of the trust, then all income for trust assets will be reported on their individual IRS 1040 form. This is because they would be the primary beneficiary of the assets, even though they would be the owner of the trust.
The more control the creator of a trust relinquishes, the more likely it is that a federal tax ID number will be required for the trust, and as a result, a trust tax return (IRS form 1041) would need to be filed. In all cases, if someone is the beneficiary of a trust that they did not create, then a federal tax identification number and Form 1041 will be required.
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