Trusts have become extremely popular in recent years. The most popular type is the intervivos or living trust which is used to control the disposition of your assets after death while avoiding probate.
Many of these trusts are A-B trusts where the trust splits on the death of the first spouse into two trusts: the A, or surviving spouse’s trust, and the B, or the deceased spouse’s trust. This arrangement is used to eliminate or save on estate taxes owed.
When setting up a trust, you will want to work with a lawyer and a financial planner who specialize in trusts and estate planning. Once the trust has been drawn up, you will need to change the title on each and every asset you wish to place in the trust.
Trusts are drawn up by the trustors and managed by the trustees for the beneficiaries. Beneficiaries include the income beneficiaries, who are entitled to current income according to the terms of the trust, and the remainder beneficiaries, who receive the principal upon death of the trustors.
In general, if you have a living trust where you and your spouse are the trustors (creators) of the trust, trustees and income beneficiaries of the trust, you do not need a Federal Tax I.D. number and do not need to file a trust tax return. Your investments would report the income under your social security number and the income would go directly on your personal tax return.
If your living trust has its investments reporting under a Federal Tax I.D. number, you will need to file a trust return to let the IRS know what the trust income is and that they can find it reported on your personal return under your social security number.
When the trustor or grantor of the trust is no longer the trustee of the trust, the trust often needs to obtain a tax I.D. number and begin filing its own returns. This also applies to the B trust after the first spouse dies and to all other irrevocable trusts.
The responsibilities of the trustee should not be taken lightly.
The trustee is required to manage the trust and distribute income per the terms of trust document. When the trust document is silent as to certain income distribution provisions, then the California Principal and Income Act must be followed.
The trustee is responsible for doing the annual trust accounting and determining the trust accounting income. Trust accounting income must be accurately determined in order to preserve the rights of both income and remainder beneficiaries.
Trust accounting rules often differ from income tax accounting rules.
In addition to a thorough knowledge of the trust document and the California Principal and Income Act, the trustee will want to enlist the help of a lawyer and tax preparer expert in trusts to ensure that they fulfill their statutory duties and beneficiaries are treated equitably.