Trusts were once used almost exclusively by very wealthy families as a way to pass down the family wealth without incurring taxes during the transfer of wealth. Trusts also allowed for a degree of continued protection or control over the family money the family patriarch was gone.
Eventually, the government closed the tax loopholes; however, that did not discourage the use of trust agreements. On the contrary, it caused trusts to evolve to the point where trusts are now commonly found in estate plans.
One thing that all trusts have in common is the need to appoint a Trustee (a kind of Manager) to oversee the administration of the trust and manage the trust assets. The Trustee of a trust has a wide range of duties and responsibilities. One commonly over-looked Trustee responsibility is tax preparation. If you are a first-time Trustee, failing to understand your tax preparation responsibilities could be a costly mistake.
Trust Basics: What Is a Trust?
One of the biggest mistakes people make when creating a trust is to appoint a spouse, friend, or family member as the Trustee of the trust without taking the time to understand what the job of Trustee entails. Consequently, the Trustee may feel lost and unsure where to begin with his duties and responsibilities. If you are in this position, the best place to begin is to learn some trust basics, starting with the definition of a trust.
A trust is a relationship whereby an asset or property is held by one party for the benefit of another. The person creating a trust is called a “Settlor”, also referred to a Trustor or a Grantor, who transfers property to a Trust.
The Trustee holds that property for the trust’s beneficiaries. Those beneficiaries may be current or future and may be an individual, an entity, or even your family pet. Every trust must have at least one beneficiary and may have numerous beneficiaries.
Trustee Duties and Responsibilities
The Trustee of a trust is responsible for administering the trust according to the terms created by the Settlor. The Trustee must follow those terms precisely unless a term is illegal or immoral. The role of Trustee is a fiduciary role which essentially means you must handle the trust assets with even more care than you handle your own and must always make decisions based on the best interest of the trust beneficiaries. Typically, a Trustee does more than simply protect trust assets, he also invests those assets and distributes the interest or principal from the trust to the beneficiaries according to the terms of the trust agreement.
Tax Preparation: An Important Trustee Responsibility
One Trustee responsibility that may be over-looked, or that you may not pay much attention to, is tax preparation. Failing to take the tax aspect of your job as Trustee seriously, however, could have grave consequences for the trust – and even for you as Trustee!
A trust is a separate legal entity. As such, the Trustee of the trust must prepare and file a trust tax return every year and must pay any taxes due out of trust assets.
Failing to prepare, file, and pay taxes on behalf of the trust could be a breach of your fiduciary duty. Under certain circumstances, you could even be held personally responsible for any taxes, fines and penalties due.
To ensure that you perform your tax preparation duties properly each year it is in your best interest to keep detailed records of all trust business throughout the year. Unless you have a background in finance or tax, it is also in your best interest, and that of the trust, to retain the services of a tax professional to assist you with tax preparation.
Just as you will likely consult with an experienced estate planning attorney to help you administer the trust, you should not hesitate to depend on a certified public accountant (CPA) to help you with the trust taxes.
If you have additional questions or concerns regarding your tax preparation responsibilities as the Trustee of a trust, contact the experienced Georgia estate planning attorneys at Fouts Law Group, LLC by calling (678) 242-8344 to schedule an appointment.
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