6 Tips for Smooth Trust Asset Allocation and Distribution

Aug 26, 2022 10:00:00 AM


6 Tips Trust Allocation-Distribution-Blog

Trust administration is a complicated process with many moving parts. As you represent the trustee, you must keep in mind the needs and demands of the trust beneficiaries. Though there may be pressure to make trust distributions as quickly as possible, your top priority should be to make sure all of the necessary tasks are completed—and in the proper order. Keep reading for tips on how to make the trust asset allocation and distribution processes go smoothly.

1. Pay the Decedent’s Debts

Before funds can be distributed to beneficiaries, a decedent’s debts must be determined and paid. If given proper notice, creditors have a certain amount of time to make their claims in probate court. These claims will generally be paid from the assets of the probate estate, followed by the assets of the revocable living trust. Rather than waiting for creditors to emerge, your trustee client should be proactive in locating and providing proper notice to creditors and resolving their claims. If liability will pass with an asset to a beneficiary, such as real property subject to a mortgage, make sure that the lender has approved the transfer in writing and provided written assurance that they will not enforce an acceleration or due-on-sale clause in the loan agreement.

2. Settle the Decedent’s Taxes

Another important step that the trustee must take before making distributions is paying the decedent’s final income taxes and any unpaid taxes from previous years. Even if the decedent had no income, the trustee could file a tax return to claim any refunds due to the decedent for taxes withheld, estimated taxes paid, or other credits that would result in a refund. The trustee, as a fiduciary, typically must also file a fiduciary income tax return for the estate and the trust. The Internal Revenue Service (IRS) has three years from the later of the date an income tax return was filed or its due date to assess additional taxes, unless the fiduciary requests assessment within the reduced eighteen-month period. Fiduciaries often prefer this practice, which can allow for a more efficient postdeath administration process and final distribution to beneficiaries. 

Other tax returns that a fiduciary may be required to file include the following:

  • Final or late gift tax returns
  • State or federal estate tax returns
  • State inheritance tax returns

A fiduciary’s discharge from personal liability for tax deficiencies related to filing returns varies depending on the circumstances and nature of the assets subject to the postdeath administration, as well as the IRS’s available avenues for collecting unpaid taxes.

3. Communicate with Beneficiaries

A trustee must maintain regular communications with the trust beneficiaries, as required by the Uniform Trust Code, for the smooth administration of a trust. In addition, an attorney must effectively communicate with their trustee client, as required by Model Rule of Conduct 1.4, so that the trustee can, in turn, keep the beneficiaries informed. Each beneficiary should receive certain information about the trust administration, including trust accountings required by law (or any report or disclosure provided in lieu of formal accountings if waived by the beneficiary). In addition, a receipt, release, and refunding agreement may be used to promote transparency with beneficiaries and reduce the fiduciary’s potential liability when the fiduciary makes final distributions. This type of agreement typically includes the following:

  • Identification of the fiduciary and beneficiaries
  • Information about the instrument governing the beneficiary’s interest in the trust
  • Estate tax status
  • Beneficiary’s agreement to refund erroneous or excess amounts distributed to them
  • Beneficiary’s agreement to indemnify the fiduciary from expenses and liabilities that may arise from a distribution

Balancing confidentiality between the attorney and the trustee client with the beneficiary’s right to remain informed can be difficult. States differ on whether communicating with third-party advisors constitutes an exception to attorney-client privilege. Coming to an agreement with your client can prevent conflicts on this issue. For example, you could advise the trustee on how to deal with beneficiaries or obtain permission to communicate with the beneficiaries directly. Communication with your trustee clients will also improve if you send follow-up letters or emails after meeting with them.

4. Set a Reserve Amount

Once the trustee is sure that debts and taxes have been paid, beneficiaries have been informed, and the trust has been fully funded (all appropriate probate and other assets such as life insurance have been transferred to the trust), your trustee client must set aside a reserve amount. This will cover any remaining expenses, fees, tax adjustments, and fiduciary commissions. 

5. Allocate Trust Assets

When allocating trust assets, remember to consider the following:

  • The valuation methods of the assets
  • Separating a surviving spouse’s assets where there is a joint trust
  • Dividing the decedent’s assets based on mandatory funding formulas
  • Estate and generation-skipping transfer taxes and amounts of remaining exemptions

Income-generating assets should generally be allocated to marital trusts, while appreciative assets may be more appropriate to fund nonmarital trusts. The trustee may also have the discretion to allocate assets to subtrusts on an asset-by-asset basis or a fractional basis, such as one-third of the assets to each of three beneficiaries.

During your representation, keep in mind that the trustee has a fiduciary duty to the beneficiaries, which includes the following:

  • Good faith and loyalty
  • Impartiality
  • Accurate record-keeping
  • Reasonable cost
  • Defending claims

6. Distribute Money and Property

Money can be distributed by wire or check, while property may be distributed through a transfer of deed or assignment of title. Your fiduciary client must communicate with the beneficiaries and financial institutions to determine the proper methods. When the distribution process is complete, the trustee may notify the IRS of the termination of the fiduciary relationship.

Wealth Tracx® Can Help You Manage the Process

WealthCounsel offers Wealth Tracx®, a trust administration software solution that gives you all of the documents and resources you need to manage multiple trusts from start to finish. To learn more about Wealth Tracx and schedule a demo, click here

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