Magazine article The CPA Journal

Administering a Testamentary Trust for a Child

Magazine article The CPA Journal

Administering a Testamentary Trust for a Child

Article excerpt

For CPAs involved in trust compliance and planning, the key step when any testamentary trust is formed is to have a meeting with the trustee and trust counsel to review the trust and how it should be operated. This meeting is quite different from the analysis given by their attorney when creating a trust. The result of tins trust administration meeting should be an annotated trust document that highlights:

* Key provisions relevant to administration

* Decisions that remaní to be made

* Elaboration of technical tenus and provisions

* Notes on the application of generic trust tenus to specific circumstances

* Confirmation of steps that have been taken so that interpreting the trust will have appropriate context

* Assignment of a tax identification number.

Trust Administration Road Map

To illustrate these issues, consider a typical trust formed under a will for an heir, for example, a parent's will setting up a testamentary trust for a child. Tins situation raises a myriad of planning issues. CPAs can help explain the implications of the trust tenus with regard to the proper administration of the trust, including distributions, investments, and other mattem with income tax consequences. the following represents a road map to follow for the typical administration of such a trust.

Annual meeting. The participating parties should establish an annual review meeting. Few trusts that are administrated without professional guidance can withstand the scrutiny of professional review. Too often, by the time professional advisers aie sought out, costly damage to the administration process has already been done. An annual meeting should review operations, tax planning with the trust's attorney (who should be engaged by the trustee), CPA, and wealth manager, as well as create an updated compilation of all trust actions and events. Tax returns, investments, and bank account statements should be reviewed. Any changes in circumstances, as well as tax and other laws, should be evaluated.

Name A trust's name should be agreed upon. If a name was used in fifing for the trust tax identification number, that same name should generally be used. Many wills and trusts that create trusts have no particular name assigned to them and become known by the article number that creates them. It is easier for all involved if a trust has a more descriptive name, like "Father Smith Trust f/b/o Son Smith" It is also helpful to include the date of the instrument creating the trust, in case there aie multiple trusts for the same settlor and beneficiary.

EIN: An EIN (Employer Identification Number) should be obtained for the trust. This can often be confusing to nontax specialists, who are generally aware of the need to name an estate or revocable trust but not a separate testamentary trust formed under that instrument. Confusion is particularly common when there is only one beneficiary, making the distinction between a deceased-parents living trust and the trust formed under that instillment for the sole surviving child seem inconsequential, when it is not.

Effective date Confirm the effective date of the trust, whether it be the date of the decedent's death or some other date.

Corpus. Which assets aie in the trust, and winch assets should be in the trust? CPAs should not assume they are the same without confirmation. Look for all loose ends that need to be addressed to complete the funding process.

Independence CPAs have a vital role in turning theoretical legal concepts like "fiduciary duty" into concrete fiscal steps. The trustee must understand all relevant concepts, including the following:

* All trust transactions must be handled through separate trust bank, brokerage, and other accounts.

* Nontrust assets may not be deposited into the trust. Neither the trustee nor beneficiary can make gifts into the irrevocable testamentary trust.

* Each trust must file its own income tax returns. …

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