The management of trust accounts requires careful attention to the proper accounting and tax reporting, investment, and distribution of funds. Any errors in these areas can cause significant costs to the beneficiaries and impose personal liability on the trustee.
As a result, the design and control of operating systems are critical to trust department operations. They should be created with a practical method of checks and balances, and they should be able to process work quickly and efficiently.
Know Your Role
In a trust, one party—the settlor—gives another party—the trustee—property, and the trustee retains the property for the benefit of others (the beneficiaries).
You must administer a trust’s assets under its provisions and make distributions as required as a trustee. You also have a fiduciary duty to the beneficiaries to act in their best interests and make investment and distribution decisions that align with their wishes.
Your fiduciary duties must be performed in good faith and under certain principles of prudence and fairness. For example, you must be transparent in communicating with the beneficiaries about the trust and provide them with a full accounting of all trust expenses, including income, fees, and investments.
Along with these obligations, you are responsible for filing an annual tax return for the trust and paying any associated taxes. You should obtain advice from an expert attorney on handling this portion of the rules of trust administration in California because it can be complicated.
Communicate with Beneficiaries
As a trustee, it is your legal duty to communicate with your beneficiaries reasonably and regularly. This includes letting them know what is going on with the estate and when distributions will be made.
It’s also important to let them know when they can challenge the trust or object to its terms. This gives them a chance to state their objections openly and avoid being held in limbo during the trust administration process, which could be costly.
Keeping them informed will help you gain their trust, and they’ll appreciate your efforts. It can be as simple as sending them an email when you get an offer on trust real estate or announcing that you’re having trouble liquidating a brokerage account.
An excellent way to start is to meet with the beneficiaries in person before you begin administering the trust. This is a perfect opportunity to answer their questions, provide them with your contact information, and explain how the trust will be distributed.
Know the Law
A knowledgeable trust administration lawyer can help you ensure your estate is structured correctly, fulfill your wishes, and protect you from liability. While there are numerous helpful resources online and in books, the best advice comes from someone who knows your situation.
Knowing the laws and regulations around trust administration can save you time, money, and stress, whether you are the settlor of a trust, a trustee, or an heir at law. It can also prevent unnecessary disputes between beneficiaries and Trustees over distributions, known as invasions of principal.
Trusts are a great way to achieve various goals, including caring for a disabled child or grandchild, protecting your spouse, and preserving wealth for generations. Yet, they can only be fully effective with the hands-on attention of a dedicated trustee.
Stay Organized
Staying organized is vital to a successful and rewarding trust administration. As a trustee, your job is to oversee the distribution of trust assets in the most efficient and tax-efficient manner possible. The best way to do this is to have a system of records and folders, or trust bins, for your most important documents. Getting these in order will make a massive difference in the life of your trust. This is especially true of the more complex documents such as tax returns and beneficiary revocable trusts. Getting these into order will pay off in dividends and tax savings for years to come.
Keep Records
Keeping records of trust expenses and income can help if beneficiaries raise questions in the future. Trustees must also keep copies of vouchers, receipts, and other documentation that evidence disbursements, expenses, and capital transactions.
Beneficiaries of discretionary trusts will want to know how much income they’ve received and whether the trustees have deducted tax from it. Trustees often provide form R185 (Trust Income) to beneficiaries to explain how much they’ve paid and to show the trustees’ deductions.
However, HMRC suggests that trusts should only retain documents for a short time to meet their tax obligations. This advice seems short-sighted, as it could lead to the loss of proper evidence if a beneficiary raises a dispute with the trustees.
One way to keep accurate and detailed records is to create a bookkeeping system. A reliable accounting system will be able to track all expenses and income and can make it easier to prepare annual reports. Alternatively, some trustees hire a professional bookkeeper to handle this task.