Posted by Lee Sausen, CPA
For most Estates and Trusts, there are three parties involved: (1) the person who funded the Trust (or passed-away in the case of an Estate) – called the Grantor/Contributor/Donor for a Trust or the Decedent for an Estate; (2) the person(s) who are in charge of following the rules of the governing document and managing the assets – called the Fiduciary – can be the Trustee for a Trust or the Executor/Administrator/Personal Representative for an Estate; and (3) the person(s) who ultimately receive some type of benefit from the Trust/Estate’s assets (or the assets themselves) – called the Beneficiaries. In many cases, one of the beneficiaries (or the sole-beneficiary) may also be the Trustee or Executor.
The Trustee/Executor must act on behalf of the Beneficiaries, no matter what. This responsibility – known as Fiduciary Duty – is the highest standard of care that common law allows. There are many responsibilities inherent in becoming the Trustee or Executor of a Trust or Estate. For an Estate, the Executor is responsible, among other things, for:
- Filing Form SS-4 to apply for the Employer Identification Number (EIN).
- Filing Form 56 to notify the IRS of the fiduciary relationship.
- Filing applicable Federal and State tax returns such as the final Form 1040 (U.S. Individual Income Tax Return), Form 1041 (U.S. Income Tax Return for Estate and Trusts), Form 706 (U.S. Estate Tax Return), Form 709 (U.S. Gift Tax Return), and others.
- Notifying the Social Security Administration
- Probate and other State filings
- Paying any creditors and taxes owed – in some cases, an Executor may be held personally liable for any unpaid tax.
- Collecting all of the decedent’s property.
- Following the “Prudent Investor Rule,” which states that an Executor/Trustee must invest any assets held in the Estate/Trust as if they were their own assets.
- Distributing the assets to the Beneficiaries according to the Will/Trust (assuming the Decedent created a Will).
Many of the responsibilities for the Trustee of a Trust are the same as those of the Executor of an Estate. The Trustee of a Trust must act in accordance with the governing document of that Trust, as submitted by the Grantor. The following are some common additional responsibilities that can be included in some Trusts:
- Periodic financials or “accounting” – reporting financial information to Beneficiaries and/or municipalities. This process varies by State and County.
- Periodic income distributions. Determining the net income for a given period (usually monthly or quarterly) and distributing that net income to the applicable beneficiaries.
- The Trustee may obtain assistance from a CPA or Attorney in fulfilling these requirements, but it’s the Trustee who is ultimately responsible for the execution and accuracy of any filings or distributions.
Please note that the above lists of fiduciary responsibilities are not exhaustive. Governing documents can be flexible in some areas and un-flexible in others. Please consider forming a team of advisors for your Trust or Estate plan to include your CPA, Attorney, and Financial Advisor. If you would like to discuss your Trust or Estate plan in more detail, please reach out to our Estate and Trust team.