MSTR Cat

Trust Law/Level II · Do you need one?/2.2 What it costs/Lesson 4

Ongoing costs: tax returns, accounting, administration

The recurring costs of running a trust, and who pays them

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. While you live, a revocable trust costs almost nothing to run: most can use Optional Method 1 (Form 1041 instructions), reporting income on your own return. Catch: at death it needs its own free IRS EIN and Form 1041 if gross income reaches $600.
  2. After death, distribute promptly: every year the trust stays open adds a Form 1041, an annual report to current beneficiaries (UTC §813) and fees. Catch: pay debts, expenses and taxes first, or the trustee can be personally exposed.
  3. Deduct the costs that exist only because property is in trust: IRC §67(e) treats them as allowable in arriving at adjusted gross income. Catch: ordinary costs an individual would have incurred anyway do not qualify.
  4. Show banks a certification of trust (UTC §1013) instead of paying a lawyer to produce and explain the whole document; it also keeps the beneficiaries’ shares private. Catch: it must accurately state the trust’s existence, trustee and powers.
  5. Choose an irrevocable trust only when a purpose, such as benefits protection or tax, outweighs its separate returns and reporting each year. Catch: some irrevocable trusts remain grantor trusts for income tax, so filing duties depend on the terms.

MaterialsA copy of your current tax return (Form 1040)The name and contact information of your accountant or bookkeeperA list of all assets held in the trust, including bank statements

Wonder

  1. Who actually pays for the accountants every year?
  2. Why does a revocable trust usually not file its own tax return while the settlor is alive?
  3. What happens if I cannot afford a corporate trustee?

Explore

  1. In the US, a revocable living trust is treated as a grantor trust for income tax: the IRS Form 1041 instructions say most such trusts can use an optional method in which income is reported under the grantor’s own taxpayer number on the grantor’s own return, without a separate Form 1041. When a trust becomes a separate taxpayer, as a revocable trust usually does at the settlor’s death, the trustee must file Form 1041 for any year with taxable income, gross income of $600 or more, or a nonresident alien beneficiary.
  2. Trustees also report to beneficiaries. In states that follow the Uniform Trust Code (section 813), current beneficiaries are generally entitled to a report at least once a year showing the trust’s property, receipts, payments and the trustee’s pay, unless the trust terms or state law change this. While a revocable trust’s settlor is alive, these duties are owed mainly to the settlor. A professional trustee includes this work in its fees; a family trustee does it personally or pays an accountant.
  3. Trust assets need management. Someone must decide how to invest the money and maintain any property held in the trust. Investment management fees cover professional advice on stocks, bonds, or real estate. Property costs include insurance, maintenance, and taxes for any physical buildings or land owned by the trust. These are ongoing operational expenses that reduce the total value of the trust over time.
  4. Legal advice is another recurring cost. Questions come up about how to read the trust, when to make distributions, or how to handle a dispute between beneficiaries. With an irrevocable trust the settlor generally cannot change the terms alone, so the trustee must work within them, and unclear wording may need a lawyer’s opinion or even a court ruling. Under the Uniform Trust Code, a trustee can be reimbursed from the trust for expenses properly incurred, so these costs usually come out of the trust.
  5. Costs vary widely by place and complexity. Corporate trustees commonly charge an annual percentage of trust assets, often with a minimum fee; tax preparation, accounting and investment management may be included or charged separately. Every fee paid from the trust reduces what is left for beneficiaries, so the ratio of costs to assets matters most for smaller trusts. Ask any professional for a written fee schedule, and look for minimum fees and charges for extra tasks.
  6. Irrevocable trusts generally cost more to run than revocable ones, because they more often need their own tax returns, reports to beneficiaries and a trustee who is not the settlor. Some irrevocable trusts are still grantor trusts for income tax, so filing rules depend on the trust. A revocable trust is simpler while the settlor is alive, but usually becomes irrevocable at death, and these costs then begin and are paid from the trust. Planning should allow for them.

Key facts

  • US Form 1041 is filed for a trust that is a separate taxpayer when it has any taxable income, gross income of $600 or more, or a nonresident alien beneficiary.
  • A US revocable living trust is a grantor trust; most can report income under the grantor’s own taxpayer number on the grantor’s return instead of filing Form 1041.
  • US corporate trustees commonly charge an annual percentage of trust assets, often with a minimum fee; rates vary widely by institution and place.
  • Under Uniform Trust Code §813, current beneficiaries are generally entitled to a report at least annually, unless the trust terms or state law provide otherwise.
  • Irrevocable trusts incur higher ongoing administrative costs than revocable trusts.
  • Under the Uniform Trust Code, a trustee is reimbursed from trust property for expenses properly incurred, so running costs reduce what beneficiaries receive.

Exercise nine, six, three, one

9CollectList up to 9 recurring costs a trust might face over ten years, such as a tax-preparation fee, a trustee fee, an investment fee, property insurance, repairs, property tax, a legal consultation, an accountant’s report and a bank charge.
6ClusterSort the 9 examples into 6 categories: Tax Filing, Professional Fees, Property Maintenance, Investment Management, Legal Advice, and Administrative Reporting.
3DistillReduce the 6 categories to 3 main cost drivers: Fixed Annual Fees, Asset-Percentage Fees, and Event-Based Costs.
1CrystallizeWrite 1 sentence explaining which of these three cost drivers is most predictable for a standard family trust.

Fact check

Dates, figures and claims checked against the published sources listed below.

Open in the interactive academy →

PT ES ZH JA KO RU DE FR MS