For families who created estate plans in order to minimize state or federal estate taxes, the process of administering their living trust or trusts is somewhat more complex than the more straightforward trusts used for asset distribution and probate avoidance. These trusts work by dividing into sub-trusts after the death of the person who created the trust. For the successor trustee, the important decisions to be made include choosing which assets to use to fund these sub-trusts. There are important tax and other considerations that must be carefully assessed.
Four Considerations When Choosing Assets for Sub-Trusts
- The expenses, taxes, and income of the trust. Typically, the trust instrument itself will direct how these expenses, taxes, and income are to be allocated among the various sub-trusts. The direction provided by the trust relating to these items will often guide the decision of which assets to use for funding the sub-trusts.
- The appreciation or depreciation that might occur with regard to the asset. Depending on whether you anticipate an asset might appreciate or depreciate from the date of your loved one’s death, this may impact which assets are best suited for funding each sub-trust. Before the funding takes place, any appreciation or depreciation of the asset is typically allocated equally among the sub-trusts.
- The income tax issues generated by the asset. Certain types of assets may appreciate after your loved one’s death, resulting in a capital gains tax. As a result, it is important to consider these important tax issues when deciding how to fund sub-trusts.
- The assets of a trust that may be unproductive. In some cases, such as when the beneficiary of the sub-trust is entitled to income from the assets, it may make sense to choose productive assets for certain sub-trusts and reserve unproductive assets for the other sub-trusts.
Choosing which assets to use to fund the sub-trusts of your loved one’s living trust is an important and complicated job. Unless you have a significant background in this complex field, it is best to pursue guidance from experienced professionals. We recommend that you involve lawyers, tax advisors, and financial planners in the decisions as to how to allocate the trust’s assets.
When you are ready to move forward, we are here to help. We encourage you to reach out for guidance.