For families who have 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 will direct how these expenses, taxes, and income are to be allocated among the sub-trusts, which will often guide the decision of which assets to use for funding the sub-trusts.
- The appreciation or depreciation of 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 usually 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. It is important to consider these tax issues when deciding how to fund sub-trusts.
- Unproductive assets of the trust: 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 others.
Choosing assets to fund the sub-trusts of a loved one’s living trust is an important and complex task. Unless you have a background in this field, it’s best to seek guidance from experienced professionals, such as lawyers, tax advisors, and financial planners, to help with allocating the trust’s assets.
When you are ready to move forward, we are here to help. We encourage you to reach out to us for guidance.