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3 Financial Guidelines for Trustees

Posted on: April 24th, 2017
financial reportingA trustee is responsible for carrying out various duties as outlined in the trust agreement; in many cases, the trustee must also observe duties and requirements under state law for trust administration. These duties involve careful financial management, both for maintenance of the trust assets, accounting for distributions, and filing tax returns and paying any applicable tax. Trustees have a fiduciary duty to impartially administer the trust with care and loyalty. 

While the types of assets held in different trusts vary, the trustee’s role remains constant. The guidelines discussed below can help to ensure that a trustee is not found in breach of their duty. The consequences of violating a fiduciary duty are broad, ranging from penalties and damages to possible felony charges. If you are currently serving as trustee or planning to accept the role, consider these basic financial matters associated with trust administration:
  1. Form 1041. Trust income must be documented properly and reported timely on the Form 1041, Income Tax Return for Trusts and Estates. The form is required for all estates earning $600 or more in the tax year and may be required in other circumstances as well. Failure to file or miscalculations leave the trustee personally liable for interest and penalties. To prevent errors, trustees may elect to retain a tax attorney to assist in preparing and filing the Form 1041.
  2. Schedule K-1. The trustee is required to provide a Schedule K-1 (an annual income tax statement) to all beneficiaries who received taxable income earned by the trust. As with the Form 1041 above, if the trustee neglects filing this form or makes accounting errors, the trustee can be held personally liable for interest and penalties. Similarly, a trustee may seek counsel with a tax attorney familiar with trust administration in order to ensure proper preparation and filing.
  3. Investments. Best practices in trust administration include accurate and regular accounting, and active investment management. When trust assets include investments, basic maintenance of the assets may be insufficient. According to the American Bar Association, “[u]nless a fiduciary has financial experience, he or she should seek professional advice regarding the investment of trust assets …Simply maintaining the investments that the decedent owned will not be a defense if an heir claims [the fiduciary] did not invest wisely or violated the law governing trust investments.” In addition to being a tax attorney and a Board Certified Specialist in Estate Planning and Probate Law (NC), TrustCounsel’s senior attorney Gregory Herman-Giddens is also a Certified Financial Planner™. TrustCounsel regularly advises trustees on trust asset management and related tax implications. 
If serving as trustee is overwhelming or confusing, TrustCounsel offers administrative trustee services to provide advice and assistance on issues including tax reporting, accounting, and other trust administration matters. Our attorneys counsel trustees or can be retained to serve as trustee. Learn more about trustee services.
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