facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Retired Military Finances 301: Congratulations! You're a Trustee Thumbnail

Retired Military Finances 301: Congratulations! You're a Trustee

Estate Planning

Years ago, Mom and Dad told you that you are the successor trustee of their “trust”. You haven’t thought much about it until last week when they said they need you to take over as the trustee. Great. What now? While you’ll definitely want to consult with the attorney that drafted the documents, here are some things to consider.

Determine the Type of Trust

More likely than not, your folks set up what is commonly called a Living Trust (or Revocable Trust). The IRS calls these types of trusts Grantor Trusts. These trusts allow Mom & Dad to use the assets as they see fit while they are alive and directs the trustee to manage or distribute funds in the trust after death. Since the trust is a Grantor Trust, that means the trust and your folks have the same tax “identity”. While they are alive, Mom & Dad report trust income on their own tax return. Upon passing, the trust becomes its own entity and will have its own tax filing requirements.

Other types of trusts that you might run into are irrevocable in nature. That means that assets go into the trust and for all practical purposes the assets no longer belong to Mom & Dad. They may have rights to the income, but the principal (called corpus) is gone forever. These types of trusts can be used for MEDICAID planning, estate tax management and/or asset protection. These are pretty complicated, and you’ll probably want a team of experts (investment advisor, attorney, and tax professional) to help you administer these types of trusts. We won’t talk much about them today.

What to Do as a Trustee when Mom & Dad are Alive

The first thing you’ll need to do is establish yourself as the trustee. Again, you’ll want to work with the drafting (if possible) attorney on this. If you’re lucky, Mom & Dad have realized that they really can’t handle their affairs and they take the action to name you as the trustee while they still have the capacity to do so. This should be a paperwork drill. If you’re not so lucky and Mom and/or Dad don’t have the capacity to pass trusteeship to you, there is normally a process in the trust document to change the trustee. A common one I’ve seen requires two doctors to attest that Mom and/or Dad can’t handle their financial affairs.

Then read the trust document. There are probably instructions on how Mom & Dad want to be treated and supported while they are alive. You need to follow those instructions. Beyond that, do what is right for them.

As mentioned, Mom & Dad will file their tax return including the trust income.

What to Do as a Trustee when Mom & Dad are Gone

Things get a lot more complicated once Mom & Dad have passed. At this point the trust becomes its own entity, so you’ll need to establish it as such. That means filing for an EIN (Employer Identification Number…even though the trust is not an employer). You complete a Form SS-4 to get the number.

Re-read the trust document to determine what to do and the type of trust you're dealing with (you thought you already did this, didn’t you). The trust is now irrevocable, and you need to determine what to do with the trust income. If the trust is a simple trust, then you must pay out all income (dividends and interest) earned each year minus any legitimate expenses. Capital gains can be retained as they are treated as corpus. Any income retained by the trust, is taxed to the trust and tax trust rates are brutal (For 2024 the 37% tax bracket starts at $15,200 of retained ordinary income). If the trust is not required to distribute income, it is called a complex trust.

Since we’re talking taxes, the trust will be required, in most cases, to file an income tax return. Trustees file a Fiduciary tax return (Form 1041). As mentioned, if all the income is paid out to beneficiaries the trust will not owe taxes. But that income has to be reported. As a trustee, you’re required to provide beneficiaries a Schedule K-1 to document the income distributed. A K-1 is a lot like a Form 1099. It lists interest, dividends and capital gains. But it can also include income like rental income on the form as well. You’re probably not going to be filing a 1041 using TurboTax (years ago I did do one manually. Don’t recommend it).

I think taxes are the biggest issue most trustees are unprepared for (at least that is what I’ve observed). But there are other things to keep an eye on too. As a trustee and fiduciary, your investment decisions are subject to review and potential challenge. You’ll want to be able to document and prove that you made prudent investment decisions. You may also have reporting requirements to the beneficiaries. For example, you may have to give them an annual accounting of how trust assets and funds were used.

Finally, decide if you’re going to be paid for your efforts. You’re allowed to pay yourself for services rendered as a trustee. It may be tempting to skip the pay because we’re all family. That doesn’t reduce the amount of work and stress involved. Pay yourself. You’ll earn it.

I’ve probably just scratched the surface here. I can’t emphasize enough to not try to do this yourself. You may think things will be simple and clear cut. I can almost guarantee that won’t be the case. Money and death make people do weird things. Get the protection a team of professionals provide you. And…good luck Mr./Ms. Trustee.

Military Finances are Different

Trust law and taxes aren't any different for Active and Retired Senior Military Officers and NCOs than for their civilian counterparts. That isn't always the case. As an Active or Retired Senior Military Officer or NCO you have unique financial benefits and unique tax situations. That's why we think you should work with a financial planner or advisor that works with Active and Retired servicemembers each and every day. If you'd like to find out how we do things, use the button below to schedule a free initial consultation.

If you liked this article, you might find the following blog posts useful:

One Reason to Consider Moving Your Assets Out of TSP - Estate Planning

Retired Military Finances 301: ILITs

Military Finances 401: Ancillary Probate. What Is It?

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.