What CPAs Should Know About Trusts
What CPAs Should Know About Trusts
MARCH 2, 2016
BY SEYMOUR GOLDBERG
Many estate planners recommend that clients create trusts for various reasons, but problems can arise when the trustee is a family member who has no experience regarding the responsibilities of a trustee.
In many cases the trustee selected by the creator of the trust is not capable of handling the responsibilities that are involved in administering a trust. The trustee should always engage a qualified CPA to assist in administering the trust.
The trustee is subject to a number of obligations, including maintaining adequate records, making investment decisions, reading and interpreting the provisions of the trust document, making sure the annual fiduciary income tax returns are filed in a timely manner, and making distributions in accordance with the terms of the trust.
There are several reasons for creating trusts. They can include protecting assets, providing for minors or beneficiaries who cannot handle funds, saving on estate taxes, preventing the wasting of trust assets, anticipating a will contest, elder law planning, and avoiding ancillary probate proceedings if real property is located in multiple jurisdictions.
In order for the accountant to do justice for the trustee, the accountant must have a certain level of knowledge. Initially the accountant must read and understand the terms of the trust in order to properly prepare a fiduciary income tax return for the trust.
In addition, the accountant who prepares a fiduciary income tax return for the trust should be well-versed in the trust accounting rules that apply under state trust law.
This author, in practice, advises the client to seek the services of a CPA who is knowledgeable in both the Internal Revenue Code’s trust compliance rules, from a tax preparation point of view, as well as the state trust accounting income and principal rules.
The client often decides to use his or her own tax return preparer to handle the trust tax preparation work. Unfortunately, that is not always the best solution. Here are a few examples that I have run into:
1. The accountant fails to read the trust document, or the client trustee doesn’t even give a copy of the trust document to the accountant.
2. The accountant fails to realize that the trust mandates that the accounting income of the trust must be paid each year to the trust beneficiary.
3. The accountant erroneously has the trust pay the fiduciary income tax liability on the trust income at the trust rates, despite the fact that the trust mandated the trust income be paid out to the trust income beneficiary each year. (Note that capital gains are generally not considered to be accounting income under state trust law.)
4. The accountant fails to tell the trustee to write a check to the trust beneficiary each year when the trust requires that the trust accounting income be paid to the trust beneficiary at least annually.
5. In many trusts, it turns out that the trust beneficiary never received the correct accounting income or the proper trust distributions from the trust. The reason for that is simple; no one ever told the trustee that he/she was required to pay out the accounting income from the trust to the trust beneficiary.
6. According to the law and the IRS, any unpaid accounting income that should have been paid out to the trust beneficiary, as determined on the date of death of the trust beneficiary, is an asset of the trust beneficiary’s estate.
7. In a number of trusts, the tax basis of the trust assets that were initially received to fund the trust was not adequately tracked by the accountant for the trust. That can become an issue when those trust assets are sold many years later, or when those trust assets are ultimately transferred to the trust remainderman on termination of the trust.
The accountant for the trust should not only file fiduciary income tax returns but should agree to maintain books and records for the trust.
Other issues to watch out for in this area:
• When the trustee resigns, becomes disabled or dies, the potential successor trustee may not wish to accept the trusteeship appointment without receiving a full accounting from the prior trustee or the legal representative of the prior trustee.
• The court that has jurisdiction over the trust may require that an accounting be made to the potential successor trustee as well.
• Upon the termination of the trust, the trustee may be required to do a full accounting in order to obtain a release from the trust remainderman beneficiaries. The bottom line is that the accountant for the trust should be engaged to do more than just the tax preparation of the trust fiduciary income tax return.
Many accountants have not received any training (such as CPE programs) on the state accounting income and principal rules that apply to trusts. The CPE programs involving trusts normally concentrate on fiduciary trust income tax preparation.
If the accountant for the trust concentrates solely on trust compliance from an IRS tax preparation point of view, then the trustee may later need to engage another CPA who is knowledgeable in the state trust accounting income and principal rules. The trustee should consider engaging an accountant from the inception who knows both the trust compliance rules from a tax preparation point of view and the state-specific trust accounting income and principal rules that apply to the trust.
Recently, I was engaged to review trust compliance from an IRS and trust accounting point of view for a trust that was in existence for over 10 years. I discovered the trustee was wrongfully withdrawing funds from the trust principal without any legal authority to do so. The accountant for the trust never reviewed the trust document. The trustee erroneously thought that since she was the trustee and the trust was for her benefit, she could do whatever she wanted with the trust assets.
I have found many IRA trusts are noncompliant from an IRS point of view and a state trust accounting point of view. Basically an IRA trust is a trust that is the beneficiary of an IRA account.
Many accountants are not familiar with the rules that apply when an IRA is payable to an IRA trust. These trusts are often recommended and drafted by attorneys for asset protection and estate planning purposes.
There is a significant need for CPE organizations, including most state societies, to offer programs on the state-specific trust accounting income and principal rules that apply to trusts. This is necessary to avoid headaches for CPAs who are involved in preparing trust tax returns.
Seymour Goldberg, CPA, MBA, JD, is a senior partner in the law firm of Goldberg & Goldberg, P.C., in Melville, N.Y. He is Professor Emeritus of Law and Taxation at Long Island University. He has taught many CLE and CPE programs at the state and national level as well as CLE courses for the New York State Bar Association, City Bar Center for Continuing Legal Education, NJICLE, local bar associations and law schools. He has been quoted in major publications including The New York Times, Forbes and The Wall Street Journal and has been interviewed on CNN, CNBC and CBS. Mr. Goldberg is a member of the IRS Long Island Tax Practitioner Liaison Committee and the Northeast Pension Liaison Group. He was formerly associated with the Internal Revenue Service and has been involved in conducting continuing education outreach programs with the IRS. He is the chairman of the Estate & Financial Planning Committee of the Suffolk Chapter of the New York Society of CPAs. He is the author of Fundamentals of Trust Accounting Income and Principal Rules under the Revised New York State Laws and Can You Trust Your Trust? What You Need to Know about the Advantages and Disadvantages of Trusts and Trust Compliance Issues, available on Amazon.com and the American Bar Association at shopaba.org.