Question About Trusts

[antelopedundee]

A trust exists with the trustee being person T for the benefit of person B. The trust is a spendthrift trust with the provision that any distributions or no distributions are at the discretion of the trustee. The trust operates a small family farm which does generate a net profit at the end of the year. The trust also stipulates that the profit wii be shared equally between the trustee and the benefactor.

So for those that know about such things, my question is; does the discretionary payout apply to the one half of profits or only to other trust assets?

 

[Big Fin]

A: It depends.

There are restrictions on payments of Trust Corpus (assets) and Trust Income, both of which are defined in the Trust document created by the Grantor of the Trust. And know that there are three types of income that come into play with a Trusts, two of which (#1 & #2) will impact the answer to your question about distribution of Income (which can include Farm Profits) -

1) Fiduciary Income (being defined by the Trust Document or by the Uniform Principal and Income Act adopted by the state within which the Trust is domiciled.

2) Distributable Net Income (DNI) that is calculated differently and is the limit on how much of the distributions are allocable to Beneficiaries and thus are/aren't deductible in arriving at Taxable Income.

3) Taxable Income that is defined by the Tax Code. Trust Tax Rates are higher than individual rates, in most instances, possibly making a Trust a very poor tax planning vehicle, even if it accomplishes liability protection and control goals.

You mention it is a Spendthrift Trust. Those Trusts seldom holds business interests like a farm. It also usually has very tight restrictions on distributions, not merely "Trustee discretion."

You mention the Trustee has sole discretion as to distributions, but profits get allocated equally between the Trustee and the Beneficiary. I would get that checked out, as I know of no Trust that a Trustee is allowed distributions the same as a Beneficiary. One can be both a Trustee and a Beneficiary of the same Trust (not recommended), but they are different roles/standing, and each gets a different type of payment/distribution, with different tax consequences and deductibility.

As a side note, over half of my CPA work was Trust and Estates. Most CPAs were happy to bring their Trust returns to me. Those who tried to do it themselves, especially with Trusts drafted by attorneys who knew little about Trusts, usually were a train wreck, especially if it held an operating business.

From what you have written here, I see a lot of incongruities that might be problems you weren't anticipating. I would make sure you get working with someone who knows the answers to your questions. Once you start operating a business in a Trust, things get complicated, fast. Make sure you have a Trust attorney and Trust CPA who knows this stuff.

And also know that there are a ton of snakes out promoting Trusts as a necessity, as a tax avoidance entity, as the only way to avoid probate, and a ton of other stupid reasons that I've had clients be pitched Trusts as the answer to all of their problems. When the situation calls for it, Trusts are great instruments. But, the situation calls for it maybe 5% of the time.

 

[antelopedundee]

Thank you for your comments.

The atty who created the will/trust is deceased. The farm was willed to the trustee's mother and the trust was created by her will when she passed. The tillable land is leased to other farmers, thus the bulk of the income is from rent. They ran some cattle, but that has ended. The trustee has made some discretionary distributions during the years and the atty who does the trust taxes says that that is all that the beneficiary gets. The atty makes it his K-1 income even tho it is less than his half of the profits would be. The trust ends up paying taxes on the difference between his calculated half and his distributed amount. My opinion is that since the trust stipulates a split of profits the "discretion" should not apply to it. Anyway, the trust and a 5 year report have been approved and accepted by the state revenue dept. and the courts so it is what it is. It's small potatoes so it's really not worth opening up a can of worms for.

 

[antelopedundee]

Any other comments or opinions?

 

[antelopedundee]

For some reason we were under the impression that the trust ended when the beneficiary passed away. The trust is named the John Doe and Jane Doe trust so it apparently ends when both John and Jane pass away. The letter accompanying the 5 year report specifically states that it ends when both pass away clearing up that misconception. If John passes first then Jane would have to relinquish her trusteeship; probably to the contingent trustee. There really is no need for the trust at that point since it was created to protect assets for the benefit of John Doe.

In the event that John Doe passes first is it possible to dissolve the trust?

 

[Big Fin]

For some reason we were under the impression that the trust ended when the beneficiary passed away. The trust is named the John Doe and Jane Doe trust so it apparently ends when both John and Jane pass away. The letter accompanying the 5 year report specifically states that it ends when both pass away clearing up that misconception. If John passes first then Jane would have to relinquish her trusteeship; probably to the contingent trustee. There really is no need for the trust at that point since it was created to protect assets for the benefit of John Doe.

In the event that John Doe passes first is it possible to dissolve the trust?

The name of the Trust has nothing to do with the provisions of the Trust. The Trust document determines if it ends when both John and Jane pass away. Assume nothing. Read the Trust document. It rules every question that might arise.

It is not possible to dissolve the if the Trust document states is must stay in effect until the passing of Jane Doe. Once someone passes, their revocable trust becomes irrevocable.

Jane would only have to relinquish her Trustee position if the Trust document required such. Absent affirmative language requiring that, she could continue as Trustee.

 

[npaden]

I'm no an expert on Trusts like BigFin is but what I do know is that you have to read them. And read them again. And then go over the confusing parts a 3rd or 4th time.

If the trust agreement is written correctly, all the questions you are asking should be covered in the agreement.

There's a reason why attorneys and CPAs both have specialists that tend to deal nearly exclusively in estate and trusts as they can get very complicated.

 

[antelopedundee]

I'm no an expert on Trusts like BigFin is but what I do know is that you have to read them. And read them again. And then go over the confusing parts a 3rd or 4th time.

If the trust agreement is written correctly, all the questions you are asking should be covered in the agreement.

There's a reason why attorneys and CPAs both have specialists that tend to deal nearly exclusively in estate and trusts as they can get very complicated.

It's been a couple years since I read the document. My primary question was about discretionary payment of the beneficiary share of the profits which I don't recall being answered in the document itself. It just seems to me that if it specifically states that both share in the profits equally then both of them should have the option of receiving those funds at their discretion and not just at the discretion of the trustee.

Thanks for all of the input.

 

[Big Fin]

It's been a couple years since I read the document. My primary question was about discretionary payment of the beneficiary share of the profits which I don't recall being answered in the document itself. It just seems to me that if it specifically states that both share in the profits equally then both of them should have the option of receiving those funds at their discretion and not just at the discretion of the trustee.

Thanks for all of the input.

Unfortunately, not always true, even if logic would seem to lean towards that answer. It may be true half the time. Allocation of income and allowed distributions are two different things in Trust Law. Sometimes you restrict distributions to "protect beneficiaries from themselves." Sometimes you restrict distributions so the surviving spouse cannot clean out the Trust for his/her new boyfriend/girlfriend. Sometimes you restrict distributions to discourage creditors for making a claim or asking for a charging order against a beneficiary. Sometimes there is a restriction on distributions, because someone wanted to retain some control or didn't know the consequences of doing so.

Again, if it is not addressed in the Trust document, your state Uniform Principal and Income Act, along with your state Probate Code will answer your question. I know that can be frustrating, but that is part of the trade off with Trusts - they can provide some great benefits, but they also tie the hands of the Trustee and the Beneficiaries if not drafted with a lot of thought.