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Home » What Is Trust Administration?

What Is Trust Administration?

March 4, 2020Trust in Indianapolis

  • Indianapolis trust administration attorney

Although once used almost exclusively by wealthy families, trusts are now commonly found in the average person’s estate plan. If you are contemplating the addition of a trust to your estate plan, it is important that you choose the right Trustee to administer that trust. Understanding the trust administration process a little bit better may help you choose the right Trustee. Toward that end, an Indianapolis trust administration attorney at Frank & Kraft explains what is involved in administering a trust.

Choose Your Trustee Wisely

One of the most common mistakes a Settlor (the creator of a trust) can make is to appoint the wrong person as Trustee. This often happens when a Settlor appoints someone close to them, such as a spouse, close friend, or relative as the Trustee based solely on their relationship to the individual instead of on the individual’s ability to perform the job of Trustee well. Ultimately, this can lead to the failure of the trust if the Trustee ends up in over his/her head and doesn’t seek the help and guidance of a professional in time. To avoid making this common mistake, make sure you have a firm understanding of what is expected of a Trustee and then take the time to choose the right person for the job.

What Is Involved in Trust Administration?

To understand the importance of choosing the right Trustee, you need to understand what is involved in administering a trust. Trust administration involves a wide range of duties and responsibilities, including:

  • Following trust terms — the Trustee of a trust is required to abide by the terms of the trust, as created by the Settlor, unless a term is illegal, impossible, or unconscionable. This requires the Trustee to understand the terms and to have the ability to follow a term even if the Trustee doesn’t personally agree with the term.
  • Managing trust assets – this could require something as simple as monitoring and filing bank statements or something as complex and time-consuming as handling the maintenance and upkeep of real property or a business.
  • Investing trust assets – ideally, the assets held in a trust are income producing assets. This, however, requires the Trustee to invest those assets wisely. A Trustee must always use the “prudent investor standard” which dictates conservative investments wherein the trust principal is never at risk.  Moreover, because a Trustee is in a fiduciary role, he/she must be more careful with trust assets than the Trustee would be with his/her own assets.
  • Keeping detailed records – because a Trustee is managing assets intended to benefit a third party, and receives a fee for that management, very detailed records should always be kept.
  • Communicating with beneficiaries – a Trustee is responsible for keeping beneficiaries informed of all trust business in a timely manner.
  • Resolving conflicts – if a conflict arises. the Trustee must defend the trust in any litigation. If the conflict is among beneficiaries, a Trustee should act as a mediator try and resolve the conflict.
  • Paying taxes – a trust is a separate legal entity, meaning taxes must be prepared and paid each year by the Trustee. Even if a Trustee hires a CPA to prepare the trust taxes each year, the Trustee should have sufficient financial skills to understand the tax return and any obligation the trust has for paying gift and estate taxes.
  • Distributing assets – the Trustee is responsible for distributing trust assets to the designated beneficiaries according to the terms of the trust.
  • Making discretionary decisions – typically, a Trustee has some degree of discretion. Some Settlors give a Trustee only a token amount of discretion in case of an emergency while other provide a Trustee with the discretion to make major trust decisions.

Contact an Indianapolis Trust Administration Attorney

For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about administering a trust, contact an experienced Indianapolis trust administration attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

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Paul A. Kraft, Estate Planning Attorney
Paul A. Kraft, Estate Planning Attorney
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.

Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
Paul A. Kraft, Estate Planning Attorney
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To ensure that your estate doesn’t lose assets to federal gift and estate taxes you may need to include tax avoidance strategies in your estate plan. One estate planning tool that can provide tax avoidance benefits is a Grantor Retained Income Trust, or GRIT. Always consult with your estate planning attorney before deciding what tools to incorporate into your estate plan. In the meantime, however, the Indianapolis trust attorneys at Frank & Kraft explain how a Grantor Retained Income Trust works and why you might want to include one in your estate plan. What Is a GRIT? A GRIT is a specialized type of irrevocable trust that allows the Grantor (creator of the trust, also referred to as the “Settlor”) to transfer assets into the trust while retaining the right to receive all of the net income from the trust assets for a fixed term of years, referred to as the “initial term.” Income from the trust is distributed to the Grantor at least annually during the initial term. At the end of the initial term, the remaining principal is either distributed to the trust beneficiaries or remains in the trust for the benefit of those beneficiaries. The primary benefit of a GRIT is that if (this condition is important) the Grantor survives the initial term, the value of the principal held in the GRIT is excluded from the Grantor’s estate for federal gift and estate tax purposes. How Does a GRIT Help with Tax Avoidance? The tax avoidance benefit of a GRIT is found in how the value of the trust principal is determined because those assets are valued at a discount. The value of the discount depends on the length of the initial term of the GRIT, and the applicable federal rate in effect at the time the GRIT is established. The transfer of assets to a GRIT constitutes a gift equal to the total value of the assets transferred to the GRIT, less the present value of the retained income interest held by the Grantor for the initial term. If the Grantor survives the initial term, the assets comprising the GRIT will pass to the designated remainder beneficiaries at a reduced gift tax value. GRIT Beneficiaries Section 2702 of the Internal Revenue Code determines who you cannot name as a beneficiary in a GRIT. Excluded beneficiaries include your spouse, your ancestors or the ancestors of your spouse, any lineal descendant of yours or your spouse, any sibling of yours or your spouse, or the spouses of any of the foregoing persons. You can name lineal descendants of siblings, (nieces and nephews) relatives even more distant than nieces and nephews, or friends of yours or your spouse as beneficiaries of a GRIT. How a GRIT Works in Practice Imagine that you establish a 15-year GRIT and transfer $100,000 of assets into the trust and that the applicable federal rate is five percent. As the Grantor, you will receive the income from the GRIT during the initial term. The present value of the retained income interest is $66,007, making the value of the gift $33,993. If you survive until the end of the initial term, however, the remainder beneficiaries will receive $100,0000 plus all capital growth. Your estate, however, will only need to acknowledge a lifetime gift in the amount of $33,993 (the applicable value of the gift at the time it was made). Disadvantages of Using a GRIT Just like most tax savings tools and strategies, there are some disadvantages to relying on a GRIT. First, it is an irrevocable trust, meaning if your personal circumstances change, you cannot make corresponding changes to the trust. Second, if you do not survive the initial term the advantages gained by creating a GRIT do not apply. Contact the Indianapolis Trust Attorneys For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about establishing a Grantor Retained Income Trust, contact the experienced Indianapolis trust attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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