Trustees have a fiduciary duty to act in the best interests of a trust’s beneficiaries, but with new tax rates and brackets in effect, deciding the best course of action is now harder.
Income-accumulating trusts typically pay a much higher effective tax rate than the trust’s beneficiaries, and with the Tax Cuts and Jobs Act’s (P.L. 115-97) revised individual income tax rates and brackets, that effect has now been enhanced, noted Donald P. DiCarlo Jr. of Wilmington Trust Corp. “The best economics may be to make distributions to beneficiaries…so where does the duty come in to manage the overall tax efficiency, versus the intention of the settlor to keep the asset in trust in the first place?” DiCarlo asked July 19 at the American Law Institute Continuing Legal Education estate planning conference in Chicago.
I think the [trust law] cases tell you…as a trustee, your principal goal is to do the right thing for the beneficiaries, and that might mean pay more tax,” said Steven M. Fast of Day Pitney LLP. If distributions to the beneficiary are unnecessary or inappropriate, or if there’s value in retaining the trust’s income for future distributions in future years, tax savings shouldn’t override those considerations,” he said, adding, “All things being equal, however, it’s pretty hard not to at least pay attention to what a prudent person would do managing the funds of others, which would be to be as tax efficient as you can.”
Fellow panelist James Kronenberg of Bessemer Trust Co. NA said his firm rarely makes distributions to a beneficiary to get a preferential tax rate on the income, observing that in most cases the reason the trust was set up in the first place was to limit distributions to the beneficiary.
DiCarlo concluded that in the wake of the TCJA, trustees will at least face “renewed responsibilities to consider this tax efficiency,” and that whatever their decision, they must be able to communicate their reasoning to the beneficiaries. “There’s enough ambiguity in the [fiduciary] standards that it’s really prudent to be deliberate and then to communicate whatever your decision was – to show your math, so to speak – to the parties and interests,” DiCarlo said.
This article was written by Jonathan Curry and originally published by Tax Analysts. To learn more about the author and Tax Analysts, please visit http://www.taxanalysts.org . You can also follow Jonathan Curry on Twitter for real-time updates.
Jonathan Curry wrote this article as a result from his attendance at ALI CLE’s Representing Estate and Trust Beneficiaries and Fiduciaries 2018 annual program. More information about this program can be found here: http://www.ali-cle.org/ca001