We’ve made it well past the trust filing due date of April 15th, and in reflecting back on what we noted with our trust clients, I thought it would be helpful to educate our trustees as to why we ask for certain information in preparing your trust returns.
If your trust holds only an investment brokerage account, you may think that the only document you need to provide to your tax preparer is the Form 1099 statement. However, if that is the only item your tax preparer asks for, then your returns may be incomplete.
At a minimum, I have put together a list of what else you should give your tax preparer for accurate tax return preparation:
- A copy of the trust agreement
- Names, addresses and birthdates of any trust beneficiaries
- A year end account statement or list of deposits and withdrawals from the trust
- A copy of any trustee fiduciary accounting prepared for the year
- Inventory of trust assets
Below is a brief description of what we look for in each of the items mentioned above:
Copy of trust agreement
The trust agreement is the “road map” for the trust. It discloses the following: who the grantor is, who the beneficiaries are, what type of income or principal distributions are allowed, what state law to follow in administering the trust, how to allocate receipts and disbursement between income and principal, and when the trust terminates. These are just a few of the items we look for in the trust agreement. We also look to see if the current trustee is different from the initial trustee named in the trust agreement. If so, we consider any state income tax impact, based on the residency of the new trustee.
Names, addresses and birthdates of any trust beneficiaries
We need these in case the trust needs to issue K-1s to any of the beneficiaries. Also, we consider whether a beneficiary is a “skip person” under the generation skipping transfer rules; so knowing their ages is important. Knowing where the current qualifying beneficiaries live assists us in evaluating any state income tax issues regarding the trust. For example, a trust will pay California income tax if there is a non-contingent beneficiary who is a resident of California, regardless of whether the trustee resides in California or whether the trust has California source income. If a beneficiary moves to another state, we need to know!
A year-end account statement or list of deposit and withdrawals from the trust
This shows all the deposits and withdrawals from the trust investment account. We look for deductible expenses or distributions made to any beneficiaries. For deposits, we also consider whether there is a gift tax filing requirement for whoever transferred assets to the trust during the year.
A copy of any trustee fiduciary accounting prepared for the year
This document determines the fiduciary accounting income of the trust. This is used in calculating how much of the trust’s taxable income is to be taxed to the beneficiaries.
Inventory of trust assets
Knowing what the trust holds, assists us in making sure we have reported all income generated from those trust assets. For example, unless the trust writes a check for the premiums due on a life insurance policy that the trust owns, then how would the tax preparer know that one of the trust assets is a life insurance policy? The trust may also own some non-income producing assets, such as non-dividend paying corporate stock or a non-interest bearing checking account.
