Extremely wealthy families usually do a good job of preparing estate planning documents before they die. They don’t always do a great job of interpreting those documents after somebody passes. That gap can cost the family real money, usually because the professionals involved aren’t communicating with each other.
Three professionals, one conversation that rarely happens
When it comes to a trust, three different professionals have distinct roles. The attorney should be interpreting the trust document. The financial advisor should be controlling the flow of income out of the account. The accountant should be filing the trust tax return. But these three professionals are rarely in communication with each other.
Here’s how this plays out. When someone passes away, the attorney typically tells the advisor how the trust needs to be titled, and the account gets set up. But a lot of times the advisor doesn’t go back to the attorney and ask: how does the income need to be distributed each year for the surviving spouse or the children?
The tax cost of leaving income in the trust
If income isn’t distributed from certain trusts, the money that stays in the trust is often taxed at the trust tax rate. That rate reaches the highest tax bracket a lot more quickly than individual tax brackets do. For wealthy widowers who are surviving their spouse, they may not see the need to take income from a trust, and that decision can end up costing them considerable tax dollars.
Who’s actually filing the trust tax return?
A related issue: if the family hasn’t talked to their accountant about the fact that the trust now exists, nobody may be filing the trust tax return at all.
Get your professionals in the same conversation
Whenever someone passes away, it’s important to get all of your professionals together to talk through a few questions:
- How is the trust document going to be interpreted?
- Does income need to be distributed from the trust each year?
- If so, how often should that income be distributed?
- Should distributions include things like capital gains?
- Who is going to be filing the trust tax return?
I always suggest consulting with your advisor, attorney, and accountant to get this done.
