Running an Irrevocable Trust
- 1). Keep close to the law firm that is in charge of the trust. It is the main adviser to you as trustee. It has experience in this field, and, in general, it is a good idea to trust professionals rather than your own judgment. Some of the taxation issues can become very complex. If there is an unintentional error in bookkeeping, the IRS is not loathe to pounce on this. The point is that being a trustee means acting in a scrupulous manner relative to the law, the beneficiaries and the grantor for whom you are working.
- 2). Familiarize yourself with the IRS code concerning trusts. The big issue for you as the trustee is to always keep this money sheltered from federal gift, estate or capital gains tax. For example, a “Credit Shelter” fund permits a married couple to double its exemption from estate taxes. A “Generation Skipper” fund will shelter up to $1 million, or $2 million for a married couple, from federal taxes, though what is beyond this amount is subject to a 55 percent gift tax. Therefore, if you are running a “Generation” style fund for the grantor's grandchildren, always make sure that the assets never exceed these amounts. All interest and excess should then be given to the proper beneficiaries. If they are too young, then it might be time to open another, revocable, trust in their name. Chances are, the grantor has already left instructions as to how the “excess” should be parceled.
- 3). Study the laws in the state. Irrevocable trusts are governed by state regulations, and these vary widely. What is not state based is the nature of the tax relief. This is derived from IRS code regulations. Therefore, you should be fluent in both sides of the equation. Any income received from this trust needs to be accompanied by a separate 1040 form to the IRS. Follow these regulations with an almost exaggerated scrupulosity.
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