Can A Person Have Multiple Trusts
There are many reasons why you might use multiple trusts. Doing so, however, can result in a significant administrative burden. At a minimum, each trust will have to file a tax return, and have to follow a unique set of rules. Not staying on top of these can put you at risk for legal noncompliance and a greater tax burden than necessary.
If you have multiple trusts, here are four things to consider.
1. Strategize distributions to minimize tax impacts.
Different types of trusts have different rules around the legal and tax treatment of distributions. If you need to take cash distributions from a trust, be sure you understand the legal and tax ramifications involved.
Distributions from certain types of trusts can transfer the income tax burden from the trust to the beneficiary. Generally, income taxed at the trust level is taxed at a higher rate than income distributed to beneficiaries, so distributing income from a trust can be a useful tax planning opportunity. After the end of the year, it’s critical to run certain calculations to determine each trust’s income and the optimal (i.e., most tax efficient) distribution amount.
These distributions must be made within 65 days of the end of the calendar year. Failing to calculate or incorrectly calculating the requisite amounts could leave you paying more tax than necessary.
2. Know legal restrictions.
In addition to distribution amounts, be sure you know the legal restrictions surrounding the kinds of distributions you can make to a beneficiary. Each trust is governed by a trust agreement or other legal document. Being familiar with each trust’s governing document is necessary to know what distributions can be made, to whom and for what purpose.
A trust’s governing document can significantly limit the trustee’s ability to make distributions for certain purposes. Some trusts may allow for distributions for any reason while others adhere to the Health, Education, Maintenance, and Support (HEMS) standard, which means distributions must fall into one of these categories. As a trustee it is critical to know when you are allowed to distribute funds and for what purposes.
3. Plan for multiple tax returns.
Each trust is generally required to file a separate tax return each calendar year. If you have multiple trusts, be prepared to file multiple tax returns every year. (Filing is optional for most grantor trusts.) This can not only become a substantial administrative burden but also incur tax preparation costs. Before forming multiple trusts you should consider the associated ongoing costs.
4. Should you consolidate?
When a trust gets small enough or has similar terms to another trust, it may be wise to consolidate for tax and administrative purposes. At Origin CPA Group, we often review clients’ trusts and make recommendations for consolidation. Regardless of the number of trusts you have, we can manage the administrative, legal, and tax details of each one for you, so you’re free to make the most of your time.
If you’d like to learn more about how we could help you manage your trusts, contact us today to learn more.