How to Compile Records of Trust Transactions

As trustee, tracking all transactions in and out of the trust account can help in many ways. Record the transaction every time you buy or sell a security, receive interest or dividend payments, or make any payments.

This helps because you can determine how much is available to distribute to the income beneficiaries, while at the same time keeping track of the trust’s ongoing tax situation. You’ll also gain some insight into how much you should charge for your trustee’s fee.

The difference between income and principal

As you keep track of these transactions, you need to understand the difference between income and principal. Unlike personal accounts, trusts differentiate between principal, or the assets of the trust, and income¸ or the money earned by the assets. Distinguishing between income and principal can sometimes be confusing because certain types of income are actually considered principal, and others remain segregated on the income side of the account.

However just keeping track of the approximate records isn’t enough when administering a trust. You have to know what the trust’s cost is in an asset before you can make an informed decision as to what to do with it, and should you decide to sell it, you need to know the basis in order to correctly calculate the capital gain or loss.

Don’t rely on brokerages or mutual fund companies, which will record approximate costs, to keep track of your cost basis in securities. Each time you buy a security, you create one tax lot; each time you sell, you may choose which lot or lots you’re selling.

By designating which shares are sold, you can generate either a larger or smaller capital gain or loss, depending on what’s most advantageous to the trust. Keeping track of each specific tax lot allows you to keep all your options open.

Even if your broker supplies you with an informational schedule with its version of gains and losses, you’re not obligated to use it, provided you have the supporting documentation necessary to back up yours.

Filing income tax returns annually

A trust is a taxable entity, and any income it earns must be reported annually, either on the grantor’s Form 1040, in the case of a revocable trust, or on Form 1041, U.S. Income Tax Return for Estates and Trusts. Almost all trusts are required to file, using a calendar year, and the tax return is due on April 15 of the following year.

If you’re unable to complete and file the return by the filing deadline, you may file Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns instead. Remember, any taxes owed for the prior year must be paid by April 15; the extension of time to file isn’t an extension of time to pay.

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