How to Plan for Final Expenses when Terminating a Trust

When terminating a trust, you need to put money aside to pay final taxes and fees. The trust income needs to be reduced by any expenses accrued as of the termination date. If you decide to pay the income beneficiary before paying the expenses, deduct the estimated cost of expenses from the income before making a distribution. Keep the money reserved for expenses in an account that does not earn income.

The following are some examples of expenses that a trust may have accrued:

• Trustee’s and investment advisor’s fees

  
  



• State, local, and foreign taxes on income received and accrued

  
  



• Miscellaneous expenses

  
  



• Probate court costs (for filing annual accounts)

  
  



• Any other such fees attributable to the income earned in the trust as of that date

  
  

If you’ve collected all the income but haven’t yet paid all the expenses, you don’t need to keep all that income in the trust. Determine how much you think you’ll need to pay the expenses and then pay out what remains to the income beneficiary.

Estimate the expenses on the generous side; nothing is worse than having to ask the income beneficiaries to repay money they’ve already spent.

You can hold the money you set aside for future expenses in a separate, non-interest-bearing, non-trust account or keep one of the trust accounts open. Remember, though, that you don’t want to earn any additional income, especially after you’ve filed the final tax return. After you finish paying the expenses, the rest of that money should be sent to the beneficiary to close out the income side of the account.

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