As the successor trustee of a trust, you have a lot of responsibilities on your plate. This is especially true for trustees administering more complex trusts that were designed to minimize state or federal estate taxes. Often, this is done by using what is known as a credit shelter, bypass, or AB trust. The general theme behind these trusts is that they call for the creation of sub-trusts after the death of the creator of the trust. Furthermore, as the successor trustee, it is your job to allocate the assets of the trust into these sub-trusts.
Fractional and Pecuniary Formulas
When making decisions about asset allocation during the trust administration process, trustees must first look to the terms of the instrument itself. In many cases, the trust document will provide direction as to how trust assets should be in place. This often means the use of fractional and pecuniary formulas. The following is an overview:
If the trust directs you to divide assets using a fractional formula, each sub-trust will own a fractional interest in each asset. The division of the interests in each asset calculate using mathematics. These divisions appear in the trust’s accounting records. Specific asset allocations to individual sub-trusts are not necessary. Unless you have experience in this field, it is important to seek guidance from an attorney and a tax advisor when preparing these accounting records.
In contrast, a pecuniary formula allocates the assets of the trust based on an amount of money, known as the pecuniary amount. This can provide greater flexibility in some circumstances, allowing choices of allocation of assets based on their expected appreciation amounts. If you are the trustee of a trust with a pecuniary formula, however, you must be careful with how the assets allocate as you can also inadvertently trigger an income tax on capital gains if you allocate assets that appreciate substantially to certain sub-trusts.
In conclusion, decisions relating to asset allocation are difficult and complex. We are here to help guide you through that process. Check out the words of our many previous clients in our client testimonials page today.
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