How Are Trustee Commissions Calculated & Taxed?

If you are the trustee of a trust, in most cases, you are allowed to be paid a commission from the trust assets.  States have different rules with regard to the trustee commission calculation.  This article will assist you in understanding how the commission is calculated, how the payments are taxed, the rules for commissions not taken in past years, and how the trust commissions are split between multiple trustees. 

Trust Document

The trust document usually has a special section that addresses commissions paid to the trustee.  It’s common for the trust document to include language that states that “the trustee shall receive annual commissions in the same manner and at the same rates as prescribed for testamentary trustees under the laws of the State of (Name of State)”.

For New York the formula is as follows:

1.05% of the first $400,000

0.45% of the next $600,000

0.30% of the rest

For example, a trust has $500,000 in assets as of December 31st, the calculation would be as follows:

$400,000 x 1.05% =          $4,200

$100,000 x 0.45% =          $   450

Total Commission:           $4,650

The trustee would be eligible to receive $4,650 from the trustee assets as their commission for the year.

How Are Commissions Taxed?

Commissions paid by the trust to the trustee are reported as income by the trustee on their personal tax return.  The trust deducts the commission paid as an expense.  We frequently receive the question, “does the trust have to issue a 1099-MISC tax form for the commission that was paid to the trustee?”    Many tax professionals take the position that a 1099-MISC is not required to be issued because serving as trustee does not meet the definition of a “trade or business” which is the prerequisite for issuing a 1099-MISC tax form. 

More Than 1 Trustee

What happens where there is more than 1 trustee?  Do the trustees have to split the commission equally?  The answer is “it depends”.   It depends on the size of the trust and the number of trustees.

Again, I’m referencing New York State law her.  The rules will vary for by state.  For trusts with under $100,000 in assets, each trustee gets the full commission.  If a trust has $80,000 in assets and there are 3 trustees, each trustee would receive $840 ($80,000 x 1.05%).

For trusts with assets between $100,000 – $400,000, if there are one or two trustees, each trustee is entitled to a full commission.  If there are 3 or more trustees within this asset range, the single trustee commission is divided equally between the trustees.  I don’t necessary understand the logic behind if there are two trustees the commission is doubled but if there are 3 trustees, a single commission payment is split between the trustees.  But that’s how the law is written.

For trusts with more than $400,000 in assets, if there are 1 – 3 trustees, each trustee is entitled to the full commission amount.  If there are more than 3 trustees, again, the commission is split equally amongst the trustees.

Can You Waive The Commission Payment?

As the trustee, you can voluntarily waive the commission payment.  The money simply remains in the trust.  Why would a trustee do this?  Some trustees just don’t need the income. In some situations, the parents will setup a trust, they have more than one child, but only one of the children serves as trustee.   The child that serves as trustee may decide to waive the commission payment to avoid conflict with their siblings about “taking money from mom and dad’s trust”.

Another reason for waiving the commission payment is the trustee may purposefully want to realize that income at a later date.  Whatever the reason, I just wanted you to know that waiving the commission payment is an option.

Back Payments

We will frequently get the following question:

“I have been the trustee of this trust for the past 10 year but I have never taken a commission.  Am I still entitled to the trustee commissions for past 10 years even though I did not take them?”

The answer is “yes”.  The trustee is still entitled to receive those commissions for past years even though they did not take them in the year that they were due.   The trustee would just need to be able to produce the records necessary to calculation the trustee commission for all of the past years.

In these cases, remember, commission payments to the trustees are taxed at ordinary income tax rates to the trustee. If you decide to “catch-up” on past commissions that are due to you and you receive $30,000 in trustee commissions in a single tax year that could bump you up into a higher tax bracket.  It may make more sense from a tax standpoint to spread those past commission payments over the course of the next few years to reduce the tax hit.

Disclosure: This article is for educational purposes only. For legal advice, please consult an attorney. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Do Trusts Expire?

Do trusts have an expiration date after the death of the grantor?  For most states, the answer is “Yes”.  New York is one of those states that have adopted “The Rule Against Perpetuities” which requires all of the assets to be distributed from the trust by a specified date.

The Rule Against Perpetuities

For most states, the trust assets have to be distributed no later than the “lifetime of those then living plus 21 years.”   In other words, the trust asset must be distributed 21 years after the death of the youngest beneficiary listed in the trust document.   For example, if I setup a trust with my children listed as beneficiaries, after my passing the trust assets would have to be distributed no later than 21 years following the death of my youngest child.

Per Stirpes Beneficiaries

Some trust documents have the children listed as beneficiaries “per stirpes”.  This mean that if a child is no longer alive their share of the trust passes to their heirs.  In many cases their children.  If the beneficiaries are listed in the trust document as per stirpes beneficiaries then you may be able to make the argument that the “youngest beneficiary” is really the grandchildren not the children which will allow the trust to retain the assets for a longer period of time.  Typically trusts do not allow the perpetuity rule to extend beyond their grandchildren.

Consult An Estate Attorney

Trust can be tricky and the language in a trust document is not always black and white,  so it’s highly recommended that you consult with an estate attorney that is familiar with the estate laws for you state of residence and can review the terms of the trust document.DISCLOSURE:  The information listed above is not legal advice. For legal advice, please consult your attorney. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Should I Establish A Power of Attorney?

There are three key estate documents that everyone should have: 

• Will

• Health Proxy

• Power of Attorney

If you have dependents, such as a spouse or children, the statement above graduates from “should have” to “need to have in place.”  The power of attorney document allows someone that you designate to act on your behalf if you are rendered incapacitated such as a car accident, illness, or as you become become more frail later in life.

What happens if I'm in a car accident?

If I have a wife and kids and one day I end up in a car accident and end up in a coma, without a power of attorney in place, not even my wife would be able to access accounts that are solely in my name such as bank accounts, retirement accounts, or creditors.   It could put my family in a very difficult situation if my wife is unable to access certain accounts to pay bills or withdraw money to pay for my medical bills while I am recovering.  If I establish a Power of Attorney with my wife listed as the POA (Power of Attorney), if I become incapacitated, she can use that document to access all of my accounts as if she were me.

Protecting Against Long Term Care Event

While this a valid example, the Power of Attorney document is more frequently used when elderly individuals experience a long term care event and they are no longer able to manage their finances.  The POA gives the designated person the power to make gifts, setup trusts, or implement other wealth preservation strategies to prevent the total depletion of your assets due to the expenses associated with the long term care event.

What happens if you don’t have a power of attorney?

From working with individuals that have been in these situations, it’s ugly.  Very ugly.  Instead of a trusted person being able to step in and act on your behalf, without a POA your family or friends would need to initiate a guardianship proceeding, wherein the individual is declared incapacitated and a guardian is appointed by the court to manage their financial affairs. The largest drawback of a guardianship proceeding is time and money.  It can often times cost more that $15,000 to complete a guardianship processing when taking into account court fees, attorney fees, court evaluations, and bonding fees.  In addition and arguably more importantly, you have no control over who the court will decide to appoint as your guardian and that individual will have full control over your finances.   You know your family and friends best.  Ask yourself this, wouldn’t you prefer to appoint the individual that you trust to carry out your wishes?  If the answer is “yes”, then you should strongly consider putting a power of attorney in place. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Do I Have To Pay Taxes On My Inheritance?

Whenever people come into large sums of money, such as inheritance, the first question is “how much will I be taxed on this money”?  Believe it or not, money you receive from an inheritance is likely not taxable income to you.

Of course there are some caveats to this.  If the inherited money is from an estate, there is a chance the money received was already taxed at the estate level.  The current federal estate exclusion is $5,430,000 (estate taxes and the exclusion amount varies for states). Therefore, if the estate was large enough, a portion of the inheritance may have been subject to estate tax which is 40% in most cases.  That being said, whether the money was or was not taxed at the estate level, you as an individual do not have to pay income taxes on the money.

Although the inheritance itself is not taxable, you may end up paying taxes if there is appreciation after the money is inherited.  The type of account and distribution will dictate how the income will be taxed.

Basis Of Inherited Property

Typically, the basis of inherited property is the fair market value of the property on the date of the decedent’s death or the fair market value of the property on the alternate valuation date if the estate uses the alternate valuation date for valuing assets.  An estate will choose to value assets on an alternate date subsequent to the date of death if certain assets, such as stocks, have depreciated since the date of death and the estate would pay less tax using the alternate date.

What the fair market value basis means is that if you inherit stock that was originally purchased for $500 and at the date of death has appreciated to $10,000, you will have a “step-up” basis of $10,000.  If you turn around and sell the stock for $11,000, you will have a $1,000 gain and if you sell the stock for $9,000, you will have a $1,000 loss.

Inheriting a personal residence also provides for a step-up in basis but the gain or loss may be treated differently.  If no one lives in the inherited home after the date of death, it will be treated similar to the stock example above.  If you move into the home after death, any subsequent sale at a loss will not be deductible as it will be treated as your personal asset but a gain would have to be recognized and possibly taxed.  If you rent the property subsequent to inheritance, it could be treated as a trade or business which would be treated differently for tax purposes.

Inheriting An IRA or Retirement Plan Account

Please read our article “Inherited IRA’s: How Do They Work” for a more detailed explanation of the three different types of distribution options.

When you inherit a retirement account, and you are not the spouse of the decedent, in most cases you will only have one option, fully distribute the account balance 10 years following the year of the decedents death.   The SECURE Act that was passed in December 2019 dramatically change the distribution options available to non-spouse beneficiaries. See the article below: 

If you are the spouse of the of the decedent, you are able to treat the retirement account as if it was yours and not be forced to take one of the options above.  You will have to pay taxes on distributions but you do not have to start withdrawing funds immediately unless there are required minimum distributions needed.

Note: If the inherited account was an after tax account (i.e. Roth), the inheritor must choose one of the options presented above but no tax will be paid on distributions. 

Non-Qualified Annuities

Non-qualified annuities are an exception to the step-up in basis rule.  The non-spousal inheritor of a non-qualified annuity will have to take either a lump sum or receive payments over a specified time period.  If the inheritor chooses a lump sum, the portion that represents the gain (lump sum balance minus decedent’s contributions) will be taxed as ordinary income.  If the inheritor chooses a series of payments, distributions will be treated as last in, first out.  Last in, first out means that the appreciation will be distributed first and fully taxable until there is only basis left.

If the spouse inherits the annuity, they most likely have the option to treat the annuity contract as if they were the original owner.

This article concentrated on inheritance at a federal level.  There is no inheritance tax at a federal level but some states do have an inheritance tax and therefore meeting with a professional is recommended.  New York currently does not have an inheritance tax. 

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.

First Time Homebuyer Tips

home buyer tips

Buying your first home is one of life’s milestones that everyone should have the opportunity to experience if they choose.  Owning a home gives you a feeling of accomplishment and as you make payments a portion is going to your personal net worth rather than a landlord.  The process is exciting but one surefire piece of information that I wish I knew when buying my first home is that you will come across surprises.  Whether it be a delay in closing, an issue with financing, or closing costs being higher than expected, it is important to know that you can do all the preparation possible and still be hit in the face with some setbacks.

This article will not only touch on some of the important considerations when buying your first home but will give examples of possible setbacks and how to avoid them.

Know Your Number

The most important piece of information to have when purchasing your home is how much you can spend.  The purchase of your home should not be the only goal to consider.  All of your other financial objectives such as paying off debt (i.e. college and unsecured) and saving for retirement must be taken into consideration.  Also, it is recommended you have an emergency fund in place that would cover at least 4 months of your fixed expenses in case something happens with your job or some other event occurs.  Knowing your number does not only include what you can afford today but how much you can afford monthly moving forward.  If your monthly cash flow becomes dangerously low or negative with the addition of a mortgage payment (including mortgage/property taxes/homeowners), the house may be too expensive.

NOTE:  Just because you are preapproved for a certain amount does not mean you need to spend that amount.

Choose An Agent You Trust

You will be spending a lot of time with your agent so choose them wisely.  It should be someone you get along with and someone you can trust will look out for your best interests.  If your agent just cares about receiving a commission, they may push you to purchase a home before looking at all of your options or buying a home you can’t afford.  Remember, you are the client and therefore should be treated as such.

NOTE:  Just because you never physically cut a check to your real estate agent doesn’t mean you aren’t paying them.   In a typical transaction the seller will pay the commissions.  An agreed upon percentage will come out of the sales proceeds and go to both real estate agents (the buyer’s and the seller’s) and therefore the cost is built into the price you pay.

Use Your Agent As An Asset

Your agent is likely much more knowledgeable about home buying than you so use that knowledge to your benefit.  The agent should be able to help you value homes and determine whether the house is fairly priced.  Ask them as many questions as possible throughout the entire process.

On The Fence

If you are on the fence whether or not to buy a home then take your time.  If you may relocate because of your job or family don’t jump into purchasing a home.  It is not worth paying the closing costs and going through the hassle of home buying if you may move in the near future.  We typically use the “5 Year Rule” when making the determination.  If you don’t see yourself being in the house for at least 5 years you should consider whether or not you will get your money back when you sell.

Compare Lenders

The banking industry is extremely competitive and it is worth shopping around for the best offer when choosing a mortgage provider.  If you aren’t comfortable with numbers, don’t be afraid to ask for help.  A difference of 0.10% on a 30 year mortgage could be the difference of thousands of dollars wasted on interest.

Don’t Cheap Out On Homeowners

Don’t choose your homeowners policy based on price.  Of course price is one of the considerations but it is not the only one.  Make sure your policy is the most comprehensive you can comfortably afford as the cost of increased premiums is likely much less than the cost of coming out of pocket for something not covered.  Remember, insurance companies, like banks, are in a competitive industry so shop around.

Down Payment

Most lenders require a 20% down payment of the home value to avoid paying additional costs.  This means if the value of the home is $200,000, you will have to pay $40,000 out of pocket!  Most lenders offer Federal Housing Administration (FHA) loans that allow you to put down as little as 3.5%.  If you choose this type of loan you also have to purchase Private Mortgage Insurance (PMI).  This will be a cost added to your mortgage payment until the value of your home is adequate enough to remove the PMI.  It is important to factor this in as a cost similar to interest because a 5% interest rate could quickly look like 6-7% if you have to pay PMI.

Closing And Other Additional Costs

There are a lot of out of pocket costs to consider when purchasing a home.  Examples of these costs are listed below.  An important piece of knowing your number is to consider all the costs that may come up during the process.

• Loan Origination Fee

• Attorney Fees

• Property Taxes

• Home Owners Insurance

• Appraisal Fee

• Inspection Fee

• Title Insurance

• Recording Fee

• Government Recording Charges

• Credit Report Fee

• Flood Determination Fee

How To Help Avoid Certain Complications

Situation:  I bought a house at the top of my budget that I thought was move in ready but needs repairs.

Recommendation:  Choose an inspector that has a great reputation and knows the location.  There may be issues that are common to the area that one inspector may be more likely to identify.  Also, bring a contractor or someone of similar background for a walk through.  Repairs can be extremely costly and if you purchased a home at the top end of your budget you may not be able to afford certain fixes.  It should be known that all issues cannot be foreseen but taking the necessary steps to diminish these situations will not hurt.  Don’t purchase a home that will bankrupt you if repairs need to be done.

Situation:  I bought a home I can’t fill.

Recommendation:  Closing costs and repairs won’t be the only out of pocket expenses.  Complete a summary of items you think you may need to buy after the purchase.  This may include furniture, appliances, décor, and fixtures.  In these situations it is always better to overestimate.

Situation:  My lease is up in a month and I would like to purchase a home.

Recommendation:  Purchasing a home is something that requires time and planning.  The home will likely be the largest purchase you’ve ever made (depending on the college you choose) so it is not something to rush.  If you are thinking of moving after your lease is up or when you relocate jobs, start planning as soon as possible.  Feeling forced into purchasing something as important as a home will likely lead to regrets. 

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.

What is the Process for Setting Up a Will?

What is the Process for Setting Up a Will?

Creating a will is often a task that everyone knows they should do but it gets put on the back burner. Creating a will is one of the most critical things you can do for your loved ones. Putting your wishes on paper helps your heirs avoid unnecessary hassles, and you gain the peace of mind knowing that a life's worth of possessions will end up in the right hands.  But before for you do, it helps to know the overall process of setting up a will to save you time and money.

What is a will?

A will is simply a legal document in which you, the testator, declare who will manage your estate after you die. Your estate can consist of big, expensive things such as a vacation home but also small items that might hold sentimental value such as photographs. The person named in the will to manage your estate is called the executor because he or she executes your stated wishes. Sometimes though, people get confused by this and aren't too sure what the meaning of an executor.

A will can also serve to declare who you wish to become the guardian for any minor children or dependents, and who you want to receive specific items that you own - Aunt Sally gets the silver, Cousin Billy the bone china, and so on. Someone designated to receive any of your property is called a "beneficiary."

Some types of property, including certain insurance policies and retirement accounts, generally aren't covered by wills. You should've listed beneficiaries when you took out the policies or opened the accounts. Check if you can't remember, and make sure you keep beneficiaries up to date, since what you have on file when you die should dictate who receives those assets.

What happens if I die without a will?

If you die without a valid will, you'll become what's called intestate. That usually means your estate will be settled based on the laws of your state that outline who inherits what. Probate is the legal process of transferring the property of a deceased person to the rightful heirs.

Since no executor was named, a judge appoints an administrator to serve in that capacity. An administrator also will be named if a will is deemed to be invalid. All wills must meet certain standards such as being witnessed to be legally valid. Again, requirements vary from state to state.

An administrator will most likely be a stranger to you and your family, and he or she will be bound by the letter of the probate laws of your state. As such, an administrator may make decisions that wouldn't necessarily agree with your wishes or those of your heirs.

Do I need an attorney to prepare my will?

No, you aren't required to hire a lawyer to prepare your will, though an experienced attorney can provide useful advice on estate-planning strategies such as establishing testamentary, revocable, and irrevocable trusts. But as long as your will meets the legal requirements of your state, it's valid whether a lawyer drafted it or you wrote it yourself on the back of a napkin.

Do-it-yourself will kits are widely available online which are of course better than nothing but we usually recommend that our clients at least have an attorney review their will and make sure the specifications in their will match their wishes.

Should my spouse and I have a joint will or separate wills?

Estate planners almost universally advise against joint wills, and some states don't even recognize them. Odds are you and your spouse won't die at the same time, and there's probably property that's not jointly held. That's why separate wills make better sense, even though your will and your spouse's will might end up looking remarkably similar.

In particular, separate wills allow for each spouse to address issues such as ex-spouses and children from previous relationships. Ditto for property that was obtained during a previous marriage. Be very clear about who gets what. Probate laws generally favor the current spouse.

Who should I name as my executor?

You can name your spouse, an adult child, or another trusted friend or relative as your executor. If your affairs are complicated, it might make more sense to name an attorney or someone with legal and financial expertise. You can also name joint executors, such as your spouse or partner and your attorney.

One of the most important things your will can do is empower your executor to pay your bills and deal with debt collectors. Make sure the wording of your will allows for this, and also gives your executor leeway to take care of any related issues that aren't specifically outlined in your will.

How do I leave specific items to specific heirs?

If you wish to leave certain personal property to certain heirs, indicate as much in your will. In addition, you can create a separate document called a letter of instruction that you should keep with your will.

A letter of instruction, which isn't legally binding in some states, can be written more informally than a will and can go into detail about which items go to whom. You can also include specifics about any number of things that will help your executor settle your estate including account numbers, passwords and even burial instructions.

Another option is to leave everything to one trusted person who knows your wishes for distributing your personal items. This, of course, is risky because you're relying on this person to honor your intentions without fail. Consider carefully.

Who has the right to contest my will?

Contesting a will refers to challenging the legal validity of all or part of the document. A beneficiary who feels slighted by the terms of a will might choose to contest it. Depending on which state you live in, so too might a spouse, ex-spouse or child who believes your stated wishes go against local probate laws.

A will can be contested for any number of other reasons: it wasn't properly witnessed; you weren't competent when you signed it; or it's the result of coercion or fraud. It's usually up to a probate judge to settle the dispute. The key to successfully contesting a will is finding legitimate legal fault with it. A clearly drafted and validly executed will is the best defense.

Michael Ruger

About Michael.........

Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.