Advice on Making More $$ in a Trust Account

[SoReadyToRetire]

My mom sadly passed away in April 2023. She had created a trust that held all her property, including her bank accounts, and named me as Trustee.

For years she drove me crazy by using the bank right next to her house for her checking and savings. They charged her outrageous monthly fees. I couldn't even get her to move her money to a credit union that didn't have those, bless her heart. She felt safe there.

There's now a little over $86K sitting in her checking account at that bank. I'd like to open a high-yield savings account, probably online-only as they have the highest rates, and move about $75K of that into it, so it generates some income. But of course *I* don't want to have to pay taxes on that income, so I need to open it in the name of the Trust.

I'm looking at Ally Bank's HYSA right now, as rate is still over 5%.

Anybody have experience doing this, as Trustee of a deceased person's money? Does this sound like a good idea? Any red flags? Any advice?

 

[38Chevy454]

Better check trust tax rates, they are typically higher than individual. Just curious, why do you want to keep the trust? Once your mother passed, the trust becomes irrevocable and the trustee then proceeds with distributions per the trust and will. The checking account should be after tax money, so no tax on that beside small interest income that is taxable.

 

[GrayHare]

Tax on trust income is usually at higher rates than an individual tax rate. Some believe interest rates will be declining soon, and if correct, locking in a rate by putting the funds in a long-term CD is likely to yield more return.

 

[SoReadyToRetire]

Better check trust tax rates, they are typically higher than individual. Just curious, why do you want to keep the trust? Once your mother passed, the trust becomes irrevocable and the trustee then proceeds with distributions per the trust and will. The checking account should be after tax money, so no tax on that beside small interest income that is taxable.

I left out some important info. I haven't distributed that money yet because we are trying to sell my parents' property. The zoning rules where the property sits are extremely (ridiculous and) complicated, so we've had to lay out thousands of dollars to have engineering done, water testing, wetlands delineation, etc, before we could even arrive at an asking price and get it on the market.

Also, I have 5 siblings. Two of them have substance abuse issues, so we don't want to just give them a chunk that's not big enough to get a new place to live--it'd disappear. We're hoping to wait until the property is sold and then distribute the whole estate at once.

I don't really want to tie the money up in a CD, partly because my siblings don't want me to move this money at all (they don't trust online banks), and we might need more of it for unexpected expenses for the place. That's why I'm planning to leave that $11K in the current account.

 

[SoReadyToRetire]

One other thing: I did Mom's taxes for her every year. I just did a personal income tax return--never a trust return. The lawyer who set up her trust never told us to do otherwise. (Of course, the Trust has never generated any income, either--the balance of all her accounts has only gone down.)

Is this going to bite me now? Do I need to do 14 years of back Trust tax returns?

 

[GrayHare]

Often such trusts do not need to file their own tax return until the tax year the grantor passes.

 

[Dtail]

Often such trusts do not need to file their own tax return until the tax year the grantor passes.

Not sure that is true. We have an irrevocable trust for my brother and even though there isn't enough income to generate taxes owed, we still need to file a 1041 each year.

 

[cathy63]

One other thing: I did Mom's taxes for her every year. I just did a personal income tax return--never a trust return. The lawyer who set up her trust never told us to do otherwise. (Of course, the Trust has never generated any income, either--the balance of all her accounts has only gone down.)

Is this going to bite me now? Do I need to do 14 years of back Trust tax returns?

Often such trusts do not need to file their own tax return until the tax year the grantor passes.

Not sure that is true. We have an irrevocable trust for my brother and even though there isn't enough income to generate taxes owed, we still need to file a 1041 each year.

If the trust was originally set up for the purpose of estate planning and avoiding probate, then most likely it was a Revocable Living Trust. For a revocable trust, all the income would have been reported on your mother's return. Since you did her tax returns, you probably know if you reported the interest from bank accounts owned by the trust and if you took deductions for property tax on trust properties, etc. If all the income has been properly accounted for on your mother's 1040s in prior years, there's nothing else to do.

When your mother died, the revocable trust was converted to an irrevocable one. Irrevocable trusts usually do need to file tax returns, but you should read the instructions for Form 1041 and figure out whether that applies to your own situation. Lots of trustees will go ahead and distribute income from a trust to the heirs and issue K-1s because as others have pointed out, the trust tax brackets are narrow and income over ~$14.5K is taxed at 37%. If the trust is earning less than $3K in interest income, then it's in the 10% bracket and it may make sense to hold it and have the trust pay the taxes. This gets complicated quickly, so you might want to get some professional help with the 2023 return.

 

[socca]

I left out some important info. I haven't distributed that money yet because we are trying to sell my parents' property. The zoning rules where the property sits are extremely (ridiculous and) complicated, so we've had to lay out thousands of dollars to have engineering done, water testing, wetlands delineation, etc, before we could even arrive at an asking price and get it on the market.

I assume that you have applied for and received an EIN (tax ID #) for the now-irrevocable trust. Has the irrevocable trust received any 2023 taxable income? The 1099s that arrive (if any) will let you know. There are simple rules that govern whether a trust needs to file a tax return (Form 1041) during any given tax year (the trust might also need to file state and local tax return(s) as well).

When you sell your Mom's property the trust will receive a 1099-S for the sale which will also be reported to the IRS. You'll probably need to prepare and file a 1041 for the year that the house is sold.

You'll want a good tax advisor to give you advice on these issues.

 

[SecondCor521]

Others have already discussed the taxation situation.

There's now a little over $86K sitting in her checking account at that bank. I'd like to open a high-yield savings account, probably online-only as they have the highest rates, and move about $75K of that into it, so it generates some income. But of course *I* don't want to have to pay taxes on that income, so I need to open it in the name of the Trust.

I'm looking at Ally Bank's HYSA right now, as rate is still over 5%.

Anybody have experience doing this, as Trustee of a deceased person's money? Does this sound like a good idea? Any red flags? Any advice?

The executor of her will should follow the instructions in her will.

Likewise, the trustee(s) of the trust should follow the instructions in the trust document. It's not up to you or your siblings to just decide what to do. The truustee(s) of the trust have to follow the trust document and applicable state law.

The trust document could say anything:

1. "Distribute all the money as soon as possible."
2. "Sell the house, then distribute everything as soon as possible after that."
3. "Distribute proceeds to siblings Annie, John, and Jane immediately; keep the portions for substance abusers Fred and Wilma in trust in perpetuity."
4. "Keep the money in the neighborhood bank."
5. "Maintain liquidity and security at any FDIC institution."

Or lots of other things. You need to find the trust document, read it, and follow it, perhaps in consultation with an attorney if you don't understand it well enough or if state law is unclear or if there is anything not straightforward.

If the terms of the will or trust aren't followed, the executor and/or trustee can probably be sued, probably by the other beneficiaries. Even if a lawsuit doesn't occur, there could easily be bad blood directed at the trustee/executor.

 

[pb4uski]

I would leave the money where is. I assume that it is earning next to nothing but that's ok.

As others have indicated, the trust is most likely a revocable trust and income from the account was included in your mom's tax return each year before her death and reported on a 1099 under her SSN.

Technically, upon your mom's passing the trust became irrevocable, and the 2023 trust tax return should report income after her passing, but from what you wrote it sounds like the income for the account was negligible. Were there other significant trust assets that generated income in 2023?

If not then I wouldn't sweat doing a trust 1041 for 2023 as it sounds like the trust income was negligible. Just report it all on your mom's 2023 tax return as you have always done.

Apply for a TIN for the trust ASAP and plan to do a trust 1041 for 2024.

 

[SecondCor521]

^ Trusts get a small ($100 or $600 usually) "standard deduction", so trusts with less than that amount are not required to file a tax return. See the Form 1041 instructions for details.

Also, trusts can elect a taxable year other than a calendar year. Depending on the timing of income, it could be helpful to reduce the number of 1041s filed.

 

[marko]

Sounds to me like you need to see a good tax accountant.

 

[rk911]

My mom sadly passed away in April 2023. She had created a trust that held all her property, including her bank accounts, and named me as Trustee.

For years she drove me crazy by using the bank right next to her house for her checking and savings. They charged her outrageous monthly fees. I couldn't even get her to move her money to a credit union that didn't have those, bless her heart. She felt safe there.

There's now a little over $86K sitting in her checking account at that bank. I'd like to open a high-yield savings account, probably online-only as they have the highest rates, and move about $75K of that into it, so it generates some income. But of course *I* don't want to have to pay taxes on that income, so I need to open it in the name of the Trust.

I'm looking at Ally Bank's HYSA right now, as rate is still over 5%.

Anybody have experience doing this, as Trustee of a deceased person's money? Does this sound like a good idea? Any red flags? Any advice?

I've been successor trustee four times and have had to open bank accounts several times. As I recall all I needed were copies of the title page of the trust, the page naming me as ST and the signature page. Be sure you also bring your ID and a copy of the IRS form showing the new tax ID number of the trust. The process to open accounts in person and remotely were the same.

 

[38Chevy454]

You can get the Trust EIN online, it's an easy process.

 

[SoReadyToRetire]

If the trust was originally set up for the purpose of estate planning and avoiding probate, then most likely it was a Revocable Living Trust. For a revocable trust, all the income would have been reported on your mother's return. Since you did her tax returns, you probably know if you reported the interest from bank accounts owned by the trust and if you took deductions for property tax on trust properties, etc. If all the income has been properly accounted for on your mother's 1040s in prior years, there's nothing else to do.

When your mother died, the revocable trust was converted to an irrevocable one. Irrevocable trusts usually do need to file tax returns, but you should read the instructions for Form 1041 and figure out whether that applies to your own situation. Lots of trustees will go ahead and distribute income from a trust to the heirs and issue K-1s because as others have pointed out, the trust tax brackets are narrow and income over ~$14.5K is taxed at 37%. If the trust is earning less than $3K in interest income, then it's in the 10% bracket and it may make sense to hold it and have the trust pay the taxes. This gets complicated quickly, so you might want to get some professional help with the 2023 return.

You're right on all assumptions, Cathy. Thank you for this. I'll check with the attorney to be sure of everything.

 

[Jerry1]

This is one of those times when you need to consult with an attorney. The points being brought up here are typical but who knows your specific situation. Best not to move any money or pay any bills until you work out a plan of action with your attorney. DW is handling her mom’s estate and their first meeting with their attorney is this Friday. The attorney said “Do not do anything until we talk. Do not pay any bills, nothing. A lot of times, you can’t “take it back” or get a “do over” so best not to do anything until you consult with the attorney.

I would look at feedback from this group as a way to educate yourself and prepare for the meeting with the attorney.

 

[socca]

... Technically, upon your mom's passing the trust became irrevocable, and the 2023 trust tax return should report income after her passing ...

Yep. The IRS wants 2023 income received after date-of-death and reported on a 1099 under the decedent's SSN nomineed to the irrevocable trust's 2023 tax return. I suspect that this requirement is often ignored, especially for small estates. I did the nominee dance because my dad's estate has above-average probability of being audited and I wanted to make the IRS auditor happy when the time comes.

 

[OldShooter]

... Also, I have 5 siblings. Two of them have substance abuse issues, so we don't want to just give them a chunk that's not big enough to get a new place to live--it'd disappear. We're hoping to wait until the property is sold and then distribute the whole estate at once. ...

Question for your attorney: Can you give the "safe" siblings their cash distribution and wait on the other two? That reduces by 60% the benefit/maybe the need for chasing around for better interest rates. It seems like that should be within your discretion as trustee.

 

[SoReadyToRetire]

Thank you to all who have responded. This was all helpful info.

Just for a bit more background, I went with my mom to all her lawyer appointments when she set up the Trust, did her Will, etc. I applied for the EIN after she died, on the attorney's advice. I handled all her financial/medical/misc "stuff" for her for years; she was a typical 1950's bride who was overwhelmed once my father died 13 years ago.

This account is pretty much the bulk of her estate (besides the $500K property, which we thought before she died would be worth well over $1M, which is why she set up the Trust in the first place).

The only reason I want to do this is to generate a little more money for my siblings. Some are very needy; others, not as much. $86K split 6 ways doesn't go very far for those who need to find a new place to live (two are still living at her home while it's on the market).

 

[pb4uski]

Yep. The IRS wants 2023 income received after date-of-death and reported on a 1099 under the decedent's SSN nomineed to the irrevocable trust's 2023 tax return. I suspect that this requirement is often ignored, especially for small estates. I did the nominee dance because my dad's estate has above-average probability of being audited and I wanted to make the IRS auditor happy when the time comes.

Yeah, I'm intentionally ignoring it. I think the important thing is that the income gets reported somewhere.

My mom died in November and had a trust. I distributed the assets to the beneficiaries in late December.

Technically, I should get a TIN for the trust and report the income from her date of death to the end of December on a 1041 and send out 5 K-1s to each of us for really minor amounts. Too much hassle. I'll report al that income on her final return and declare victory. The important thing to me is that all the income gets reported. The government will get about the same amount of tax since my Mom's marginal tax rate is about same as us kids. Close enough. Too much paperwork for me to fret about.

 

[sheehs1]

Thank you to all who have responded. This was all helpful info.

Just for a bit more background, I went with my mom to all her lawyer appointments when she set up the Trust, did her Will, etc. I applied for the EIN after she died, on the attorney's advice. I handled all her financial/medical/misc "stuff" for her for years; she was a typical 1950's bride who was overwhelmed once my father died 13 years ago.

This account is pretty much the bulk of her estate (besides the $500K property, which we thought before she died would be worth well over $1M, which is why she set up the Trust in the first place).

The only reason I want to do this is to generate a little more money for my siblings. Some are very needy; others, not as much. $86K split 6 ways doesn't go very far for those who need to find a new place to live (two are still living at her home while it's on the market).

If her assets consist of the house and $86,000, I'd be inclined to leave that $86,000 where it is until the house sells, if for no other reason than to pay the monthly expenses, utilities, possibly property taxes and insurance, upkeep, etc. Those are technically Trust expenses at this point. The house is owned by the trust and more importantly stuff happens to a house. Unless you have a very good idea of costs until it sells and how long it may take to sell.

 

[pb4uski]

If her assets consist of the house and $86,000, I'd be inclined to leave that $86,000 where it is until the house sells, if for no other reason than to pay the monthly expenses, utilities, possibly property taxes and insurance, upkeep, etc. Those are technically Trust expenses at this point. The house is owned by the trust and more importantly stuff happens to a house. Unless you have a very good idea of costs until it sells and how long it may take to sell.

+1

I would leave the money where is. ...

 

[lem1955]

My Dad died in January 2023. I will file his Trust tax return soon for 2023. I had a Trust bank account until the lawyer told me I could disburse all the money. Because there were a few outstanding expenses I moved the remainder, about $20K, to my personal account. Once those last expenses are expended I will distribute half of whatever remains less an estimate of my taxes on the last of it to my sister. I'm lucky to have a good relationship with my sister!

 

[imnontrad]

What are the terms of the trust? Does it limit you concerning what it can be invested in? Also, what are the conditions to dissolve the trust? If it is her death, then go ahead and distribute the funds and be done with it.
Otherwise if ou have a choice on how to invest, look at low cost ETFs that do not have dividends (or little dividends). This is because a trust pays a much higher tax rate than individuals so you want to minimize income.