The Challenges of Trust Administration

Clients considering charitable remainder unitrusts sometimes hesitate to pay the fees charged by corporate fiduciaries, thinking they can serve as their own trustee.  But what exactly does the DIY client need to do?  In addition to making investment decisions that must balance the needs of the income and remainder beneficiaries, the client will be required to:

  • Value the trust assets every year so the unitrust amount (a fixed percentage of the trust assets) can be determined.  Valuation will involve fixing the fair market value of all investments on the date set out in the trust instrument.  Additionally, if the trust contains a hard-to-value asset such as real estate, a qualified appraisal will be needed to establish value (grantor/trustees are disqualified from this task under IRS regulations).

  • Make timely distributions of the unitrust amount, as called for in the trust instrument.

  • Track the income and capital gain realized by the trust, so that proper tax reporting can be made to the IRS and income beneficiaries.  The trustee takes the grantor’s cost basis as to assets transferred into the unitrust, and capital gains, when realized by the trust, may be passed through to the income beneficiaries under the four-tier tax reporting system [Reg. §1.664-1(d)(1)].

  • File annual tax returns for the trust, including Form 5227, Schedule K-1 of 5227 (to individual beneficiaries), Form 1041-A (if not all trust income is distributed in a particular year) and possibly other forms if the trust should become subject to private foundation taxes and penalties.  If appraisals were needed for any property transferred to the trust, such as real estate, collectibles or closely held stock, the trustee generally will be required to file Form 8282 reporting the details of the sale.

  • Clients serving as trustee often retain tax, legal and investment advisers to assist with these tasks, or might consider co-trusteeship with a commercial trustee.  In many cases, the charitable remainderman may offer trustee services at a modest cost.


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