Question: I thought I did everything right as a trustee. I followed your advice and that of my attorney and was transparent about what I was doing along the (long) way of administering my dad’s estate. Then, when I gave my siblings an accounting of my administration, my sister filed a lawsuit against me for breach of fiduciary duty! She is contesting my actions as outlined in the accounting. Now I must “lawyer up” and go to court to defend myself. The litigation attorney I retained asked for a $5,000 retainer and warns me that it will be a lot more – possibly $100,000! Is this a cost I need to pay? I thought I was doing everything right.
Answer: It sounds like you did everything right but without knowing the details of your accounting and her complaint, it is difficult to provide an opinion. It is a tall ask but try not to be offended by the fact that someone has filed a complaint against you. Unfortunately, anyone can file a complaint for just about anything, so it is up to you and your attorney to provide a strenuous defense. Transparency of your actions during the administration and the accounting you freely provided both speak well of you.
Costs of defense are normally paid by the trust but, if it is found that you breached your fiduciary duties, you could be surcharged for the legal costs and also be made to return any trustee fees you have been paid. However, if your sister does not prevail, she can be made to pay both her own attorney’s fees and the fees you had to expend to protect yourself and the trust. This is a terrible thing to have happened on the heels of losing your dad and working through the administration which, as you state, was a long journey. Trust your attorney and defend yourself. I hope everything turns out well.
Question: The bank trust company handling my grandmother’s estate told me not to file my personal tax returns until I receive a notification from them. They tell me I may have taxes to pay on what I received from my grandmother’s estate in 2023. I was under the impression that when you receive an inheritance, it is subject to estate tax and not income tax. What am I missing here, and do I really need to wait on the bank to file my tax returns?
Answer: Ah, tis the season – tax season that is! Generally, when you inherit a house, assets or other property, it is not taxable to you. If the estate value was over $12.92 million, an estate tax may be due but that is normally paid by the trustee or executor before distributions are made to heirs.
What the bank trust company is alerting you to is that they, most likely, distributed income of the trust or estate to you in 2023 and that they will provide you with a K-1 reflecting your tax liability for that income distribution. If, during an estate administration, income, dividends or capital gains are received or realized, the bank may choose to “pass out” the income tax payment obligation to the heirs. This is actually a smart move on the bank’s part because income tax paid by a trust or estate is at a much higher rate than individuals are required to pay. In other words, the overall tax on the assets you will eventually receive is less than if the bank pays the income tax at the higher rates. Also, you may have personal tax deductions that can reduce the overall tax you will need to pay.
Let your tax preparer know you are waiting on your K-1 and put your personal returns on extension until you receive it. The bank will report this income information to the IRS so the taxing agencies will be looking for you to pay the appropriate income tax.
Liza Horvath has over 30 years experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust Management Company. This is not intended to be legal or tax advice. If you have a question call (831)646-5262 or email liza@montereytrust.com