Calculating Trust Fiduciary Accounting Income: Interpreting Operating Documents, Applying UPIA and State Law

Description

The critical first step to completing a Trust Income Tax Return is the calculation of FAI, also sometimes referred to as trust accounting income (TAI). FAI is the amount generally available to the income beneficiaries of a trust or estate. It is different from both taxable income and distributable net income, both of which are tax-generated concepts. The starting point for calculating FAI is the operating instrument, such as a will or trust agreement. Tax professionals working on trust returns must have a firm grasp of how to apply the documents to an FAI calculation.

Where the operating document is unclear as to an income receipt, an expense item or a distribution item, the FAI calculation defaults to the state law of the trust’s situs. Most states have incorporated the UFIPA, with some local differences. However, fiduciary accounting principles determine the timing and amount of distributions to beneficiaries.

In the “real world”, it’s not unusual that fiduciary accounting principles are misapplied. With trusts established for blended families (i.e. second marriages; remainder beneficiaries are children from prior marriages), misapplying fiduciary accounting principles can result

• in some trust beneficiaries getting shortchanged;
• while other trust beneficiaries getting windfall overpayments; and
• in surcharge actions against the trustee.

Using actual examples, the presentation will illustrate fiduciary accounting blunders made by trustees, their accountants and their lawyers.

Another critical skill is reconciling FAI to both distributable net income and trust taxable income. Accountants and lawyers representing fiduciaries and beneficiaries need to identify the essential differences between fiduciary accounting and tax accounting to avoid both tax consequences and beneficiary challenges. With blended families, the differences can cause turmoil.

Listen as our experienced panel provides an in-depth and practical guide to mastering fiduciary accounting income beyond the basics.