As a trustee, you should establish a payment schedule for the trust to ensure that the trust has enough money when you make distributions to beneficiaries and when you pay taxes and service fees. To create a trust’s payment schedule, you must project your yearly income and expenses. Pay taxes and service fees before you distribute payments to beneficiaries, and ensure that the trust has enough funds at tax time.
You can create a payment schedule for your trust using pen and paper or a computer spreadsheet program. When you create a payment schedule for the trust, keep the following pointers in mind:
Project what your income and expenses will be throughout the year, and when you expect to make payments for fees and expenses in the trust. If the income generated by the trust is uneven, be sure to schedule your fees and expenses payments after you’ve received the bulk of the trust’s income. Only after those payments have been made should you make payments to the income beneficiary.
For example, if you receive large payments in May and November but not much else for the rest of the year, you should schedule your fee and expense payments for early June and December. Then you can safely pay whatever income is remaining to the beneficiary toward the end of June and December.
Make sure that you pay all other obligations before you write a check to the beneficiary. Income from interest and dividends posts most heavily into accounts around the 1st of each month, and most tax payments are due on the 15th. Service providers usually bill you on about the first of the month. After the trust pays these obligations, then you can make beneficiary payments, usually toward the end of the month or quarter.
Most important, don’t ever leave yourself short at tax time. Although accountants, attorneys, and beneficiaries may pressure you for payments, the IRS and the state tax authorities can have tremendous power over the trust. In addition to charging penalties and interest for late payment or late filing, the IRS can also levy, or reach in and grab the taxes due directly from the trust’s bank or brokerage account.