When terminating a trust, you must be certain that all required income distributions have, in fact, been made to the income beneficiary before you can distribute the remaining trust principal to the person designated to receive it (the remainderman). Any income accumulated in the trust and/or due to the trust by the date of termination belongs to the income beneficiary.
If the income beneficiary and the remainderman are the same person, then that individual will receive everything. But if the principal is going to someone or someplace other than where you’ve been making income distributions, you have to pay any owed income before you can make distributions of principal.
You determine how much you owe, if anything, to the income beneficiary by dates. The income interest may end on the date the income beneficiary dies or turns a specific age, or after the trust has been in existence for a certain number of years. After you know the date the trust officially terminates, you can then calculate the final payout.
You need to pay out to the income beneficiary all the income still in the trust on the date of termination and all the income that the trust was entitled to receive by that date but that hadn’t yet been paid to the trust.
In addition, you need to make adjustments for the following items when terminating a trust and calculating a final payout to the income beneficiary:
Accrued interest earned on any bonds held by the trust, or earned to the termination date in any bank accounts. Interest is earned on a daily basis, even though it’s paid only periodically.
Stock dividends that are owed to the trust but haven’t yet been paid.
Rents owed but not yet paid for the period from the end of the last rental period to the termination date.
Partnership and business income from the date earned but not yet paid, through the termination date.
State tax refunds attributable to income earned prior to the termination that are due but haven’t been received.
Any other miscellaneous income earned but not yet received prior to the termination.
Although doing the research and making all these calculations yourself is possible if you’re only dealing with a few securities, you may want to call a broker or a valuation service if the trust owns tens or even hundreds of securities. The money spent to pay an expert will be worth the time you save.
