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

Reconciling FAI to DNI and Trust Taxable Income, Avoiding Tax and Beneficiary Challenges

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Thursday, November 12, 2020

Recorded event now available

or call 1-800-926-7926

This course will provide tax advisers and compliance professionals with a comprehensive guide to navigating the complexities of calculating fiduciary accounting income (FAI) for trusts and estates. The panel will detail how to interpret essential trust and estate provisions to apply to FAI calculations and will identify tax traps, planning considerations in maintaining FAI computations, and deducting excess deductions under Section 642(h)(2) as outlined in the recently issued final regulations. The panel will discuss the fundamentals of FAI calculations using typical real-world examples.

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.

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Outline

  1. Tax definition of FAI/TAI
  2. UPIA factors in calculating FAI
  3. Impact of FAI on trust distributions
  4. Planning considerations and traps to avoid

Benefits

The panel will discuss these and other important issues:

  • How operating documents impact FAI calculations
  • Interpreting state laws and UPIA provisions in circumstances where operating documents are silent or inconclusive
  • Reconciling FAI to DNI and to trust taxable income
  • How FAI determines distribution amounts and timing

Faculty

Gadarian, Gregory
Gregory V. Gadarian
Partner
Gadarian & Cacy

Mr. Gadarian's practice focuses on tax strategy, estate planning and asset protection law. Previously, he was a...  |  Read More

Sanger, Howard
Howard L. Sanger
Attorney
Sanger & Molever

Mr. Sanger has over a quarter century of experience in estate planning, trust and estate administration, tax...  |  Read More

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