So you’ve been named a trustee. It’s an honor to be entrusted with your friend’s or family member’s legacy. At the same time, trust administration can be a daunting responsibility. You are bound by the fiduciary duties of care, loyalty, good faith, and (in the case of more than one beneficiary) impartiality, and missteps can have a range of implications—from ruffled feathers to tax liability to legal action. 

Navigating the world of trust administration is complex, so it’s wise to understand the common challenges. To help you manage your responsibilities with confidence, we’ve outlined a few of the key pitfalls below. Steering clear of the following potential hazards will help you fulfill your fiduciary duties smoothly and honor the trust’s intent.

  • Failing to Follow the Trust Agreement: A trustee’s primary responsibility is to follow the trust agreement. Sounds simple enough. However, trustees sometimes disregard certain instructions in the trust agreement, essentially treating the trust as if it were their own. As one example, trustees might be tempted to expense personal costs that arise during trust-related business, such as airfare or meals, directly to the trust. However, those expenses are actually distributions, and failing to characterize them as such exposes the trustee and the trust to tax fines and potential litigation. 
  • Trust is Not Reported as Its Proper Type: There are many types of trusts, and each has different tax implications. Misclassification can result in an over- or underpayment of tax, as well as being out of compliance with the trust document. For example, a non-grantor trust owes tax at the entity level (hitting the 2025 top federal rate of 37% at approximately $15,000 of taxable income, plus 3.8% net investment income tax), whereas a grantor trust reports and pays the tax at the individual level. If the beneficiary is in a lower tax bracket, depending on the amount of the distributions, misclassification could result in drastically overpaying federal and state income tax.
  • Trustee is Unaware of Tax Filing Requirements: As trustee, you are personally responsible (e.g. liable) for complying with the trust’s tax filing requirements—from knowing whether the trust must file Form 1041 and issue Schedule K-1s, to remitting estimated tax payments. Missed tax filing deadlines and improper reporting (such as reporting non-grantor trust activity on Form 1040) could incur penalties, as well as putting you at risk of being found out of compliance with the trust document. Copeland Buhl has extensive experience filing trust tax returns that will help you avoid this tax filing pitfall.
  • Misidentifying the Trust’s State Income Tax Status: If a trust earns income in multiple states, it’s important to report income according to the laws of the state where it originated. Minnesota income tax law treats trusts and individuals quite differently. Minnesota residents are required to report all of their income, including income earned in different states, and then receive a credit for taxes paid to other states. Trusts, on the other hand, only report income from Minnesota sources. Trustees who mistakenly apply the individual income tax treatment will end up overpaying state taxes on trust income.
  • Incorrect or Missed Required Fiduciary Income Distributions: Trustees must comply with the trust’s distribution requirements. With simple trusts, problems often arise when trustees don’t make the required income distributions or when they make those distributions without accounting for trust administration expenses. This mistake might arise because the trust’s investment advisor created a sweep account to distribute all interest and dividends on a monthly or quarterly basis. While well-intentioned, the problem is that professional fees may need to be allocated to the income of the trust, reducing the amount available to income beneficiaries. To avoid over-distributing these assets, it’s wise to make sure your CPA and investment advisor are in close communication. Also, consider making more modest distributions throughout the year, with a catch-up distribution after the end of the year when all the numbers have been computed. 
  • Not Following the Separate Share Rule When Required: The separate share rule essentially states that, if a single trust has more than one beneficiary, their shares should be treated separately, ensuring each beneficiary is entitled to their respective share. To avoid complications, these trusts require separate sets of books and records for each beneficiary.
  • Missed Opportunities with Sprinkle Provisions Pot Trusts: Since complex trusts don’t have required income distributions, most trust agreements empower trustees with the flexibility to make discretionary distributions to the beneficiaries based upon a defined standard. Some of these trusts include so-called “sprinkle” provisions, which allow trustees to use their discretion to strategically allocate distributions amongst the beneficiaries. For example, when considering beneficiary distribution needs, they might consider allocating higher distributions to beneficiaries who are in lower individual tax brackets while avoiding making distributions to beneficiaries in higher income tax brackets or whose level of assets could trigger future estate tax issues, all while following the trust’s defined distribution standards.
  • Issues with Joint Revocable Trusts in Different Jurisdictions: In the case of a grantor who moves from a community property state to a common-law state, correct asset identification and titling are crucial. In community property states, when the first spouse dies, the surviving spouse gets a 100% step-up in basis on all of the assets. In a common-law state, on the other hand, the surviving spouse only gets the step-up in basis on the deceased spouse’s share of the assets. A common mistake for people moving from a community property state to a common law state is to retitle the assets in the new state, effectively robbing one spouse of the tax benefit of the full step-up in basis.

Start on the Right Foot with Guidance from Trust and Estate Professionals

You can avoid most of these pitfalls by carefully following the trust agreement. However, we know that isn’t as easy as it sounds. Every family has different needs and requirements, and so each trust agreement will vary. These are challenging documents to sift through for someone who isn’t well-versed in trusts (and that includes many tax and investment advisors). 

As a fiduciary, you’re at risk if things go wrong, so don’t hesitate to seek out a qualified trust and estate professional. Keep in mind that fees paid to trust accountants, attorneys, and trustees are tax-deductible for the trust, and the investment provides you with priceless protection. If you have any questions related to your trust administration responsibilities, reach out to Copeland Buhl’s high-net-worth advisors.