A trust is a legal entity that's managed by a qualified third-party adviser who is referred to as the trustee. The trustee manages the funds for the benefit of the beneficiaries. Parents might want to set aside money for their children but not give them access to it until they're 21 years old. They could place it in a trust.
Having multiple trusts can occur when people marry or when grandparents create them for grandchildren. At some point, maintaining multiple trusts might not make sense anymore, especially for the same beneficiaries. The creators of the trust might want to combine them so they're managed as one. This isn't always practical because the terms of trusts can differ greatly. But combining trusts can benefit both the beneficiaries and the trustee in some cases.
Legal Authority for Combining Trusts
A trustee who manages more than one trust can combine them provided that the law does not prohibit them from doing so. The Uniform Trust Code typically allows this practice as long as it doesn't conflict with the grantor's wishes, the beneficiaries' rights or the performance of the trusts. A trustee who doesn't have explicit permission to combine trusts can negotiate permission with the grantors, or go to court to get permission. The grantor is the individual who authorizes and funds the trust, and they can combine trusts as well.
Pros and Cons of Combining Trusts
Family members sometimes decide to combine their trusts to make management of them more efficient. They can reduce any trustee fees or the burden on a volunteer trustee by doing so. Likewise, a trustee might opt to combine trusts to streamline the management process.
People set up trusts to ensure that their money is managed wisely, to provide for their children's futures and to take advantage of tax savings, among other reasons. Combining trusts can offer tax advantages and aid in management of the funds, accomplishing the grantors' goals. But if the trust terms are too different, combining may be difficult.
For example, merging the funds might have tax implications if the beneficiaries of one trust will soon be entitled to receive the funds while the beneficiaries of the other trust won't start receiving funds for many years. You can refer to IRS Form 1041-ES to learn more about making estimated tax payments on your trust.
What Combining Involves
Spouses who each have a trust with the same beneficiaries – normally, each other or their children – might find it beneficial to combine their trusts. Trusts with similar terms and the same beneficiaries are easier to combine. But funds from different trusts that are intended for different beneficiaries can be designated to different beneficiaries even though the trusts are managed as one.
The trustee simply consolidates the funds, invests them, and tracks how much each fund has earned. A trustee or qualified attorney who specializes in trusts can advise you as to whether you and your beneficiaries will benefit from combining your trusts.
Considerations When Combining Trusts
Trusts present a number of pros and cons for those who create them. A trustee who combines trusts must be extremely conscientious about record-keeping. Otherwise, they could be accused of stealing money or distributing it improperly. A skilled trustee with excellent accounting skills might feel that the benefits of combining trusts far outweigh this risk, however.
Of course, the trustee should always keep their own property separate from trust funds they manage for other people.
Melanie J. Martin specializes in environmental issues and sustainable living. Her work has appeared in venues such as the Environmental News Network, "Ocean" magazine and "GREEN Retailer." Martin holds a Master of Arts in English.