Mom left a beautiful diamond ring to her daughter Jane. It was worth $75,000.00. Jane was so happy to receive it and proudly showed it to all of her friends. Then one day the Trustee of her mother’s trust called her and told her that she owed $37,500.00 for her share of the trust expenses.
In your trust you can direct whether a gift will be subject to expenses or not. So in this case, Mom could have directed that Jane would get the ring free of expenses or taxes and she would have received the ring without being responsible for contributing to those expenses of administration. The expenses don’t go away they just get delegated elsewhere.
Jack received a distribution of $50,000.00 from his Dad’s annuity. He was happy and he took a vacation and spent all of the money. Later the Trustee called him and said that his share of the expenses and taxes was $10,000.00 but Jack said that he didn’t have the money. The Trustee then told Jack’s sister that she had to pay the $10,000.00 that Jack owed since he didn’t have it.
Because the annuity was paid outside of the trust the Trustee had no control over what Jack did with it. If the Trustee had control of the funds he would have deducted Jack’s share of expenses first and given him the rest.
All trusts and estates will have expenses. Some may owe taxes. Some may get sued. The possibilities are endless. California law provides that all beneficiaries pay the expenses proportionately and according to what they receive. Other states may provide that expenses are paid out the residuary. However, all states provide that you can elect how the expenses/taxes are to be divided in your will or trust.