Trust and Tax Question

[Ready2Go]

So, when my DF died in 2005, my mother & I worked with an elder care attorney on estate planning. One of the executed documents was the irrevocable trust for her home (condo). At the time, my brother and his wife were have major marital issues….stemming from her alcoholism. It was very ugly for all of us, especially my mother. The marriage seemed doomed to any honest observer. So, my mother didn’t want the DIL to have any possible financial gain…now or later. She had the attorney set up the trust for just my sister & I….DB was excluded. My sister and I agreed to give DB his 1/3 upon sale of the condo. Shortly after the trust was set up, my SIL found AA and got her act together. She still attends meetings and has sponsored dozens of others. She really turned her life (and their marriage) around. 15 years now and she has been a model citizen. I had forgotten all about how the trust was created until recently when I stumbled on it while looking for some other papers. I wondered if my sister & I would get a tax hit by distributing the trust dollars to him. The condo is worth approx. $400k. Also, at this point, my mother is in middle stages of dementia and I’m assuming she would be classified as cognitively deficient….although she does have moments where she is sharp. Does anyone know if we would be facing a significant tax hit? We would each be giving DB ~$66k. Is it worth trying to modify the trust at this point? Is it even possible? If not, are there any distribution/tax strategies we should consider? Thanks in advance!

 

[Car-Guy]

Check with a tax attorney but read about IRS gifting and form 709 first to acquaint yourself with the gifting tax laws... May be applicable in your case and you could avoid all taxes on the smaller amounts you are talking about.

 

[Souschef]

Imo, and I am not an attorney, when you DM passes away, the condo will get the stepped up basis. You will each receive $200K tax free (less selling expenses).
If you each give your DB $66K each, the first $15 K is not counted toward gift tax. Since the exemption is presently $11 mil plus, there will be no tax.
There are wrinkles, too. If you are married, both you and your wife can give $15 K each to DB, and $15K each to his wife, for a total of $ 60 K,then give them the final $6K the next year.
YMMV

 

[pb4uski]

Definitely talk with a lawyer. It might well be possible to amend the trust's designated beneficiaries to include the 3 offspring instead the two of you, and in that case, problem solved.

Who are the trust's trustees?

 

[OldShooter]

Go back to your elder law attorney. This sounds a bit odd; normally an irrev trust is funded at the death ("testamentary trust") of the grantor. That's the way ours work. In that case the trust wold not yet exist, at least to the extent of holding any assets. The question: "Who is paying the taxes?" will offer a clue. Your attorney can explain your situation and probably advise on taxes, specifically basis step-up. From that point you can move into the gift tax questions.

The short answer, though, is that no taxes are payable now regardless. You just fill out a gift form. If the your eventual estate is over the limit, currently about $10M IIRC, then your portion of a big gift will be taxed at the estate tax rate when the estate tax return is filed. You can also make tactical moves as @souschef suggests.

 

[pb4uski]

Go back to your elder law attorney. This sounds a bit odd; normally an irrev trust is funded at the death ("testamentary trust") of the grantor. That's the way ours work. In that case the trust wold not yet exist, at least to the extent of holding any assets. The question: "Who is paying the taxes?" will offer a clue. ...

It depends. My mom and dad each have trusts and the trusts both have substantial assets. While alive, the income from assets in the trust are taxed just as if they owned them personally.

Mom is still alive and she gets a 1099's from Vanguard that have the name and address of her trust but her SS# as a TIN, so the income is reported on her tax return as if the trust didn't exist and she owned them directly.

Dad passed many years ago at which point I obtained a TIN for the trust, so the income from those assets is reported on a trust return and then Mom receives a Schedule K-1 for that income... so it is as if she held those assets directly but reported on a K-1 rather than a 1099. The income is also paid to her... when the assets pay dividends the dividend goes directly into her bank account as a pass-through distribution from the trust.

So in both cases Mom is paying the taxes, even though the assets are in trusts.

 

[OldShooter]

It depends. My mom and dad each have trusts and the trusts both have substantial assets. While alive, the income from assets in the trust are taxed just as if they owned them personally.

Mom is still alive and she gets a 1099's from Vanguard that have the name and address of her trust but her SS# as a TIN, so the income is reported on her tax return as if the trust didn't exist and she owned them directly.

Dad passed many years ago at which point I obtained a TIN for the trust, so the income from those assets is reported on a trust return and then Mom receives a Schedule K-1 for that income... so it is as if she held those assets directly but reported on a K-1 rather than a 1099. The income is also paid to her... when the assets pay dividends the dividend goes directly into her bank account as a pass-through distribution from the trust.

So in both cases Mom is paying the taxes, even though the assets are in trusts.

Yes, it's very confusing. Actually we, too, have two rev trusts now and they do hold assets, principally our houses. We pay the taxes. The rev trusts simplify probate but are different animals than what the OP seems to think he has. At our deaths, most of our significant assets go into three irrev trusts, at which time trust income tax issues come into play and the real estate taxes will be paid from trust assets. I think of the rev trusts as kind of casual things (without their own TINs), and I think of the irrev trusts as the real deal with real TINs.

I am grateful that DW is a trusts & estates professional. She and our estate attorney work all this stuff out and I just sign when told. (The plan gets updated every few years as the law and our circumstances are always changing.) But knowing the complexity albeit secondhand is why I suggested that the OP contact the attorney that did the original plan. SGOTI is just not a good place to consult on this kind of stuff IMO.

 

[CaliKid]

Imo, and I am not an attorney, when you DM passes away, the condo will get the stepped up basis. You will each receive $200K tax free (less selling expenses).
If you each give your DB $66K each, the first $15 K is not counted toward gift tax. Since the exemption is presently $11 mil plus, there will be no tax.
There are wrinkles, too. If you are married, both you and your wife can give $15 K each to DB, and $15K each to his wife, for a total of $ 60 K,then give them the final $6K the next year.
YMMV

It depends on the trust but I would say most irrevocable trusts, especially when done for "elder law" (read: qualify for Medicaid nursing home) reasons will not get a step-up because there is no retained interest in the grantor (i.e. Mom).

Irrevocable trusts can be amended by court order and that might be a better fix to the whole problem... but need to talk to the elder law attorney to make sure the Medicaid qualification is not messed up.

 

[Ready2Go]

Thanks for everyone's input. We've decided to just keep everything as is and just give DB his share of a few years.