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    Trust Issues

    Taxpayer died in 2009 (did not handle return) and prior to death taxpayer had a living trust. Living trust stated at time of death, all assets in trust should remain in trust until grandchildren reach age 40 and dauighter to handle trust. In 2010, 1099-R's were issued under taxpayer's social security #. Estate is less than 1.3 million and no estate tax return was filed. How should the 1099-R's be handled for 2010? Any direction would be greately appreciated!

    #2
    Living Trust

    The 1099 forms were issued incorrectly, although it may not be the fault of the institution that issued them. The daughter has probably failed to take the proper steps.

    A living trust, while the grantor is alive, is a disregarded entity. It is permissible for the trust to operate using the grantor's SSN. A trust tax return does not need to be filed. Income to the trust is reported on the grantor's Form 1040.

    Once the grantor dies, however, it is no longer a living trust. It becomes a separate entity. It now needs an EIN, and it must file a 1041.

    If the grantor died in 2009, the trust should have obtained an EIN well before the end of 2010. Banks and other institutions holding accounts in the name of the trust, with the grantor's SSN, should have been notified of the death of the grantor, and they should have changed the TIN on the account to the new EIN.

    But now that I'm thinking about this...

    What kind of 1099-R was this? An IRA? A traditional pension plan? An annuity?

    If it was a retirement plan account, then it probably was not an asset held by the trust during the life of the grantor.

    Okay, so the deceased taxpayer had a living trust. That's great. But you can't transfer assets that are inside an IRA or a 401(k) into a living trust. That would have been a distribution from the retirement plan during the grantor's lifetime. Perhaps the trust was named as the beneficiary of the retirement plan...

    How were the checks made out?

    For these retirement plan distributions, were the checks payable to the deceased taxpayer as an individual, or were they made out to the name of the living trust?

    What's the name of the taxpayer on the Form 1099? Is it an individual or is it the living trust?

    You'll need to get some more information in order to sort this out.

    Start by finding out whether the trust even has an EIN. If it doesn't, they need to get one ASAP.

    BMK
    Burton M. Koss
    koss@usakoss.net

    ____________________________________
    The map is not the territory...
    and the instruction book is not the process.

    Comment


      #3
      Trust Issue

      Thank you so much for responding. There are three 1099-R's and one is made out to"Estate of Taxpayer" and the other two are made out to "Taxpayer Trust". One is an IRA and the other two are from pension plans. So, I would think that a 1041 for the trust needs to be filed for 2010 once an EIN is obtained and the funds from the 1099-R will be taxable to the trust - does that sound correct? Is there a way that the disbursements would not be a taxable event? Also have a 1099-B for stock sales under taxpayer's SS # for 2010 as well. How do we file a 1041 with all income statements showing incorrect tax ID #?

      Comment


        #4
        Trust

        You have two different issues.

        For the 1099 forms that were issued to the trust, you can probably just report it on the trust return. Whether it is taxable and how it is taxed is a different question. I gotta think about that a bit more. But it sounds like it is income to the trust. You might be able to get the institutions to issue a corrected 1099 after the trust has its own EIN. But that may not even be necessary. You could just properly treat it as income to the trust. If the IRS asks questions, clean it up on the back end. You are properly reporting the income on the trust return. You can't file a 1040 for 2010 for an individual that wasn't alive at any time during 2010, and the IRS understands that. The 2009 return should have been marked deceased.

        For the 1099 that was issued to the estate of the taxpayer, you have a different set of questions. The estate and the trust are two different entities. As I noted in my previous post, you can't transfer retirement plan assets into a trust while you are alive, because that would be treated as a distribution. For the 1099 that was issued to the estate, the retirement plan probably had no named beneficiary.

        So that income is taxable to the estate, not the trust.

        There is no estate, you say? Well, there is one now.

        The estate may or may not have to file its own return. I'm not talking about Form 709; I'm talking about a 1041 for the estate itself. There may be no estate tax, but the estate may be required to file an income tax return.

        This gets really complicated really fast. The funds went from the retirement plan into the estate, presumably because there was no beneficiary named for the plan. The income is potentially taxable to the estate. What happens to the money after that is determined by the taxpayer's will--not the trust. If there is no will, then the intestacy laws determine what happens to that money.

        Either way, the person or entity that inherits that money gets it tax-free, because inheritances are not taxable income. The income tax on that money has to be paid by the estate before the executor or administrator disburses it to the heirs. Or at least that's the way it's supposed to be done...

        It is possible that the trust will inherit the money from the estate. The taxpayer's will may state that any assets in the estate that are not bequeathed to a specific individual go to the trust.

        But that doesn't change the outcome. The trust would have a tax-free inheritance. The estate may still be required to file an income tax return.

        If the estate has to file a return, then it also needs its own EIN. But that 1099 doesn't need to be reissued. It's already issued to the estate.

        Hope this helps.

        BMK
        Last edited by Koss; 04-09-2011, 10:11 AM.
        Burton M. Koss
        koss@usakoss.net

        ____________________________________
        The map is not the territory...
        and the instruction book is not the process.

        Comment


          #5
          Originally posted by peggysioux View Post
          Thank you so much for responding. There are three 1099-R's and one is made out to"Estate of Taxpayer" and the other two are made out to "Taxpayer Trust". One is an IRA and the other two are from pension plans. So, I would think that a 1041 for the trust needs to be filed for 2010 once an EIN is obtained and the funds from the 1099-R will be taxable to the trust - does that sound correct? Is there a way that the disbursements would not be a taxable event? Also have a 1099-B for stock sales under taxpayer's SS # for 2010 as well. How do we file a 1041 with all income statements showing incorrect tax ID #?
          1. 1099-R's should go to the respective entities as titled. Apparently "Estate" was one beneficiary and "Trust" was named on others? The taxable portions as indicated will be taxable to the entity. That entity will pay the tax on it. However, if any distributions have been made to any beneficiary within the entity year, then that money flows through to that beneficiary, who will pay the tax on it. This is because, if distributions are made to bene's, taxable income comes out first, retaining its same character. That may mean paying less tax depending on the entity rate and the bene rate, especially if it is distributed to more than one bene.

          2. Don't worry about the respective incorrect tax ID#'s. Happens all the time. Just report on the correct return and all will be fine. Were the stocks titled in the trust's name? What's on the 1099-B?

          3. Sounds to me like you are going to have an Estate return and a Trust return (1041's) to do, unless executor can sweep all estate assets into the trust per the documents. Surely, the deceased did not intend to put EVERYTHING into the trust. How would the executor pay the decedent's final bills? Sometimes people try to outsmart themselves with these things. Don't try to do the returns without the Will and the Trust documents.

          4. To answer your last question, there is no way these can be a non-taxable event.
          Last edited by Burke; 04-09-2011, 04:05 PM.

          Comment


            #6
            Estate Income Tax Return

            Okay, I think Burke and I are saying pretty much the same thing.

            I did have an airhead moment, and I kinda forgot that even the estate is a pass-through entity. Burke is correct. Income to the estate can pass through to beneficiaries on a K-1, just like a trust or a partnership. And the trust may be one of the beneficiaries of the estate.

            BMK
            Burton M. Koss
            koss@usakoss.net

            ____________________________________
            The map is not the territory...
            and the instruction book is not the process.

            Comment


              #7
              Burke & Koss - More Trust Questions

              Still working on trust return and hoping you can provide some clarification for me. I have more info on trust. The trust was set up as beneficiary of IRA's per trustee, but I do not have anything in writing specifying that info. Basically, the trust states that once taxpayer dies, assets are to be disposed of and split between two minors to be held in two separate trusts for minors. However, taxpayer died in 2009, new trusts were not set up until 2011 and 1099-R's were issued in 2010. The will stated that approximately $35,000 of assets were to be paid to three family members and that is what the funds from the 1099-R's were used for. There were also some stocks sold in 2010 with a gain of $8,000. The questions I have are:

              1. When someone dies who has a living trust, does the living trust change to a testamentary trust until all assets are disbursed? Nothing is stated in trust document regarding complex or simple and no direction on capital gains. Or would attorney have to create a testamentary trust at date of death?

              2. Trust had $55,278 in income in 2010; unsure if the $35,000 that flowed through to family members should be carried to Schedule B (Income Distribution Deduction) and K-! need to be generated. If trust does not direct, how do I determine? The $35,000 came from IRA income.

              Any help would be greatly appreciated.

              Comment

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