Unusual Situation?

[erchess]

Client represents that he has lived for some time on investments and I have no trouble believing that story given the income the investments generated. He says he inherited the investments from his mother and the brokerage and bank statements have always said what they say this year which is that they are all owned by the "John Doe Trust" of which "John Doe" is trustee. Taxpayer claims not to know about any trust and the Professional who did the last three years prepared 1040s as if the brokerage statements said nothing about a trust. Can this possibly be correct? By the way all I know about trusts is that there are different kinds and each kind has to some extent different rules If a trust return is called for I will have to give up the client, which I do not want to do. The statements come from a bank and three brokerages so it seems unlikely to me they would all agree on the same mistake.

[taxea]

Is it possible that the mother created the trust before she died?

[JohnH]

Several years ago I took on a client who had some sort of trust arrangement whereby the trust held their assets and a statement was attached to the return saying that the trust income was being reported on the individual's return. I remember being told that the statement had to have some very specific language. I prepared one return for them based on info the financial advisor gave me and to help out a family member who was also a client, then passed on doing their work the next year because I wasn't comfortable with how the whole thing was set up. (Sure am glad the SOL has passed on that one). As a matter of fact, the financial advisor was based in Asheville, NC - wonder if you're dealing with someone who went to the same guy.

Maybe it was a revocable living trust? This may be more common than we think. Hopefully someone will jump in here and enlighten us.

[Jesse]

This is just one link

http://www.thetaxbook.com/forums/showthread.php?t=13511&highlight=revocable+trust

Do search for "revocable trust" and "irrevocable trust" and you'll find much information. Burke especially has provided a plethora of useful information. My first suggestion would be to find out exactly what kind of trust it is.

[luke]

had one

like this one time - client had trust set up back in the 70s - his "cpa" prepared returns with all income/expense reported directly on the 1040 - I did same thing and then a couple of years later the guy got AUDITED - what a freakin mess - my client couldnt even produce the original "trust" (some sort of "family" trust) document (and the auditor was a MORON!) If I ever have another situation like that I will kindly decline the business (sorry this wasnt any help but this one gets me fired up every time I think about it!)?

[Burke]

It could have been a revocable living trust to begin with and he just left it like that on the investment documents when she died. If it was, he could have just retitled everything in his name at that time. You (he) are going to have to do some research. There will be a trust document in there somewhere which will tell you all you want to know, whether it was a RLT or a testamentary trust (from the will) or a irrevocable trust. He needs to produce it. The brokerage may have a copy dating back to when it was set up. The fact that it lists him both as trustee and beneficiary SEEMS to indicate it was a RLT.

[Koss]

EIN or SSN?

Whose tax ID appears on the Forms 1099?

(i) SSN of your client
(ii) SSN of deceased mother, or
(iii) EIN of a trust?

A revocable living trust is an estate plan that is meant to avoid probate. It accomplishes most of what a traditional will does, but in different ways. During the lifetime of the person who establishes a revocable living trust, that person is usually the grantor, the trustee and the beneficiary.

With this type of trust, the IRS instructions explicitly allow the assets to be titled to the trust, without the need for a separate EIN, and without the need for a trust tax return.

It's called a grantor trust.

If that's what your client has, then you can indeed report the income right on his Form 1040. But if that's the case, then the 1099 information returns should have your client's SSN.

What concerns is the possibility that the deceased mother established the trust. If that's the case, then one of two things (or perhaps both) should have happened. Either:

(a) the trust should have distributed the assets to your client, and then should have been dissolved, with the assets having been retitled to your client as an individual, or

(b) the trust should have obtained its own EIN, and should have been filing its own return.

But if your client established the trust, and it is a revocable living trust, then he can report the income right on his own return.

I agree with the earlier post that somewhere there should be a trust instrument, and you should get a copy and read it carefully.

But checking the tax ID on the information returns will tell you 80% of what you need to know. If it's your client's SSN, then the prior year returns are probably correct. If it's anything else, then the prior year returns are probably wrong.

BMK