Trust Question

[erchess]

Client has two now grown children. While they were minors their grandmother funded a trust for each with a few thousand dollars. The money was invested half in US Treasuries and half in a mutual fund that had winning and losing years but overall was profitable. Parent got tired of paying for trust returns with nickle and dime taxable amounts so she stopped filing at some point. Several years ago the trusts were liquidated and the proceeds given to the children. The IRS keeps writing wanting money and I want advice on what to tell them. Client does not have all the letters so I am not sure how much the IRS wants. I don't know whether there were any IRS papers filed when the trusts were liquidated.

[appelman]

Start with a POA

Then find out what the IRS wants. You may have to file all the missing 1041's, unless you can show that there were years that didn't meet the filing requirements.

[Koss]

IRS Notices

I agree with Appelman that you need to start by getting detailed information from the IRS. In most cases, a POA is the way to do that.

You said that the IRS "keeps writing wanting money." That suggests that this has gone beyond the point where the IRS is asking for delinquent returns. You may be dealing with substitute filed returns. And that's a bit more complicated.

Based on the fact that the trust held mutual funds, I'm going to make an educated guess here...

The sale of the securities generated a 1099-B. The IRS has no idea what the basis was, so they assume the basis is zero, and that the entire amount of the gross proceeds is taxable.

Trusts don't get a standard deduction, and for some trusts, the exemption is only $100.

There may be no tax due. But you may need to file all the delinquent years. Especially if there were some sales in earlier years that generated losses. If you don't file every year, in the right order, you won't be properly tracking capital loss carryover.

Umm... Geez.

As for determining the basis in the mutual fund shares that were sold...

Can you say dividend reinvestment?



BMK