Trust Questions

[erchess]

This is a followup on my earlier post on trusts. To sum up the situation, I have found out what years are missing for two identical trusts that my client set up for two children with money that came from the taxpayer's mother. The trusts were funded with the same sum of money in each and in each the money was divided evenly between zero coupon US Treasury bonds that were disbursed without being cashed and without reaching maturity, and shares of a mutual fund. There were sales of the mutual fund in the last year for which returns were filed but none since then. At disbursement the mutual funds were passed to the children without being liquidated. So I'm going to prepare and sign the forms and the mother will sign them and mail them in. Then I'll negotiate with the IRS about arrangements to pay up.

1. In this scenario I don't have any sales of assets to worry about do I? I mean, there's no special rule that the bonds and or the fund are deemed to have been liquidated when the kids got their shares?

2. In the unlikely event that the parent dies without paying the tax can the IRS go after the husband or the kids? Mom was the only trustee, husband is not the father of the kids by biology or formal adoption, but he and Mom filed jointly for some of the years.

3. Does anyone have any ideas on getting the penalties abated? I really feel sorry for the client here because there should never have been trusts set up. The relevant fees have added up to much much more than the tax savings of the trusts which is why she stopped filing them.

4. Do I need to see the legal paperwork that created the trusts? Or is it enough that the broker and the IRS accepted that trusts existed and the IRS assigned EINs?

[appelman]

My thoughts

1. It sounds like there are no sales to worry about.

2. They probably can go after the beneficiaries.

3. Write a nice letter with a good sob story.

4. It's never a bad idea to look at the trust documents to make sure you are not subverting the intent of the trust.

[Burke]

I re-read your previous post to see if I am missing something. Has it ever been determined exactly what the IRS is billing for, who it is billing, and why it wants your client to pay up?

1. Distributing funds intact by changing ownership to beneficiaries (mutual funds, stocks, bonds etc) when a trust terminates, does not constitute a taxable sale. If the funds/bonds etc were liquidated while still owned by the trust and given to the bene's, that's different. If there were taxable income to the trust in the year of distribution, it would have been passed through to the beneficiaries via K-1's to the extent of the distributions. If there were taxable income in the prior years, and no distributions made to bene's in those taxable years, the trust pays the taxes.

2. Trust taxes are the sole responsibility of the trustee. It's possible there could be a petition for payment from the trustee's estate if she were to die with the taxes unpaid. Was bond (surety) waived?

4. NEVER do a trust return without the trust document(s.)

[Mo Sheets]

Trust Documents

I completely agree with Burke. You most definately need to review the trust documents in their entirety. The contents of the agreement may shed light on the various aspects in question (distribution of assets, distribution of corpus versus income, etc.)

Good luck!