Testamentary Trust - Date Entity Created

[JohnH]

I'm a novice when it comes to trusts and am just trying to help someone through the initial stages before handing off to another preparer. I'm looking at a situation where a client had a Revocable Living Trust during their lifetime. (The following dates are fictitious - the facts are not. )

The individual died on June 1, 2011 and a Testamentary trust came into existence (as called for in their will). When the lawyer applied for the Federal ID number for the Testamentary trust, he named it "The John Doe Trust of August 5, 2011." I'm not sure why he chose the date (I've asked but haven't yet received an answer) - I suspect that was when the executor qualified.

The Form 1041 asked for the "Date Entity Created". Seems to me that date should be June 1, 2011, not the date specified in the name of the trust. Anyone care to make suggestions?

[appelman]

The date original revocable trust was created.

This is, I believe, the usual practice, since it is a continuation of the original living trust. However, you may be stuck with what the lawyer has done.

[Burke]

It may have been the date the Trust was funded (i.e, monies transferred into it.) What he should have titled it was "The Trust U/W (under the will) of John Doe." I rarely see a date included in the title. The funds in the RLT would have had to have been transferred to this new trust EIN unless they were used to pay last expenses. Since trusts are required to have a calendar year, it probably does not matter much.

In regard to the Form 1041, are you talking about the estate? That would have been created on 6/1/11. And there may be some transactions that will be within the estate, which can be a fiscal year. I rarely see situations where absolutely everything was in the RLT at the time of death. Especially real estate, etc.

[appelman]

A well-prepared estate plan...

will have a pour-over will to sweep any odds and ends into the (now) irrevocable trust. In such case, any estate doesn't usually exist long enough for anyone to be concerned about it.

[JohnH]

Thanks for all the helpful replies.
The 1041 I was referring to is the trust return, not the estate return.

If I may carry this a little further, the only assets which went into the trust were stock in a C-Corp and stock in an S-corp. If I understand this correctly, the trust can only hold the S-corp stock for 2 years without invalidating the S-corp election (unless it doe some fancy and expensive rearranging.) The S-corp throws off very little income & has low book value (about $10K) with no real prospects of either situaton changing. I was thinking the trust should just distribute the S-Corp stock to the beneficiaries, who are also the trustees. Any thoughts on that?

[appelman]

Check the trust document.

What discretionary authority do the trustees have to distribute assets?

[Roberts]

The individual died on June 1, 2011 and a Testamentary trust came into existence (as called for in their will). When the lawyer applied for the Federal ID number for the Testamentary trust, he named it "The John Doe Trust of August 5, 2011." I'm not sure why he chose the date (I've asked but haven't yet received an answer) - I suspect that was when the executor qualified.

The Form 1041 asked for the "Date Entity Created". Seems to me that date should be June 1, 2011, not the date specified in the name of the trust. Anyone care to make suggestions?

I did a search:

http://www.dix.army.mil/LegalOffice/files/TESTAMENTARYTRUSTS.pdf

"Testamentary Trusts begin on the date of the death of the trust creator." Personally I would verify with the attorney (as you've done) and then use whatever the attorney requests. The attorney is the paid "legal" expert - they are responsible for the answer.

[Burke]

The 1041 I was referring to is the trust return, not the estate return.If I may carry this a little further, the only assets which went into the trust were stock in a C-Corp and stock in an S-corp. If I understand this correctly, the trust can only hold the S-corp stock for 2 years without invalidating the S-corp election (unless it doe some fancy and expensive rearranging.) The S-corp throws off very little income & has low book value (about $10K) with no real prospects of either situaton changing. I was thinking the trust should just distribute the S-Corp stock to the beneficiaries, who are also the trustees. Any thoughts on that?

It is a little difficult to sort this out without the actual will and the actual trust document to go by to determine why the trust was established, what was supposed to go into it, what the terms of the trust are (such as the authority to distribute shares, as Appelman mentioned), etc. Those two documents control everything. I am assuming you are doing a trust tax return for calendar year ending 12/31/11, which means there was income in excess of the filing threshold. You count everything from the date of death until the end of the year, regardless of what it is titled. If the only thing in the trust is these two entities, it sounds like an estate income tax return will also be in the picture at some point.

[JohnH]

I appreciate the ongoing comments and replies. I am going to get copies of the trust documents to get a clearer picture of this. I do believe there are few limitations on the trustees, especially since they are the only beneficiaries.

Burke, you had anticipated another question I have. The S-corp had a small loss and the C-corp did not pay any dividends in 2011, so the trust had no income. (These re the only two assets of the trust). I was wondering of a return is needed - even if not required it might be a good idea to document the filing since IRS computers are probably looking for a 1041, and its also a good idea get the SOL running. Am I right or wrong?

[Burke]

I suppose you have that option, but I do not normally do a trust return if it has no income. It is not required even for an existing, ongoing trust, although I might consider doing one for that situation if there were prior income, and I knew there was going to be future income. It's the same as for an individual. The IRS should not be looking for a return if no income was reported to them under the trust EIN, or it was under the threshold. The only thing is substantiating the loss on the S-Corp which might come into play. You need the trust document to determine if any losses pass thru to the trust bene's. Hopefully the asset(s) in the SCorp is/are not rental real estate as the Trust is not eligible to take passive losses except against passive income. It is not allowed the $25K per-year ceiling that estates are.

[JohnH]

Back in Mar-Apr we weren't sure if the trust needed to file a return, so we prepared an extension . So I'm guessing a return needs to be filed since the red flag has already been waved.

The C-corp owns a rental property, but the S-corp is an onging service-type business. I don't foresee the S-corp being likely to produce significant profit in the future, so that's why I suggested that the tustee/beneficiaries consider distributing the stock to themselves (plus if I understand it correctly, if the trust continues to hold the S-corp stock then the election terminates after 2 yrs)

[Burke]

I'm a novice when it comes to trusts and am just trying to help someone through the initial stages before handing off to another preparer. I'm looking at a situation where a client had a Revocable Living Trust during their lifetime.

There is a provision in the tax code, Section 645, which provides that an election may be made whereby the revocable trust can be treated and taxed as part of the related estate during the election period, See Form 8855, which is filed by the due date for Form 1041 for the first tax year of the related estate. I believe this also includes extensions. This allows the trust to (essentially) enjoy the benefits of a fiscal year as part of the estate and only one tax return needs to be filed for the one entity. See instructions for Form 1041, page 4. This might work in your situation.