Trust upon death

[Gretel]

Revocable trust became irrevocable upon death of one spouse. During the time the trust was revocable taxpayers could remove or add to trust as they saw fit. There was no clause in the trust that would automatically put all assets owned by deceased into trust.

Main asset is land that is leased as pasture. This is the only income producing property. Land was deeded in trust name. Income was reported for deceased spouse only on 1040 for all years (since he was the one who it belonged to). The question is in regards to equipment that was used by deceased spouse and there is no title. Can I make the argument that this equipment belonged to deceased only and therefor spouse gets 100% step up if will states that everything owned by one spouse will be transferred to the other spouse upon death? Some of the equipment was sold right after death. This once was a larger farm operation so more equipment will be sold.

The downside to deeming the assets owned by deceased only is that they then belong to surviving spouse and are not part of the trust and trust cannot depreciate this equipment. Way around is to lease equipment to trust but this gets way too complicated for $$ involved. Any thoughts?

[ATSMAN]

I would agree with you that the equipment is not part of the trust, so it should get the step up in basis when sold.

Is the surviving spouse going to be involved in this farming operation?

[Gretel]

Thanks, Atsman. She is not involved other than making the decision to have the cattle graze. The trust will report on Schedule E with only a few assets being used from the prior farm operation. The capital gain is certainly more than the depreciation she would get if having said assets in the trust. If we have a choice I will make this choice to her benefit. If it doesn't feel right I will let the attorney who set up the trust make the decision in writing.

[Burke]

Revocable trust became irrevocable upon death of one spouse. During the time the trust was revocable taxpayers could remove or add to trust as they saw fit. There was no clause in the trust that would automatically put all assets owned by deceased into trust.

The clause you mention would not have been in the trust. It would have been in the will, and is generally called a "pour over" clause in which it states that any assets not titled in the trust would be swept up and put into the trust at the testator's death. In the absence of such a clause, the equipment would be inherited by the spouse since it was not titled otherwise, and includes stepped-up basis. She could always sell the equipment to the trust.

[Gretel]

Burke, thank you so much for clarifying. I am awaiting the will. It has been some years that I have been doing this. Selling is a good idea.

[Gretel]

Burke

If everything passes to trust, does this include life insurance proceeds if beni is surviving spouse?

[natiro]

Trust

Hi Gretel,

I got your email. Haven't been on this board in a while but now that it's tax season, I should get back to it!

Regarding the life insurance, it will pass directly the the surviving spouse who is the beneficiary and will not go into the trust, even if there is a pour over provision in the will.

The equipment will get a step up in basis whether or not it's in the trust. A revocable trust, which always becomes irrevocable upon death, is generally a tool used to avoid probate. But the assets are still part of the deceased spouse's estate and as such, get a step up upon death.

Depending on the value of the equipment, keeping the it outside the trust might cause the estate to have to go through probate. Assets in the trust do not have to go through probate, so that might help make the decision clearer. And the will (and trust documents) might also give you more guidance.

I hope this helps!

[Gretel]

Thank you, Natiro, I am glad you decided to come back. I missed to give an important piece of information. The trust was not just for the deceased but for both spouses, they did not have separate trusts, which means only 50% step up since each spouse owned only 50%.

The will will be the key, I am much clearer now on the different scenarios.

Thank everyone.

[S T]

Natiro, we have missed you. I hope all is well with you, Your information, insight and direction have assisted me so many times over the years

Please post more on the Estate and Trust Issues and let us know that you are here.

Sandy

[Burke]

If everything passes to trust, does this include life insurance proceeds if beni is surviving spouse?

No. The Trust would have had to have been the beneficiary for that to happen. When the will directs assets to be "swept up" and put into the trust, it refers only to estate assets. Life insurance with a named bene (person or charity, etc) is not an estate asset. It passes directly to that beneficiary.

[Burke]

The trust was not just for the deceased but for both spouses, they did not have separate trusts, which means only 50% step up since each spouse owned only 50%.

I thought you said the land was deeded to the trust. In another place you said "it belonged to him." So that would get 100% step-up. Or are you talking about the equipment? It depends who owned the asset when it was transferred to the trust, not the fact that it was a trust in joint names. Most IRT's are in the names of both spouses.

[Gretel]

I thought you said the land was deeded to the trust. In another place you said "it belonged to him." So that would get 100% step-up. Or are you talking about the equipment? It depends who owned the asset when it was transferred to the trust, not the fact that it was a trust in joint names. Most IRT's are in the names of both spouses.

Yes - Land was deeded to trust

Belonging to him - Farm operation & Equipment

I am confused now. I thought if asset was moved to a joint trust and and is titled in joined trust name that this is the same as joint ownership if no trust exists. As of this time I do not know if land was titled jointly before. Do I need to find out?

[Gary2]

I've never seen or read about a joint trust, but I know enough about the grantor trust rules to believe that it's theoretically possible for a trust to have two grantors. I'm not sure why you'd want one.

But I don't understand how it could then become irrevocable upon the death of only one of the grantors. How exactly does that work? Is it written so that if one of the trustees dies, the other loses the rights associated with revocation?

[Gretel]

I've never seen or read about a joint trust, but I know enough about the grantor trust rules to believe that it's theoretically possible for a trust to have two grantors. I'm not sure why you'd want one.

But I don't understand how it could then become irrevocable upon the death of only one of the grantors. How exactly does that work? Is it written so that if one of the trustees dies, the other loses the rights associated with revocation?

Well, the question is not so much why one would want to have a joint trust. Rather what attorneys tell clients to do.

Yes, joint trust became irrevocable upon first spouse to die.

[Gretel]

I've never seen or read about a joint trust, but I know enough about the grantor trust rules to believe that it's theoretically possible for a trust to have two grantors. I'm not sure why you'd want one.

But I don't understand how it could then become irrevocable upon the death of only one of the grantors. How exactly does that work? Is it written so that if one of the trustees dies, the other loses the rights associated with revocation?

This might be more than you wanted to know:

https://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/jointrevocabletrusts.html