Joint Revocable Family Trust in Community Property State?

[OldJack]

Something new to me.

Client lives in a community property state and I don't know much about such since I don't practice in a community property state and the fact that I have never had a "joint" family revocable trust to deal with.

Husband and Wife had/have a joint revocable trust in the name of "The [family last name] Revocable Trust" with husband and wife as co-trustees (hereafter referred to as the family trust). Beneficiaries of the family trust are the husband and wife's 2 adult children.

Husband died in 2006 after required minimum distributions from an IRA account had begun in prior years and his IRA listed their joint family trust as the beneficiary. The attorney after death amends the family trust to remove the husband's name. No husband estate tax return required, no 1041 requirement expected but not yet determined.

The family trust has a paragraph that gives the trustee rights to determine the manner and timing of payments (received as a beneficiary) by lump sum or otherwise as permitted under IRC §401(a)(9).

The questions asked here:

1. Since the family trust is still a revocable trust (with wife only trustee due to amendment) does the required minimum distributions received by the family trust simply get reported on the family trust grantor wife's 1040, page 1, line 15 or 16, ignoring the family trust as such?

2. Does the death of the husband create a separate irrevocable trust that must be reported on a 1041 for some reason? I think not as the distributions received are by the family trust as a beneficiary.

3. Is the full amount of the retirement account taxable in the year of death or does the minimum distributions only get taxed by the wife as received and stated in question 1 ?

4. Is the required minimum distribution calculated over the life of the wife or beneficiary of the revocable family trust (oldest adult beneficiary in this case a child of the wife), or continue on the same method as was the dead husband that was receiving distributions at time of death?


All opinions would be appreciated. Thanks, OldJack.

[OldJack]

Ok everyone... please pretty please give me your opinion.

Since I started posting on this forum I could count the number of questions I have ask on one hand. I really would like for someone to say something on this question even if you say you don't know anything about it. It makes one feel pretty bad to be completely ignored.

[Bird Legs]

Revocable Family Trust

Old Jack, my thinking is that all income would be reported just as it has been in the past,
on form 1040.
Because the revocable trust is still in existence and the only thing that changed was the
death of husband and the trust now is in the name of the widow.
Question, does any of the assets of the trust receive a step up/down in bases as of
the date of death of husband?

[thomtax]

Ownership change?

If the trust continued, would there have been any change in ownership to make a basis change? If I understand you correctly, the property was placed into the trust and removed from being owned by either the husband or wife.

Of course, as usual, I reserve the right to be wrong. As has been said before, taxes do not necessarily deal with logic or reason.

LT

[natiro]

Revocable Trust

Old Jack,

I would be happy to share some information I have on this subject with you off the board. Your question is complicated to answer and I can't seem to do it in a concise manner, although I've been trying!!!

Regarding your question #2, I believe the husband's share of the revocable trust does become irrevocable at death but I do not practice in a community property state and so I can't say for sure. I can tell you that when I worked on a 706 several years ago with a joint revocable trust holding all the assets, I spent quite a bit of time on the phone with the IRS estate attorneys regarding what actually happens with a joint revocable trust upon the death of the first to spouse to die. Although this may have changed since then, their response was that joint revocable trusts were fairly new and that even they weren't clear how they should be handled!!! Maybe they've figured it out by now.

I believe I may be able to answer your other 3 questions regarding the IRA distributions by sharing some material that I have. Is there a way to contact you off the board?

[jainen]

I couldn't handle this

>>pretty please give me your opinion<<

Sorry, OJ, I couldn't handle this in the middle of the day. Even now, I can't come up with a single joke.

Generally we think of a revocable trust as a disregarded entity. I would presume that the husband's interest in any assets that were in the revocable trust, would be inherited according to the will. Surely with a lawyer this close by, there is a will.

Read the trust document and will to find out what went down. If the trust converted to a non-revocable trust on the death of the first spouse, which is the way a typical A/B trust works, it will be spelled out.

Once you have identified what property landed in what trust after the dust settled, it should be pretty clear what to do about the retirement funds.

[S T]

Calif

I will share what I have experienced, since I am in Calif.

It is common here to have "The "Doe Family Revocable Living Trust" wherein the husband and the wife are co-trustees. When the spouse dies, the Trust is split into and Decedents Trust and Survivor's Trust, but you might need to review the Trust Documents to find out for sure.

The decedent's trust becomes irrevocable and can no longer be amended or changed. Changes can only be made to the Survivor's Trust.

The attorneys takes an inventory and places the assets into each Trust. Survivor's Trust, and Decedent's Trust and possibly a Marital Trust. There seem to be variations on this. A TIN# is applied for on the Decedent's Trust only, the Survivor's Trust uses the surviving spouse's social security #.

The survivor's Trust that receives income is directly reported on the survivor's form 1040, Any income producing assets in the Decedent's Trust are reported on form 1041 and then passed through to the Survivor through a K-1 form.

I don't know which community property state you are referring to, but here is a link (Ca) that has some info www.tdelaslaw.com/RevocableLivingTrusts.html and then this might help as well (again Ca) https://www.toewslaw.com/publication...rustManual.pdf and www.mbscott.com (a lot of info on this site)

Natiro is much more versed in this and has lent assistance to me in the past with some excellent advice.

So I hope this assists you a little.

Sandy

[OldJack]

Thanks for all the replies.

The revocable trust is in the state of Idaho. It does not have the usual A-B trust paragraphs setting up a spouse trust (for the material deduction) and/or a trust to pass husbands share to the children after spouse dies. When husband dies he evidently has no share of the family trust as it is community property belonging to the surviving spouse. There is nothing mentioned about when the first grantor dies that there is anything to do (of course there would be if there was an estate tax return to file). This revocable family trust simply says when the grantors die the trust distributes as soon as possible to the named children. Since there is a surviving spouse grantor at this time there is no beneficiary distribution.

Therefore, correct me if I am wrong but I think the revocable family trust is, for tax purposes, simply ignored with all income reported on the surviving spouses 1040.

As this is a community property state it would appear to me that as of the date of death of the first grantor (husband), every asset in the family trust would receive a 100% step-up in basis as it would if the assets were in the hands of the surviving spouse.

What do you all think. Oh, my email is taxpoo@aol.com if you have documents that you think might help. Thanks again.

[natiro]

Revocable trust

Actually, the important issue here, as it relates to the IRA MRD is whether the trust can be a "designated" benficiary, since the trust is the benficiary of the IRA. Whether or not this trust is a "designated" beneficiary hinges on whether or not the trust (or perhaps the husband's portion of the trust) became irrevocable at death. So making the determination about whether the trust is revocable or irrevocable will be important.

I will email materials to you later today that discuss these issues fairly well. The materials won't help you with the revocable / irrevocable question but I think they'll explain why that issue is important.

My mom passed away in 2006 and her revocable trust was the beneficiary of her IRA. It was not a joint trust and it clearly became irrevocable at death. Since the trust fit the definitions of a "designated" beneficiary, future distributions are based on my life expectancy since I'm the oldest. We can split the account into 2 separate accounts (for my sister and me) and assign the interests in the trust to us separately, but future distributions to both of us will always be made based on my life expectancy. When I went to the bank (IRA administrator) they required the trust documents which their trust department reviewed in order to determine how the distributions were to be made.

I'm wondering if your client's IRA administrator might be able to answer some of these questions for you, too. Just a thought.

I probably wasn't clear that whether or not the trust is a "designated" beneficiary is important because it makes a difference in whose life you would use to calculate MRD.

[OldJack]

I will email materials to you later today that discuss these issues fairly well. The materials won't help you with the revocable / irrevocable question but I think they'll explain why that issue is important.

Thanks in advance natiro! Also for the explanations.

I just found out that the trust document that I have been reading was not the trust document at the date of death. The one that was sent to me was an amended one after the date of death. You wonder why they didn't tell me. The correct copy is on its way to me and as I understand it has an A-B trust feature so I guess I will have to deal with splitting the trust and a irrevocable trust. I have experience with A-B trusts, I guess you can see why I was confused.

Thanks to everyone for your help and opinions.