wrote:
- quote -

They can be filed, but it's not necessary to go to the expense.

- quote -

What money has your mother been living on? From an income tax
standpoint she should be first living off the money in the decedent's
trust, and then only using money from the survivor's trust to the
extent necessary. Of course, from an estate tax standpoint the
opposite could be true, if her estate is large enough.

- quote -

When I say "incorrect" I do not mean "illegal." What I mean is that
from a financial standpoint the assets could be handled much better.
If her estate is not large enough to worry about estate taxes, income
should have been distributed from the decedent's trust, and used for
your mother's expenses, before any money is used from the survivor's
trust. If her estate is too large and the decedent's trust is
throwing off too much money, change the investments to things that
have more internal growth and less current income.

- quote -

Not legally wrong, no, other than claiming trust deductions for
distributions that didn't take place.

But if you don't distribute income from the decedent's trust, you
should not take the deduction for distributions.

- quote -

It's not legally incorrect to do that. But then the trust should not
take deductions for distributions it did not make. If the IRS finds
out, they could ask for the additional taxes the trust would have
paid over what your mother did, plus interest and penalties.

- quote -

That brings up the dilemma of whether distribution of those assets
will increase the chances your mother's estate will be required to
pay estate taxes. It depends on her precise circumstances. Given
that her tax advisor thinks her estate is large enough to be
concerned about estate taxes, you're probably better off shifting the
decedent's trust to non-(current)-income producing assets.

Stu

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curiousgeorge408[at]hotmail.com wrote:
- quote -

You can read the forms and see - the tax on money held within the trust
have a very high rate compared to most people's personal tax rates. If
she has the choice and the trust is written to allow it, she should be
given at least the yearly income, and claim it through a K-1 on her
personal return.
You asked earlier - "Is it truly customary to "distribute" (on paper)
the estate trust income for both trusts and pay tax on it on the
personal tax return?"
The distribution should take place in fact, not just on paper.
JOE

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In article <Xns9A138D5A6776Aavocatstuyahoofr[at]130.133.1.4> ,
Stuart Bronstein <spamtrap[at]lexregia.com> wrote:

Big snip (OP has > > , Stu has> )

- quote -

Your mother can buy CD's or make other investments with any distributed
funds that are surplus to her needs. She may want/need those funds in
the future. Let's put off the day that your mother has to invade the
principal of the Decedent's Trust (if permitted by the trust) . I don't
know who the trustee is but you might consider buying a hour of an
estate lawyer's time to get up to speed.

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On Dec 27, 1:53 pm, Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

Good assumption ;-). Thanks for your quick feedback.


- quote -

That is what I thought, too, and my mother's (new) estate
attorney made the same comment off-handedly.

But when I mentioned it to a prospective CPA (we are currently
interviewing for a replacement), he suggested that since 1041s
have been filed for the Survivor's Trust for so many years now,
it might be better to continue, lest the IRS raise questions
about the sudden stoppage.

Reading the instructions for 1041 (I know: I really need to read
Pub 559 eventually), it appears that a skeletal 1041 for the
Survivor's Trust should indeed be filed. By "skeletal", I mean
that it should contain only the entity information, but no dollar
amounts (page 6 of the 2007 1041 instructions). Even so, that
is less than the recently-fired CPA has been doing for years.
This confirms that what he is doing was incorrect, as you say.

Alternatively, we could use one of two optional filing methods
(page 7), both of which obviate the need to file 1041. Perhaps
that is what you have in mind. Option 1 seems like the easiest.
That also seems to obviate the need to get an EIN for the
revocable trust. They did get an EIN for the Survivor's Trust
when the AB Trust assets were divided several years ago. I
was not involved in the decisions at that time. But in hindsight,
I had always thought it was unnecessary.

And aha! It appears that the prospective CPA's advice is correct
after all, at least to some degree. Under "Changing Filing Methods"
(page 7), we must now file a "final" 1041 return for 2007 with the
words "pursuant to sec 1.671-4(g)" in order to obviate the need for
a 1041 for the revocable Survivor's Trust in 2008, opting for Option 1
(or 2) instead.

Option 1 would also require that we file new W-9s with financial
institutions, replacing the Survivor's Trust's EIN with my mothers
SSN (TIN). I'm sure that does not sound like a "big deal" to most
people. In my case, it is. Long story; personalities involved; not
worth getting into here. But suffice it to say, it is not an
insurrmountable problem.

Is my understanding correct, at least to some degree?

I can work out the details with either my mother's estate attorney
(who is also a CPA, but prefers not to practice as such) or my
mother's new CPA eventually.


- quote -

I don't see how, since there have been no actual distributions of
income, as I said ("all of the income remained in the trust assets").


- quote -

Why do you say that?

The trust document does not "require" that the Decedent's Trust
distribute income to my mother, the only living beneficiary. On
the contrary, it states: "Income shall be accumulated and added
to the principal, except as provided by paragraph 2", which states:
"Trustee [my mother] shall have the discretion to distribute
accumulated income and principal for Spouse's [my mother's]
proper health, support and maintenance".

I have been told that that is fairly standard language for a trust of
this type.

Moreover, every legal and financial advisor has told us that it is
preferrable for my mother not to take income from the Decedent's
Trust before diminishing the value of her own estate. They said
that this decreases the chance of paying estate tax when she
dies, since the Decedent's Trust is no longer subject to estate
tax, whereas her own estate will be (that is, any amount over the
applicable lifetime exclusion in effect at the time, less any annual
gifts in excess of the annual exclusion during her lifetime).

(But see the "PS" below.)

So I believe we have done nothing wrong per se with "handling
the assets" or the income therefrom.

But my question was and still remains: given the way that we
have handled income from the Decedent's Trust (that is, by not
distributing any of it, as the trust document permits), has the
handling of the Decedent's Trust 1041 per se been correct?

Specifically, the Decedent's Trust 1041 says the income was
distributed to my mother, whereas in fact it was not. Given that
it has not been distributed, should the 1041 instead reflect that
fact, causing the income to be taxed base on the trust tax rate
schedule?

PS.... Of course, if that is the case, it raises the question: in
the long run, would it be to distribute the income to my mother
rather so that it can be taxed at the lower personal tax rate than
if it remains in the Decedent's Trust?

That's rhetorical. I presume that is a hard question that is
beyond the scope of this forum, and the answer depends on
facts that I cannot share here. I just wanted to acknowledge that
I "get" the fact that continuing not to distribute the Decedent's
Trust income might not be a prudent course of action, even if it is
permitted by the trust document.

Thanks again for your inputs.

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wrote:

- quote -

If your mother is still alive, a 1041 should be filed for only your
father's trust.

- quote -

It's customary because bracket creep is so steep for trusts that
individuals generally pay tax on the same income at a lower rate.

- quote -

Was it or could it be represented to have been transferred to your
mother's trust? If so, it's ok.

- quote -

The Survivor's Trust is generally a revocable trust, and as such is
completely transparent for tax purposes. That is to say that no tax
return is filed for it, and all income and deductions of the trust
are taken on your mother's return as if they were all hers. Because
in reality they are.

- quote -

Income from the decedent's trust should go into the account of the
survivor's trust, and spent from there. That's all you need to do.

- quote -

You have not given enough information, but it appears that you are
not handling the assets of the decedent's trust correctly.

Stu

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We are between CPAs at the moment, and I have a "burning"
question about how our previous CPA handled 1041 taxable
income for both the Decedent's Trust and Survivor's Trust, the
result of an AB Estate Planning Trust after my father died.

On the 1041 for both trusts, the CPA showed all of the
adjusted total income being distributed to my mother.
Consequently, the trusts themselves paid no tax. The tax
was paid, in effect, on my mother's personal tax return.

The CPA had explained that this is customary. Is that right?

Looking at the 2007 tax rate schedules, that appears to be a
tax benefit because the break points for the marginal rates
are so much higher for 1040 taxable income than for 1041
taxable income.

However, the fact is: the income in the Decedent's Trust was
never distributed to my mother, even though the trust document
does permit it (but does not require it). All of the income
remained in the trust assets.

So was the taxable income for the Decedent's Trust handled
correctly?

For the Survivor's Trust, one could argue that the trust income
is "distributed" insofar as that is what she relies on for income
to cover her expenses.

However, the fact is: the records that I keep for her show that
she is spending less than her trust income in some years.
Consequently, some of the trust income remains in the trust
assets.

Nonetheless, the Survivor's Trust is a revocable trust that
contains just my mother's assets. As such, I believe the trust
qualifies as a grantor type trust.

Therefore, if I understand the 1041 instructions correctly, I
believe the handling of its taxable income is correct insofar as
it is a pass-through entity for tax purposes.

Unless someone says otherwise, I am comfortable with the
handling of the Survivor's Trust income.

But I am not comfortable with the handling of the Decedent's
Trust income.

Bottom line: Is it truly customary to "distribute" (on paper) the
estate trust income for both trusts and pay tax on it on the
personal tax return? Or is that unusual and might be construed
as an abusive practice?

Thanks for your inputs.

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