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Last Login: 12/18/2009 7:27:33 AM
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| I hope this post is not beyond the scope of the forum but I have not been able to get any help elsewhere. FACTS Washington State decedents (community property state) Wife died 5/2/2007 and husband died 10/25/2008 Family trust with the standard sub-trusts; Credit Trust, Marital Trust, Survivor Trust. Family trust continued as "administrative" trust and no sub-trusts have been funded. Form 706 (no tax liability) filed for wife's estate and IRS closing letter received 2/18/2009 Form 1041 for wife's estate and "administrative" trust filed together under Section 645 election for initial year ended 4/30/2009 to include administration expenses QUESTIONS 1. Husband's estate (2nd to die) will have a significant tax liability so we want to deduct Administration Expenses on Form 706. Will the deduction be limited to those incurred after DOD or when the closing letter was received to current date or some other time period? I presume I will need to allocate expenses paid by the "administrative" trust; those up to husband's DOD to wife's estate, those after to husband's estate? Funding of the sub-trusts is to occur soon so I will be able to allocate expenses paid by the "administrative" trust between the sub-trusts if this appropriate. 2. Husband has received distributions from the "administrative" trust in the form of payment for personal expenses and costs incurred as a resident of an adult care facility. Since he died in 2008 and the "administrative" trust is filing Form 1041 with the estate with a 4/30/2009 year-end I presume these distributions will not carry out DNI, if any. 3. How do I file the Form 1041 for the husband's trust/estate. The Marital and Survivor Trusts will not be funded until 2009 so can I make a Section 645 election at that time and file a combined Form 1041 with a 9/30/2009 year end?
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Power Member
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Last Login: 1/6/2010 6:00:00 PM
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Out of curiosity, in what state do you practice?
The trustee paid three types of expenses: those specifically attributable to the wife's passing, those specifically attributable to the husband's passing, and those that deal with common issues. The 2 former are allocable entirely to the interest in the community that will pass to the decedent or surviving spouse's subtrusts, and the latter is allocable 50-50. (Examples of the latter: basic trustee fees, investment expenses.) So there may be some unpaid expenses allocable to both halves, half of which can be taken on the surviving spouse's 706.
While Washington is a community property state, and probably has rules similar to California, each state has its own way of doing things, so caveat emptor. I am not familiar with how Washington law differs from California law.
In California, when the first decedent dies, the decedent's estate and the surviving spouse each have an undivided one-half interest in each community property asset, unless agreed otherwise. (Our Probate Code Section 100) Most all California trusts I have seen give the trustee the power to make non-prorata allocations of each item of community property between the surviving spouse's sub-trust, and the decedent spouse's sub-trusts.
For trust accounting and income tax purposes, until the trustee allocates and distributes property from the terminating (what you call administrative) trust to the sub-trusts, the income is allocable one-half to the decedent, and one half to the surviving spouse. The decedent spouse's income is reportable on the 1041 for the trust (or otherwise if a 645 election) and the surviving spouse's income is reported as if it were held in a grantor trust. Note that Section 645 only applies to the portion of the trust that the decedent can revoke.
When the surviving spouse takes draws from the community property in the terminating trust, for accounting purposes, this is treated as a distribution from the terminating trust to the survivor's trust, and then a withdrawal from the survivor's trust, under its terms. Terminating trusts I have seen do not speak of distributions directly to the surviving spouse. To equalize, property of equal value is distributable (but hasn't been distributed yet) to the decedent's sub-trusts. The income split for trust accounting and tax purposes is no longer 50-50 until the trustee makes the compensating distribution. This can be a pain in the neck for the accountant until the trustee completes the allocation and distribution process, or at least equalizes the distributions. Workpaper distributions (and detailed spreadsheets) can restore sanity, but be careful of Estate of Johnson.
So while the husband was alive, the indirect distributions to him don't impact the portion of the income tax return attributable to the decedent's half. The compensating distributions do.
When the surviving spouse dies, the survivor's interest in the terminating trust is no longer treated as a grantor trust. The accountant still needs to keep each spouse's interest separate, including administration expenses allocable to both, or to one. I haven't had (the pleasure?) of dealing with one of these where a 645 election was in effect for the first spouse. If there were not one, you would have one terminating trust tax entity with three beneficiaries. Perhaps others who know about this off the top of their heads can chime in.
I hope this helps.
John Jacobson
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