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Member
 
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Last Login: 1/6/2010 10:32:28 AM
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| Please bear with me as I give you the facts, because there are several events that took place. 1. Taxpayer and spouse created a living trust and wife died in 2008. 2. Taxpayer had a house worth 2 million plus about 800,000 in other assets in the living trust. 3. Taxpayer also has retirement accounts worth 3.5 million in his name. The named beneficiary on the retirement accounts is the living trust. None of these retirement accounts are currently in the living trust. 4. Ordinarily the bypass trust can not be funded for the full 2 million dollar amount because the decedent's community property share of the trust estate was 1.4 million. However, the trust has a provision whereby any disclaimed property is to be added to the bypass trust. 5. We went ahead and prepared the 706. The surviving spouse made a valid disclaimer and we transferred the 2 million dollar house to the bypass trust. We would now like for the survivor's trust to buy half of the house back and for the bypass trust to carry a demand note at a fair market interest rate. The note would be secured so that the surviving spouse can take the interest deduction. The bypass trust would recognize the interest income, but would distribute it back to the taxpayer because it is a simple trust. Only a million or half of the house is being sold, because you can only deduct mortage interest on a loan up to one million dollars. The reason we would like to do this is in case the real estate market should rebound, and the surviving spouse should sell the house some day. we would like to be able to take advantage of the Section 121 deduction for the portion of the house owned by the survivor's trust. The big question in all of this is whether or not the house can be reassessed by the county tax assessor, on the sale of 50% of the house back to the survivor's trust? I can't seem to reach the right person at the assessor's office.
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Power Member
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Last Login: 1/6/2010 6:00:00 PM
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Assuming that the surviving spouse is the present beneficiary of the bypass trust, my guess is that there is no reassessment because the present owner would not change.
John Jacobson
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Yes, the surviving spouse is the beneficiary and the trustee of the bypass trust.
I spoke to both an agent and her supervisor at the Prop. 58 audit division of the L.A. County Assessor's office. Neither person understood what a decedent's trust (bypass, credit, etc.) was, but believed that if it was a transaction between spouses (alive or dead) that there is no reassessment issue. They gave me 95% confidence, but not full confidence that the transaction would not trigger a reassessment. This is important, because the taxpayer is paying property taxes on a value of only a couple hundred thousand.
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Power Member
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Last Login: 2/16/2010 6:30:43 PM
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I'm not sure what county you're in but here in Contra Costa we see this transaction a lot. The trust owns the house before the sale and owns the house after the sale - so no reassessment. This is despite the fact that the "living" trust owned it first and now a trust that is part of that trust owns it.
Mary Kay Foss
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Power Member
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Last Login: 2/16/2010 6:30:43 PM
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I was a little confused by your statement that the trust is the IRA beneficiary but the IRA is not in the trust. The IRA cannot be in the trust. The IRA makes distributions to the trust based on the life of the oldest trust beneficiary (in most cases) - to put it into the trust would make it 100% taxable. You always keep the IRA intact although you may want to have it titled as a beneficiary IRA.
Mary Kay Foss
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The surviving spouse (the husband) is the owner of the 3.5 million in retirement accounts. He has named his inter-vivos trust as the beneficiary upon his death. The accounts are not currently in the trust and are not currently considered part of the trust. He has full rights to change beneficiaries while he is alive.
This is a case where total combined assets were much greater than 4 million (2 million each spouse) but the trust assets were less than 4 million (2.8 million combined).
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Power Member
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Last Login: 1/6/2010 6:00:00 PM
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Was there an aggregate community property agreement?
John Jacobson
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