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Member
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Last Login: 8/31/2010 6:50:43 PM
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I am a new attorney and starting out in the area of estate planning... and I could use your help!
I have a client (widower) who wanted to restate his trust, which I have no problem doing. However, I have now discovered that his first trust, as most do, established that he was supposed to create two subtrusts: survivor's trust and decedent trust. However, he didn't do that when his wife passed in 2004.
If his gross estate is sitting at $1.5 million, the estate would get hit with about $275,000 worth of estate taxes if he passes in 2011. I am sure he'd like to avoid that. My question is, can we re-allocate the assets at this point to cure the bypass trust? If so, would that involve dividing the assets, obtaining a tax ID, and submitting back taxes? He's already reported the income as part of his taxes, so I cannot imagine any penalties on that end (correct me if I'm wrong). But, the valuation would be an issue.
If valuation is the only issue, should I just use the necessary amount of financial accounts to fund the bypass trust, since they have end of year values (as opposed to the primary residence, which did not get a formal appraisal in that year)?
Is this not recommended? If it's not, what is the best approach?
I am thankful for any recommendations!
Kyle
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This is a fairly common problem. You are right that your client's heirs could have an estate tax problem if the estate tax laws are not changed before 2011. This is a reference to an article on what to do if there are unfunded sub-trusts from the death of the first spouse. It could get you started in solving the problem. You may want to get together with a CPA in your area who is familiar with this problem as there will be some number-crunching and schedules to prepare. http://findarticles.com/p/articles/mi_m0ICC/is_9_73/ai_n15763135/ The title of the article is: "Funding Stale Trusts: What You Should Know When Faced with an Unfunded Trust" by John Woodford who is a member of our forum.
Carol Ach, CPA
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Last Login: 8/30/2010 8:41:47 AM
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As Carol says this is a fairly common problem. There are other issues besides the taxes that lack of funding of the sub-trust has subjected your client to, which I'm sure that you are aware of. As for the tax issues I normally don't recommend that trustees go back and create fictional sub-trusts and file amended returns. I would take the position that until the sub-trusts are funded you have only one trust which is the administrative trust with the surviving spouse's and decedent's interest as separate shares. Since returns haven't been filed for the administrative trust you may wish to go back and look at the possible consequences if the returns had been filed. If the results of filing a return for administrative trust would have been similar to the way the returns were filed by your client and the proper amount tax has been paid, then the IRS won't be interested in having your client file back returns. If it would be dramatically different then you should consider filing them. Also in dividing the assets between the survivor's and decedent's portion you should attempt to allocate any appreciation or depreciation equally between the two interests. In this case it would appear that you only have to worry about funding a by-pass trust with the decedent's interest, however if you have to fund both a by-pass and marital trust you will have to worrying about funding a pecuniary portion of a funding formula with appreciated assets.
I hope this gets you started.
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Member
Group: Forum Members
Last Login: 8/31/2010 6:50:43 PM
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Thanks for the help on this guys! I am currently talking with an accountant on the subject and am hopeful we can get this resolved. I am very interested in the administrative trust option, as that would probably be the easiest way to go.
Thanks, again!
Kyle
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