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Estate Planning and Taxes

Living Trusts and Taxes

You, Your Trust and Taxes

We talk a lot about Living Trusts as an important part of estate planning. What we don’t talk about is a Trust and your taxes. But if you’re creating a Trust, thinking about transferring property, or naming a Successor Trustee, taxes are an important consideration. This is about your, your Trust and your taxes.

A Living Trust is typically a Revocable Trust, meaning that the person who’s creating it, the Grantor, may add or remove the Trust’s assets and beneficiaries at any time. The Grantor may even terminate or revoke the Trust at any time. Many people want to know about the tax implications of a Trust before they move forward with creating one.

 The Trust is in the Grantor’s name and will be recorded in his taxes

Because the Trust is in the Grantor’s name, he remains entitled to receive the income and the principal of the Trust during his lifetime. As a result, the IRS still taxes the Grantor on the Trust’s income. Because this is still in the Grantor’s name, it uses his social security number to establish investments and bank accounts, so all of the Trust’s income is recorded on the Grantor’s tax return. It is not necessary to have a separate tax return for the Trust because everything is still in one person’s name—the Grantor’s.

 Having a Trust means your heirs will avoid Probate

However, while the Grantor is taxed on the Trust income, the Trust’s assets are legally held by the Trust, which will survive the Grantor’s death. For this reason, the assets in the Trust do not need to go through the Probate process when the Grantor dies. This is one of the reasons we encourage everyone to create a Living Trust. You will be sparing your heirs the expense and the time-consuming process of going through Probate.

Special circumstances during Grantor’s life

If the Grantor becomes mentally incapacitated, the Successor Trustee designated in the Trust documents may choose to obtain a separate tax ID number for the Trust. This number is called a “Federal Tax ID Number”, an “Employer Identification Number”, or an “EIN”.

A Successor Trust may choose to obtain an EIN for the Trust in order to limit his own liability for the Trust’s income tax or to help fulfill his fiduciary duties. If the Trust is using an EIN, a separate tax return for the Trust will be required for each year. The Trust’s taxes will be filed on Form 1041 and would be filed by the same date as personal taxes. If it’s a simple estate, this may not be necessary. But even in straightforward situations, it often takes a year or more to settle the estate. There are cases where the Grantor is not incapacitated and still may choose to establish an EIN for the Trust.

If the Grantor has complex personal taxes and would prefer not to report the income and losses of the Trust on his own tax return. He would still pay taxes on the income of the Trust but he would be paying those taxes under the Trusts EIN number.

Living Trust tax after Grantor’s death

After the Grantor’s death, the Trust remains in place and continues to hold legal ownership of all the Trust’s assets. If you’re the Successor Trustee, the Trust holds all of the assets that you inherit and you will be responsible for dividing among your family members, as per the Trust. The tax implications impact the outcome of both the Grantor and the beneficiaries.

  • The Grantor’s final tax return is filed by the Trustee or Executor of the Grantor’s Estate, and it declares all the income earned by the Grantor through the Grantor’s death.
  • However, any income earned by the Trust assets or principal after the date of the Grantor’s death is reported in a separate tax return for the Trust.

After death, the Trust converts from a Revocable to an Irrevocable Trust

The requirement that the Trust files its own tax return is a result of the Trust changing from a Revocable Trust during the Grantor’s life to an Irrevocable Trust upon the Grantor’s death. This makes perfect sense because it was Revocable before death—meaning that the Grantor can revoke, or make changes to the assets and beneficiaries. After death, of course, the Grantor can no longer make changes. The result: The Trust must file its own tax return each year.

 What about estate taxes?

Thanks to changes in the estate tax laws, only those estates worth more than $11.4 million will owe federal estate taxes.

Estate Planning

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Being Prepared: Documents You and Your Family Will Need

Being Prepared: Documents You and Your Family Will Need

If you’re creating a Living Trust, you’ll need to access financial records and other important documents.

End-of-life planning now will save future anxiety and stress

This is important for your own family, but it may be even more critical for those who are caring for family members. A stunning 10,000 baby boomers are turning 70 every day. That means a lot of family members are stepping up to take care of them. If you’re dealing with a parent’s health crisis, you won’t have time to be rummaging around your attic or through piles of dusty documents looking for a Do Not Resuscitate Order.

We all muddle along until there’s the inevitable health crisis
When it comes to caring for ourselves or our parents, it seems that we muddle along until we can’t anymore. It’s nearly always a health crisis that necessitates intervention. In one case, when, Jim, was diagnosed with a terminal disease, it was his health crisis that required our team to provide care solutions.

Fortunately, his daughter Jan doesn’t work, so by default, she became our team leader. Jim spent 40 years as a money manager, where he learned to keep good records. Jan was the team leader, and we all chipped in, as we could. We scheduled home visits, doctor appointments, and recreation. For nearly two years until he died, we thought we had it all covered. But we missed one very important detail that should have been a no-brainer; we all knew better. Jim had a Will, but no Living Trust. Jan and her brother are now having to Probate their father’s estate.

Parents, money, and privacy

What is it anyway? We don’t like to talk about finances with our parents—either ours or theirs. These secrets can lead to stress for whole families in cases when an unprepared elderly parent develops memory loss, falls ill or suddenly passes away.

Sometimes it’s just time to come clean. Seniors need to make sure their loved ones have access to crucial information in case of a serious emergency. If family members are trying to help their parents, they absolutely need to be aware of bank accounts, assets, and pensions, or at least where to find that information. This information is critical for planning for assisted care or a nursing home.

Financial documents can be crucial when applying for VA benefits or Medicaid

If a family member cannot locate important documents like tax returns or bank account information, it can delay or even cause the senior to be denied benefits from Medicaid or the VA. Seniors applying for Medicaid or veteran’s benefits are required to demonstrate their financial need and will have to provide comprehensive documentation of past and present finances. The approval process for such benefits can be stalled for months because of a single missing piece of paperwork. A stalled application can translate to delayed assistance—and this can be risky for those with serious health conditions.

Bank records will help locate savings and other financial accounts

You will need bank records to locate savings he/she might have had. In the final year for my own parents, when my brother was managing their affairs, we met with both their CPA and banker, making sure there were no overlooked accounts. Toward the end, my folks were really not much help. My stepfather was confusing the number of zeros associated with his accounts. He had us all thinking we were going to inherit millions, and my mother had completely checked out. After this experience, I can totally understand how hundreds of millions of dollars sit idle across the country in bank accounts of people who have been dead for years.

We caution all of our Living Trust clients: Keep your Trust in a secure place

Alert a trusted family member or friend of its location. You will receive both a hardbound portfolio and a soft copy. You may want to share the soft copy (pdf file) with someone you trust. A Trust doesn’t get filed with the county like a Divorce or a Deed. A Trust that can’t be found doesn’t exist.

Vital financial documents include:

• List of all bank accounts
• Pension documents 401(k) information, and annuity contracts
• Tax returns
• Savings bonds, stock certificates or brokerage accounts
• Partnership and corporate operating agreements
• Deeds to all property
• Vehicle title
• Documentation of loans and debts, including all credit accounts
• Power-of-Attorney

TEAM Legal Document Services assists our clients in the preparation of their Living Trusts, which include a Power of Attorney and Advance Healthcare Directive. Most of our clients are surprised at how easy it is. Schedule an appointment today by contacting us. Our dedicated team is helpful, compassionate and affordable.

Estate Planning