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MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
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Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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My sibling and I have inherited an irrevocable trust from ...

Customer Question

My sibling and I have inherited an irrevocable trust from our father who passes away 8 years ago. It was a propert which is presently being sold for 1,200,000 less mortgage, etc...the property has been generating income as well as high expenses, lawyers fees, etc which our Mother has been paying. Now she will have to pay the tax on the capital gain of the property. She and my sister are trustees...I do not get along with my sister. We will not have acess to this money until our Mother passes away. Any income generated goes to her or 5000 a year... 1. can our Mother use funds in the trust to pay the tax? 2. who decides where this cash will be invested? 3. Can this trust be broken up? 4. If I invest it in property, will we have to pay the tax when my Mother dies on this money at 39.6%? Should we just invest in something that generates CG?
Submitted: 6 years ago.
Category: Tax
Expert:  jgordosea replied 6 years ago.

Greetings,

This sounds like your mother is the curretn ebneficiary during her life and then you and your sister are benficiaries after your mother passes.

1. can our Mother use funds in the trust to pay the tax? Whether or not the trust can pay for the expenses would be determined by looking at teh trust documents; but it would be very unusual for the trust not to be able to pay for the expenses related to the property in the trust.

There is usually language that lets the trust pay for whatever your mother needs while alive.

2. who decides where this cash will be invested? The trustees decide how to invest the assets of the trust.

3. Can this trust be broken up? Probably not, as you did state it is irrevocable. Satte law may apply to limit whart can be done; and again, the trust agreement would say if there was any circumstance in which the assets of the trust could all be distributed (that might be allowed for the benefit of your mother so long as it was not against state law).

4. If I invest it in property, will we have to pay the tax when my Mother dies on this money at 39.6%? The assets in the trust will get an increased basis when your mother passes so you and your sister will likely only have to pay tax on any gain after your mother's death (If i am understanding correctly the type of trust)

Should we just invest in something that generates CG? As you said, it is your mother as the income beneficiary that has to pay tax on the income. It may or may not be preferred to only invest for capital gains or it may not cost more in tax to generate ordinary income depending on the specifics of her situation. Any question that asks "should we invest" has much more than tax considerations - such as, will your mother need the cash to pay her expenses so you do not want all teh assets in real estate or other items that are not easily converted to cash; and the level of risk that is acceptable, etc. As above, this is for the trustees to decide.

I hope this general information is helpful for you and your mother.

Best regards.

 

Customer: replied 6 years ago.
Reply to John Gordos EA's Post: I explained that we inherited it, not my mother. this has not answered my questions correctly at all.
Customer: replied 6 years ago.
Reply to John Gordos EA's Post: furthermore, an irrevocable trust is one where the tax is paid by the beneficiaries at 39.6% upon the death a stipulated person. I think I may know more then you on this trust. Maybe I should go to an attorney, I am also an EA.
Expert:  jgordosea replied 6 years ago.

Sorry I was not able to be of adequate assistance.

I will opt out so you can have another expert to assist.

Thank you.

Expert:  MequonCPA replied 6 years ago.
DearCustomer-

1. In an irrevocable trust, the trust should be paying the tax on the capital gains. The sale of an asset is a change in investment strategy and is not considered to be distributable income.
2. The current trustee makes the investment decisions for the trust.
3. The trust document would provide information about changing the trust.
4. When the trust liquidates and the residuary beneficiaries recieve the assets, there is no tax paid on the distribution, other then on actual income of the trust in its final year. The beneficiaries take the trust's basis in any assets distributed.
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2322
Experience: CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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