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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1376
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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Concerning our Family Trust. My Father passed away in 2010,

Customer Question

Concerning our Family Trust. My Father passed away in 2010, and my parents had a Revocable Trust set up in 1981. Both were trustees of the trust. When my father passed, the trust was to be set up with a 1M marital trust, and the rest in a residuary trust for the 3 children, 2M.... We filed inheritance tax forms with Indiana in Apr 2011, with my mother inheriting my fathers half of the trust, since she would be the sole Trustee anyway going forward and can do what she wants with ALL assets. Our IN tax bill was $400. Fed $0.

Last week we received notification from our Lawyer that the state of Indiana is saying we owe $122K tax on my fathers estate. Saying simply that the entire trust, not just 1/2, but the entire 2.2M Trust needs to be taxed as though the 3 children inherited the trust. And my mother did NOT inherit any portion of the trust when my father passed because since he died in 2010, and the Trust was benchmarked for the maximum Marital deduction that can be taken by law, which was thought to be 1M, actually cannot be used in 2010 since there was no limit or tax law! Long story short, the state is saying they will compromise and let us say Mom actually owned half the Trust, (she was co trustee with my father, and now is the sole trustee), but my fathers half needs to be taxed to the children,(the residuary trust). I think this is not right and feel that my moms 100% spousal exemption is being tossed to the side and we are being forced to pay tax NOW instead of LATER when my mother passes away. Our lawyer says if we fight it, we most likely will lose, and it will be very expensive. If we win, we still pay for our lawyer fees, which would be 20-30K possibly.
The madness to our thinking is Mom gifted assets in 2011, and is on the trail to gift most of the trust by end of 2012. But now Indiana saying NO 2 weeks before taxes are due. I want to fight this, and the other family members are on the fence. I firmly believe Indiana has no right to tax my mother/the trust because of the 100% marital exemption she should have. When she passes, then yes, Indiana has the right to tax the estate, but not before.... Should we fight this?
Submitted: 2 years ago.
Category: Tax
Expert:  Shawn P Adamo replied 2 years ago.

Shawn P Adamo :

Hello. My specialty is focusing on YOUR Financial needs. Financial Planner/Business Owner for 20 years. CPA,PFS,QFP,GMMA.

Shawn P Adamo :

While I understand your frustration and concerns, I beleive your attorney is giving you sond advice. The best case escenerio is that win, however there will be legal fees and the odds of winning are small.

Shawn P Adamo :

It is much more likely that you will wind up with the worst case scenario. This is where you incurre legal fees and lose the case.

Shawn P Adamo :

In additon there are other factors (emotional, time -could be very long, anxiety, etc.)

Shawn P Adamo :

As a CPA and Financail planner I would not fight this but instead follow the advice of your attorney.

Shawn P Adamo :

If this does not answer your question please let me know. Also let me know if you have additional questions. If you understand my answer and have no more questions, please ACCEPT and leave positive feedback (if so inclined). Thank you.

Customer:

Concerning an A/B Trust (marital trust and residual trust) being formed in Indiana when my father died in 2010..... I am being told that since there was no exemption level for estate tax purposes, my parents Trust did not become 2 trusts, but just one... the residual trust. The marital trust would not get funded... So this means my mothers marital trust balance is 0, and the residual trust is 2.5M..... Now for taxes. Indiana is telling us that we are responsible for inheritance tax on the entire trust value, to a tune of approx 130K, and that my Mother did not own or even inherit my fathers share of the Trust. We filed our inheritance tax on time in April of 2011, and reported that my mother was 100% exempt with the spousal rule... She was co-trustee of the trust and is now the sole trustee of a revocable trust. I am really having a problem understanding how Indiana can take the spousal exemption away from my mother and require her to pay tax on the entire trust! With her being the sole Trustee of the trust now, how can this be? We reported to Indiana when we filed our taxes last year that my mother owned half the trust, and my father owned half the trust.... And since my mother was to be the sole trustee of the trust when my father passed, that she indeed could use the spousal exemption. Hence no tax to Indiana. Our family would just be responsible for the tax when my mother passes away. I think this is totally unjust, but to fight it would be stressful and maybe expensive, not sure... What was the purpose of creating this trust if it did not benefit our family in the end? Can someone please help me understand how Indiana can say we cannot use the spousal exemption in our case?
Another question, since Indiana is saying that the entire trust is to be taxed, does that also mean that the entire trust has now received the step up in basis to DOD value, and not 1/2 did? We had been told that my mothers half of the trust would most likely receive another step up in basis when she passes, but not if all trust assets went into one trust and have been taxed.... Something is wrong here.. please help clarify our options.... thank you..

Shawn P Adamo :

where is the previous chatting?

Expert:  Jax Tax replied 2 years ago.
This is very complicated but let me make a few statements.
1. The grantor of a trust (person who originally owns property) sets up a revocable trust. If revocable, the assets are still considered assets of the grantor for tax and estate purposes.
2. There can be 1000 trustees issued but the grantor is still the owner as long as it is revocable.
3. If the grantoe dies, it is part of his taxable estate.

It really is that simply. All of the info you have listed really does not matter. The trust assets are part of the taxable estate of the grantor.
Honestly, a revocable trust is a poor idea when talking about tax planning. You may want to start looming at a malpractice issue if an attorney was involved.
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Category: Tax
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Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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Customer: replied 2 years ago.

Original Trust was held jointly and severally by Husband AND Wife. When husband or wife dies, there was to be 2 trusts created. An A/B Trust (marital trust and residual trust) being formed in Indiana when my father died in 2010..... I am being told that since there was no exemption level for estate tax purposes, my parents Trust did not become 2 trusts, but just one... the residual trust. The marital trust would not get funded... So this means my mothers marital trust balance is 0, and the residual trust is 2.5M..... Now for taxes. Indiana is telling us that we are responsible for inheritance tax on the entire trust value, to a tune of approx 130K, and that my Mother did not own or even inherit my fathers share of the Trust. We filed our inheritance tax on time in April of 2011, and reported that my mother was 100% exempt with the spousal rule... She was co-trustee of the trust and is now the sole trustee of a revocable trust. I am really having a problem understanding how Indiana can take the spousal exemption away from my mother and require her to pay tax on the entire trust! With her being the sole Trustee of the trust now, how can this be? We reported to Indiana when we filed our taxes last year that my mother owned half the trust, and my father owned half the trust.... And since my mother was to be the sole trustee of the trust when my father passed, that she indeed could use the spousal exemption. Hence no tax to Indiana. Our family would just be responsible for the tax when my mother passes away. I think this is totally unjust, but to fight it would be stressful and maybe expensive, not sure... What was the purpose of creating this trust if it did not benefit our family in the end? Can someone please help me understand how Indiana can say we cannot use the spousal exemption in our case?
Another question, since Indiana is saying that the entire trust is to be taxed, does that also mean that the entire trust has now received the step up in basis to DOD value, and not 1/2 did? We had been told that my mothers half of the trust would most likely receive another step up in basis when she passes, but not if all trust assets went into one trust and have been taxed.... Something is wrong here.. please help clarify our options.... thank you..

Expert:  Jax Tax replied 2 years ago.
The trust is not held jointly. Again, the trustee has no bearing on this. It is not an important fact. The issue is much simpler. The donor created a revocable trust. As such, the trust is part of the taxable estate. It makes no difference who the trustee is. The trustee is simply a fiduciary charged with managing the trust. The trustee has no right to the trust only to manage it. It is the donor and the fact that it was revocable that is the only issue.
Customer: replied 2 years ago.
When The Smith Personal Trust was created, it was held jointly and severally by husband and wife. The Trust states that both are the Trustees and both are the Trustmakers. You are saying to me that only one is the Trustmaker(Donor)... How can only one be looked at as Donor then??
Expert:  Jax Tax replied 2 years ago.
There can be more than one donor. Since it is revocable however the assets are still considered personal assets of the person who owned them when it was set up. For joint assets 50/50. This is causing the inheritance tax.
If it would have been nonrevocable, there would have been gift tax issues upon setting it up. This would have prevented inheritance tax bit created gift tax.
Customer: replied 2 years ago.

We started off this conversation with me stating that the Trust was jointly and severally owned by husband and wife. You came back and said the Trust was not jointly owned.

 

Think you missed the original problem I was not understanding. The 1/2 of the trust which is to be taxed by Indiana as Inherited by the children because it went into a residual trust created at my fathers death, is what we told Indiana is still there with my mother as trustee of the residuary trust and has full control of the assets and can do whatever she wants with... i.e. health and wellbeing, etc.... The arguement at hand is that since the revocable trust is still in her control, it should not be taxed yet, but taxed when she does not control, She has sole "access" to the funds and could use up or keep.before the children ever "inherit" any portion of the Trust.... We as a family want to keep the taxable funds growing while Mom is still alive and not pay now... If it is not possible for my mother to claim a spousal exemption for the movement of the assets to the residual trust that she has sole control over, then this is what I dont understand.

Expert:  Jax Tax replied 2 years ago.
I said that the listed trustees do not determine ownership. The person or persons who are the donors does. A bank could be the trustee but does not dictate ownership. That is what I wrote. The listed trustees has no bearing. It was not until later you stated that both were donors.

Second, the spousal election is a inheritance right. It has no bearing on the tax issue so no that will not work. The trust is exercised outside the probate and must be issued to the listed beneficiaries.

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