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?