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What is the penalty for not distributing the earnings in a…

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What is the penalty for...
What is the penalty for not distributing the earnings in a Bypass Trust at least annually to the beneficiary? My surviving spouse has paid the income taxes on the earnings - just never actually took the cash out of the Trust! Been going on since 1994 and now the surviving spouse passed away!
Submitted: 8 years ago.Category: Estate Law
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6/28/2010
Estate Lawyer: lwpat, Attorney at Law replied 8 years ago
lwpat
lwpat, Attorney at Law
Category: Estate Law
Satisfied Customers: 25,387
Experience: Attorney with experience in wills, estates and trusts
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There is no Montana inheritance tax or Federal estate tax

Montana's inheritance tax was repealed by the passage of I-115 in November 2000. As a result, the inheritance tax will not apply to bequests made on or after January 1, 2001. Additionally, consent to transfer stocks, bonds or insurance proceeds is only required for deaths occurring before that date.

For questions regarding the inheritance tax prior to its repeal, call us toll free 1-866-859-2254 (in Helena,(NNN) NNN-NNNN.

Estate Tax

Montana’s estate tax is equal to the maximum credit allowed against the federal estate tax (72-16-905, MCA). The Economic Growth and Tax Reconciliation Act (EGTRRA) of 2001 reduces the amount of the state death tax credit that may be taken against the federal estate tax. The EGTRRA reduces the credit by 25 percent for deaths occurring in 2002, 50 percent for deaths in 2003, 75 percent for deaths in 2004, and 100 percent for deaths occurring in 2005 and thereafter. Therefore, there is no Montana estate tax due for deaths occurring in 2005 and thereafter.

 

http://revenue.mt.gov/forindividuals/taxes_licenses_fees_permits/inheritance.mcpx

There is no penalty for not distributing the income. The assets in the trust are simply distributed to the beneficiaries.

An accept for my time is always appreciated

 

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Customer reply replied 8 years ago

I specifically remember that an instructor said that there was a penalty for not taking the distribution out of his spouse's Bypass Trust and he was suggesting to set up a note for the amount owed to the beneficary and include it in his estate. We are talking about an amount in the ballpark of $700,000.00. Now the (2) attorney(s) say that it was owed to our client - not his trust - so it will be subject to probate taxes!

Maybe I misled you - we have a trust for the wife that passed away back in 1994 and the husband had a revocable living trust as well! I know we have to include the $700,000.00 in our deceased client's estate - fortunately he died in a year that there isn't any estate tax! But we are really concerned about the penalties for not distributing - another accountant in the office remebers the subject matter coming up at a CPE class as well!

Estate Lawyer: lwpat, Attorney at Law replied 8 years ago
Here I am assuming that the distribution of the income was not mandatory but rather discretionary. That is the normal situation. As such it is not a part of his estate. Here is an article that may be of assistance.

http://www.riker.com/articles/index.php?id=3386
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Customer reply replied 8 years ago
We have always been operating under the thought process that the distributions were mandatory - especially since the trust says that it will be distributed to the survivor at least annually!
Estate Lawyer: lwpat, Attorney at Law replied 8 years ago
You would have to look at the language of the trust as a whole to see if the trustee had discretion. I would be very surprised if he did not have it.
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Customer reply replied 8 years ago
I am scheduled to meet with the daughter and the attorney Wednesday AM and hopefully they will have the original Trust document there at that time - so we can review it to see what it says? But seems like we are not in sinc, sense we have distributed the income to the personal for income tax purposes, but have never taken the cash out of the bypass trust? There wasn't much income taxes to pay because most all of the investments were Montana Municipal bonds - but the earnings over the past 15 years will exceed $700,000.00! So the $700,000.00 will have to be included in our deceased client's estate on top of everything else!
Estate Lawyer: lwpat, Attorney at Law replied 8 years ago
I don't understand why the fight over it being in the estate or the trust?
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Customer reply replied 8 years ago
The (2) attorneys both felt that the earnings were owed to the surviving spouse, not his trust - so the $700,000.00 will be subject to PROBATE fees and taxes in his Estate! They wanted me to find out what the penalties are for not taking the earnings out of the Bypass Trust over the past 15 years? I realize there won't be any Estate Tax since he passed away in 2010, but we will be looking at Probate fees and Penalties!
Estate Lawyer: lwpat, Attorney at Law replied 8 years ago
sounds like some attorneys are wanting fees. It will come down to whether the distributions were mandatory or whether the trustee had discretion.
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