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Irrevocable Living Trust

Family Law Discussion Forum

Irrevocable Living Trust

Postby Dovev » Fri Dec 02, 2016 10:15 am

Hello, and thank you for your answer in advance...  My mom is the Trustee of the family living trust..upon my dad's death, the Decedent's and Marital trust were created which I believe are now irrevocable. Trust was created in California and Trustee resides in Calif.

This is the wording from the Trust document for the Decedent's Unifed credit trust:

Income-The Trustee may pay to or apply for the benefit of the Survivor and the issue of the Trustor's marriage, as much of the net income as the Trustee, in the Trustee's discretion, considers appropriate.  Any income not distributed shall be accumulated and added to the principal of the Trust Estate.

Wording for the Marital Trust-Income-The Trustee shall pay to the Survivor during her lifetime, all net income of the Trust Estate in convenient, regular installments, but not less frequently than quarterly-annually.

My question.....the way the trusts are written...

Is the Trustee REQUIRED to draw the income of the Decedent's trust and the Marital trust??  It appears that she doesn't have to off the Decedent's but she does off the Marital trust???

2nd question.....if she is required to draw the income and she doesn't what happens??

I am asking these questions because I am preparing the 1041 tax returns and I am figuring out whether the trusts were "simple" trusts or "complex" for 2008.  
Dovev
 
Posts: 35
Joined: Mon Mar 03, 2014 2:02 pm

Irrevocable Living Trust

Postby Atuanya » Sun Dec 04, 2016 10:13 pm

Hello, and thank you for your answer in advance...  My mom is the Trustee of the family living trust..upon my dad's death, the Decedent's and Marital trust were created which I believe are now irrevocable. Trust was created in California and Trustee resides in Calif.

This is the wording from the Trust document for the Decedent's Unifed credit trust:

Income-The Trustee may pay to or apply for the benefit of the Survivor and the issue of the Trustor's marriage, as much of the net income as the Trustee, in the Trustee's discretion, considers appropriate.  Any income not distributed shall be accumulated and added to the principal of the Trust Estate.

Wording for the Marital Trust-Income-The Trustee shall pay to the Survivor during her lifetime, all net income of the Trust Estate in convenient, regular installments, but not less frequently than quarterly-annually.

My question.....the way the trusts are written...

Is the Trustee REQUIRED to draw the income of the Decedent's trust and the Marital trust??  It appears that she doesn't have to off the Decedent's but she does off the Marital trust???

2nd question.....if she is required to draw the income and she doesn't what happens??

I am asking these questions because I am preparing the 1041 tax returns and I am figuring out whether the trusts were "simple" trusts or "complex" for 2008.  
Atuanya
 
Posts: 47
Joined: Sat Jan 18, 2014 6:03 am

Irrevocable Living Trust

Postby Bailey » Thu Dec 08, 2016 4:40 am

Thank you for letting me know that California law applies.    

I believe my Allexperts profile says I cannot address income tax issues related to trusts(I only deal with estate & gift tax issues - in my own practice, I refer the income tax issues to a CPA, enrolled agent, or tax attorney).  However, your 1041 question is one of the few income tax related issues that I can answer(partially, at least).

The way the Decedent's unified credit trust is drafted, it's a "complex" trust(because income may be accumulated); the Marital Trust is a simple trust(because income must be distributed).  Even if all of the income of the Decedent's trust is distributed, it still remains a complex trust(because there isn't a **requirement** to distribute income at least once a year).

The IRS rules for marital deductions require that all income in a trust that qualifies for the marital deduction must be distributed to the surviving spouse at least once annually [it can be distributed more frequently, such as in the trust you described].  There is no similar requirement for a unified credit trust.  However, because of the "compression" in the trust tax rates, it usually makes sense to withdraw all(or most) of the  income from that trust(to avoid higher income taxes).

As to your second question, if your mother fails to take the income from the marital trust at least once a year, she loses the marital deduction election that was presumably made on the estate tax return.  In that case, any estate taxes that would have been due and payable "but for" the marital deduction would become immediately due & payable.  Plus there would be interest and penalties back to the date on which the estate tax return was originally due.

If your mother doesn't "need" the income from the marital trust, she should invest in assets that produce less income or no income - or she can invest in US treasuries or municipal bonds.  She should talk to a qualified financial advisor about what investments might be appropriate for her situation.

This information is not intended to substitute for professional legal advice and does not create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship.
Bailey
 
Posts: 45
Joined: Sun Feb 02, 2014 3:32 pm


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