Jump to content
ATX Community

Trust return; I don't do many of these...


joanmcq

Recommended Posts

I have a trust for a decedent who died in 2016, but nothing has been filed.  There is only one item in the trust, an annuity.  Half of the payout was income, the other half, principal.  The check for the payout was first issued on Dec. 31, 2016, but wasn't cashed until 2019 because of legal issues.  Apparently one of the beneficiaries (and co-trustee - yes, I know, never have co-trustees!) wouldn't allow a bank account to be opened in the trust's name.  One trustee also spent a lot of legal fees in 2017 to determine the situs of the trust and more in 2019 to try to get the bank account opened.  The check was finally deposited into one co-trustee's attorney's trust account.

Because the decedent died in 2016 I'm starting with that year's return, but can't for the life of me figure out

a) Is it a simple or complex trust?  The trust document simply says that it will terminate upon completion of the distribution of the funds within, and the funds should be distributed "as soon as practicable".  As of today, nothing has been distributed. 

b) how do I account under either type of trust for the fact that nothing has been distributed?

I haven't done a trust return in forever and now I have 2 from decedents who died in 2016 but I haven't got the stuff to prepare them until this year.  3 years ago I was a bit better versed in these things!

Link to comment
Share on other sites

Yikes,  you DO have a nice conundrum here - good luck!

Last first:  situs likely has nothing to do with where either of the trustees live; rather, the situs will be the state where the decedent lived and had the trust written up in.  However, rules can vary between states so you'll likely need to check with both NY  (generally nasty; that state wants tax on everything - I hear air is on the docket for next year [only half kidding]) and MO about their rules.  

It sounds like a complex trust, and certainly acts that way.  "Terminate on distribution" is all well and good except for the long time between the triggering event and the resolution, so circumstances have forced it.  I would think that you have an excellent case to make that the trust did *not* actually get "constructive receipt" in 2016, because it had no way to take possession of the funds (a piece of paper that was not legally negotiable is, to my mind, a block to constructive receipt).  However, you should be ready to support that with the paper/email/whatever trail of no bank account, lawyers involved, trustee acting against interests of trust by refusing to allow the bank account, probable re-issuance of check (maybe multiple times) since those are usually only good for 90 to 180 days, etc.  So what I would do (and this is without extensive - or really any - research) is prepare $0 returns for 2016, 17, 18, and the real receipt and distribution for 2019.

If you are an NATP member, this might be a real good use of their "one research question free per year" service.

  • Like 1
Link to comment
Share on other sites

6 hours ago, joanmcq said:

The check for the payout was first issued on Dec. 31, 2016, but wasn't cashed until 2019 because of legal issues.

Sounds like there was constructive receipt.  I don't think the fact the check was not cashed is going to change anything.

  • Like 1
Link to comment
Share on other sites

4 hours ago, Catherine said:

So what I would do (and this is without extensive - or really any - research) is prepare $0 returns for 2016, 17, 18, and the real receipt and distribution for 2019.

Catherine,  my concern would be signing as a complete and accurate tax return for year 2016

Look at it this way, say a corporation received a check on Dec 31 2016, but the board of directors fought over it for three years, would you have constructive receipt?

Link to comment
Share on other sites

10 hours ago, DANRVAN said:

Sounds like there was constructive receipt.  I don't think the fact the check was not cashed is going to change anything.

I agree.   When I was a young accountant I was working for a CPA with a doctor client.   The client went to India on vacation in early December and closed his office.   Returned from vacation in late January.   Had a stack of checks in the mail that he deposited upon his return.   The tax return was filed from the Doctor's accounting records that showed the deposited amounts as income.   IRS audited when the income did not match the 1099's.   CPA argued constructive receipt and lost.   Had to adjust both tax returns (first year understated, second year overstated).   I had to do the work on sorting out the check dates and tying them out to the 1099s so the income could be recorded to the proper tax year.   Taxpayer was not trying to cheat, all the income was recorded, just in the wrong year.   Cash basis taxpayer.

Tom
Modesto, CA

Link to comment
Share on other sites

Ugh, yes the check has been renegotiated many times over the years, by NY trustee after MO trustee refused to sign a paper allowing NY trustee to open bank account. That is where it differs from your corporate example where presumably there was the option of depositing. 

Link to comment
Share on other sites

4 hours ago, DANRVAN said:

and in this case they had the first 65 days in 2017 to distribute the income to the beneficiaries and claim it in 2016.

No exception to the constructive receipt rule for internal bickering, that I know of.

Wasn't on "internal bickering" but lack of a LEGAL option for taking the payment.  Without a bank account, and with a trustee not agreeing to open one, there was no legal way to accept the payment.  I'd want to know what the lawyer was doing, and why situs and more wasn't settled, and if there is a case for the recalcitrant trustee being charged with acting outside of fiduciary interests.  Claiming income in 2016, but NOT distributing it, as the trust required, opens up a possible action against both trustees.

Link to comment
Share on other sites

If you have a record of that check being re-negotiated multiple times, with the final one being the one that was able to be cashed, I still think that, based on LEGAL status, you did not have receipt until the final check.  Talk it over with the lawyer involved, as well as the trustee.  There are good arguments to be made on all sides - but don't discount the possibility of action against the trustee(s) by beneficiaries, if receipt is claimed in 2016 but no distribution was made until 2019, contrary to the direct instructions of the trust.  

Link to comment
Share on other sites

23 hours ago, joanmcq said:

As of today, nothing has been distributed. 

One way or another the trust will pay tax on the income, whether it be for 2016 or 2019 since no distribution was made in the year payment was received.

Constructive receipt takes place at the entity level of the payee; whether it be corporate, trust...etc. 

So whether it was by disagreement of trustee's or shareholders, the funds were available for deposit; but not made because of an internal disagreement. 

What is the difference between reporting for 2016 or 2019 at trust level?  Interest and penalties should be waived upon request.

Was a 1099 issued for either year?

Worse case scenario, you get a CP2000 for 2016 and have to go back and file for that year?

Link to comment
Share on other sites

1 hour ago, Catherine said:

Claiming income in 2016, but NOT distributing it, as the trust required, opens up a possible action against both trustees.

I understand your position Catherine.  But the return needs to be filed based on the facts and circumstances regardless of how beneficiaries react to it.

  • Like 1
Link to comment
Share on other sites

2 hours ago, joanmcq said:

There was a 1099-R issued for 2016, with NY as trustee.  $80k distribution & 40K income.

I see no choice but to file for 2016.

It is not worth putting your professional credentials on the line for someone else's irresponsible actions.

At least beneficiaries won't be complaining about paying tax at their level.

  • Like 2
Link to comment
Share on other sites

15 hours ago, joanmcq said:

There was a 1099-R issued for 2016, with NY as trustee.  $80k distribution & 40K income.

As far as I know, there hasn't been any CP2000 or any other correspondence from the IRS.

You should file a 2016 return if the 1099r was delivered. When you have a check in hand is deemed to have received the funds. It's not when you cash the check. It's a complex return and have the trust pay the tax. Where did they file their last personal US tax return? Boom, you likely have what they feel was their residency at death.

 

Reality is, the state isn't going to come after you if you get it wrong so pick one that just seems the most correct.

 

The check in hand thing is interesting because people threw a fit when I mentioned something before in regards to rent checks. If a renter pays you January 5th instead of December 31st, and it was previously always booked in December - report it on the tax return as received in December. The IRS wants it that way. They'd prefer you do 12 monthly checks every year instead of 11 one year and 13 the next. When you do that it appears like you are trying to manipulate your reported income.

Link to comment
Share on other sites

I book rent when received, unless a client gives me a 'we charge $1450/month' as the info.

The last 8 years of returns were filed with Vilnius, Lithuania as the address.  2008 was filed with MO's address, but I don't think that was correct, since she lived in Lithuania.  I didn't file 2008.  And yes, the sisters were fighting then too.

Link to comment
Share on other sites

On 4/22/2020 at 6:15 PM, DANRVAN said:

I understand your position Catherine.  But the return needs to be filed based on the facts and circumstances regardless of how beneficiaries react to it.

NOT beneficiaries; rather trustees with a fiduciary duty!  I am *not* wedded to the idea that it definitely has to be 2019, or 2016 - or 1986, for that matter. 

What I AM saying is that there was a failure of FIDUCIARY DUTY on the part of ONE of the trustees refusing to allow a bank account to be opened, and that fact makes this a NASTY tangle, with legal implications for BOTH trustees, for failure to do their fiduciary duty.  If it were me involved, I'd want those sorted out BEFORE I picked any year out of all those involved.  

Look:  say they go back and use 2016.  Then the actual beneficiary sues the trustees for not disbursing the funds then.  YOU want to be involved in that mess, as trustee?  Or as tax pro who gets dragged in willy-nilly?   Or use 2019;  possible same lawsuit except it's over delay in accepting payment, instead of delay in disbursement.  Another nasty mess for trustees and tax pro.  THOSE are the crucial issues that I see.  I kinda don't care what year gets used (because yes, penalties can be waived, especially if there's a good paper trail of the obfuscations and obstacles on the part of the PITA trustee).  What I would not want, as trustee or as tax pro, is to leave myself open to being sued by the beneficiary for not handing over, in 2016, funds that could not be legally accepted until 2019.  

Link to comment
Share on other sites

On 4/23/2020 at 4:29 PM, joanmcq said:

I book rent when received, unless a client gives me a 'we charge $1450/month' as the info.

The last 8 years of returns were filed with Vilnius, Lithuania as the address.  2008 was filed with MO's address, but I don't think that was correct, since she lived in Lithuania.  I didn't file 2008.  And yes, the sisters were fighting then too.

You may still owe a state return even though you live in Lithuania. If 2008 was their last US return, that's where I'd file their trust returns unless someone can give me proof why a different state is better. If you can't determine what state their trust return is due in 2016, how on earth are you arguing their 1040 was incorrectly filed in 2008? I have a hard time believing any state is going to argue that you owe the money to them over another state unless you choose a tax free state like Florida.

 

Unless the tax preparer was hired to do their taxes and didn't, I fail to see how the OP is liable for a tax return not being filed.

  • Like 1
Link to comment
Share on other sites

2 hours ago, Catherine said:

What I AM saying is that there was a failure of FIDUCIARY DUTY on the part of ONE of the trustees refusing to allow a bank account to be opened, and that fact makes this a NASTY tangle, with legal implications for BOTH trustees, for failure to do their fiduciary duty.  If it were me involved, I'd want those sorted out BEFORE I picked any year out of all those involved. 

My point is, the tax preparer has a duty to file a complete and accurate tax return, regardless of legal battle between trustees, officers, partners, spouses ..etc.

Okay so we go ahead and file for 2019, the estate is closed; legal and accounting fees are paid; and all the money is distributed.

Then a letter from the IRS turns up with a demand to file for 2016 that nobody happened to mention before.  Now who are the fingers pointed at?  

It is not going to be me unless I have found a case law exception for constructive receipt due to failure of fiduciary duty and have been compensated for it.

As  joanmcq mentioned, the sibling have been fighting since 2008, so don't expect anything to change in that department.  Some could be in it for the battle and could care less about the money.

  • Like 3
Link to comment
Share on other sites

WALK!  The time and aggravation of dealing with this, the lack of uncertainty without the trust document, a possible legal matter with the check and having to deal with the IRS sometime down the road, makes this rife for having a lot of sleepless nights.  Life is too short!

  • Like 3
Link to comment
Share on other sites

The trustees are also the beneficiaries, so I’m not expecting any issues there. 
right now I’m not believing one over the other until I see the legal docs filed.

I don’t believe 2008 was filed correctly due to paying MO tax; mom lived in Lithuania! MO should have filed with a Lithuanian address and her as POA.

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Restore formatting

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...