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Irrevocable Trust, Beneficiary dies.


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Husband set up a revocable trust with rental property in it.  He died long ago and the trust became irrevocable.  Wife was the sole beneficiary & trustee. She dies last year. Property is still in trust name and a trust return for the husband's trust has been filed every year to present.  Trust docs say that if wife dies, then their 2 children are the beneficiaries. 

Does the transition from revocable to irrevocable status eliminate the secondary beneficiaries and property is now own by the wife's estate upon her death (regardless of the deed still listing the husband's trust), or is the irrevocable trust still alive and the 2 children are now beneficiaries and should receive K-1s until the property is transferred to their names? 

Note: the 2 children are also the beneficiaries of the wife's estate.

Given the wife's estate must include these properties in her estate tax return, it seems logical that option #1 is the answer, but the property still being in the husband's trust name is tripping me up. 

And if it's #2, I don't see how ATX let's me split the income to the now 3 different beneficiaries without overriding.  It only allows percentages.  TIA!

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Need some clarification about exactly what the trust document says concerning the wife and when the assets of the trust are to be distributed.

  • Does it say that the children only become beneficiaries if the wife should predecease the grantor?
  • Does it say that the assets should belong to the wife and should be distributed as part of the settling of deceased husband's estate?
  • Does it say that the rental is held in trust for the wife's benefit during her lifetime with her receiving benefit of the income or corpus, and then it passes to the children at her death?
  • Something else?

 

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2 hours ago, jklcpa said:

Need some clarification about exactly what the trust document says concerning the wife and when the assets of the trust are to be distributed.

  • Does it say that the children only become beneficiaries if the wife should predecease the grantor?  No.  It specifically says, "Upon the death of my wife, the balance of the trust estate shall be divided into equal shares for each child."
  • Does it say that the assets should belong to the wife and should be distributed as part of the settling of deceased husband's estate?  "upon my death, wife shall have the non-cumulative right to withdraw up to 7% of the principal of the trust each year."  I take this to mean husband said wife could take up to 7% each year if she wanted it.  These rentals are the last assets remaining in the trust. 
  • Does it say that the rental is held in trust for the wife's benefit during her lifetime with her receiving benefit of the income or corpus, and then it passes to the children at her death? Not that I could find anywhere.  At the time of his death, there were many investment properties.  Wife sold many of them over the years and these rentals the the last remaining properties. 
  • Something else? 

 

 

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27 minutes ago, Catherine said:

Sounds like the trust should have been divided into two upon wife's death, one share for each child.  You mean a K-1 for the wife for income from Jan 1 till DOD and 2 K-1s for the two kids for income from DOD to Dec 31st right? 

It clearly states upon wife's death it all goes to the two kids. Her estate should get no income after her death (may have short-year beneficiaries there). Agreed, no further income after the DOD, but the estate should include the properties stepped up basis in the assets for the 706 correct?  

 

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None of this goes in the wife's estate because she did not own the assets, the trust did. This is an irrevocable trust that gives her the right to income (I think, not clear from the info given) and a limited amount of principal.  Upon her death, the assets owned by the trust go the beneficiaries and the trust dissolves.  The 1041 will have three beneficiaries--the wife's share of income received before death and the two children's share of income each received after her death.  If the assets have been distributed, you can put the property distributions on the 1041 at the trust's basis to zero it out.  No income there--the 1041 is an INCOME tax return.

Are you actually filing a 706?  The wife would have to have $12 million in assets to necessitate one.

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14 hours ago, Sara EA said:

Are you actually filing a 706?  The wife would have to have $12 million in assets to necessitate one.

Luckily no. 

14 hours ago, Sara EA said:

None of this goes in the wife's estate because she did not own the assets, the trust did. This is an irrevocable trust that gives her the right to income (I think, not clear from the info given) and a limited amount of principal. 

Here's an update for anyone that comes across this in the future. Spoke to the lawyer, they pointed me to the section of the trust that showed the wife had power of appointment for the properties.  For estate tax purposes, this means she is the owner of the properties so they must be included in her estate regardless of the deed because at any point in time, she had the power to transfer the properties into her name.     

14 hours ago, Sara EA said:

The 1041 will have three beneficiaries--the wife's share of income received before death and the two children's share of income each received after her death.

The lawyer confirmed this as well. Thank you @Sara EA!

So in conclusion:

  • For tax filing purposes, the deed in the husband's trust name meant a 1041 for the husband's trust was required each year.  If the properties had been transferred to the wife's name, the trust would be dissolved.
  • For estate tax purposes, the properties are includable in the wife's estate because of the power of appointment clause in the husband's trust. 

Thank you everyone for all your help and insight.  I really, really appreciate it!

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Exactly, I have a client who spent a lot of money on an Estate Plan, a Family LLC and a Trust  with multiple page instruction letter from the Attorney that he didn't understand. Since the Attorney made him uncomfortable he wouldn't ask questions. So he tends to regard all these documents as just paperwork, which leaves me in the position of refereeing and trying to keep him between the lines.

Really don't enjoy being in this position, since estates and trusts are not my area of expertise!

24 minutes ago, Catherine said:

And this underscores how important it is to read the actual trust documents, because what we are told is often only loosely related to the truth. 

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The trust doc provided more info than the original post--lesson learned that we must see it!  Still confusing though.  If the wife had power of appointment, she could do whatever she wanted with the assets, yet the trust doc said she could only withdraw up to 7% principal each year.  Rather than drown in the legal terms, just include it in her estate since she won't being paying estate tax anyway.

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19 hours ago, Catherine said:

And this underscores how important it is to read the actual trust documents, because what we are told is often only loosely related to the truth. 

I completely agree.  I apologize for leaving it out, but honestly, didn't even know what power of appointment was till it the lawyer explained it to me.

13 hours ago, Sara EA said:

The trust doc provided more info than the original post--lesson learned that we must see it!  Still confusing though.  If the wife had power of appointment, she could do whatever she wanted with the assets, yet the trust doc said she could only withdraw up to 7% principal each year.  

I too found this confusing and contradictory.  I asked the lawyer about this and he said, during her lifetime, the 7% clause was in effect, however the power of appointment language in the trust says that upon her death, she can will the properties to whomever she wanted.  This language effectively transfers the ownership of the properties (for estate purposes) to her.  Meaning it's includable in her estate and qualifies for stepped up basis because she is legal owner, not the husband's trust.   

It's an interesting situation that I learned a great deal from. 

Again, thank you everyone for your comments.  I hope this thread helps others in the future.  

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