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NT - Living Trust


Yardley CPA
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A client asked for advice on establishing a trust.  Since I have no experience with the topic, I advised they should seek counsel from an estate attorney.  With that said, it got me thinking.  Does anyone have experience with Living Trusts?  I've done some research and read up on the topic,  I have a fair understanding of the pros and cons.  Was hoping to receive feedback from those who are experience with the topic and maybe have established their own trust.  I know there are different types, I'm more interested in learning about Revocable Living Trusts.  I'm not aware of any real tax advantages for trusts but would also like to learn more about how they can potentially be tax friendly if at all.   

The client who inquired is married, 2 children.  One child in college, one child just graduated.  Estate value of around 5 million, including life insurance.   

  

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Personally, we did not look at tax +-.  For us, it is about creating an entity which could be managed by a fiduciary if needed. In a way, just like setting up an entity over a sole prop.  While we expect the named persons to outlive us, one cannot be certain.  The remaining heirs could be as yet unborn, or will not be of age, so we are more comfortable having a fiduciary if the named trustees are not willing or able.  In our case, we expect to have to rewrite again once I get to FRA, so we can sort of preplan that into the framework to reduce the amount of change. What we are finding is the trust items will likely not change, but the remainder (will items, kept under the CA small estate level) will likely change several times.

In the case of CA real property holders, unless one expects the property to be sold, there are issues with Prop 19 to deal with.  The practical effects are still being fleshed out.  Sadly, we had to be somewhat precedent setting, needing to get a (as much as possible) binding letter for out situation.

The nice thing, for us at least, is the estate industry seems to have gone to a flat fee model, or a subscription model, with few going the hourly route.  The subscription model is very interesting for those on the younger side, who may need multiple changes and monitoring by their experts.

I am a bit biased though, after having to sped a couple of years cleaning up two intertwined intestate estates...  Even a simple one paragraph will would have saved the estates more than $10k each.

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I think the biggest hurdle is that your client needs to be able to understand  Attorneyspeak, and be willing to ask questions if they don't understand something.

I have two clients that set up trusts and to both of them it's just paperwork that gets filed away.

One client didn't even bother to read the 20 plus pages of instructions and the trust never got funded.

In both cases I didn't become aware until after their Attorney was finished.

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PA has an inheritance tax, and I'm not sure if revocable trusts that become irrevocable at death escape it.  Find out why they are considering a trust.  Did they go to one of those seminars that convince the attendees that they need to pay the lawyers a big chunk of change for essentially no benefit to them or their heirs?  I have seen many people who really don't have much set these things up and really can't afford the 1041 annual tax filings.  This is a legal decision though and you are right to refer them to an attorney.  Just make sure s/he doesn't offer seminars.

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I'm an estate planning attorney, and I draft wills/trusts regularly.  As Sara points out, individual state laws are important.  From a federal standpoint, I agree with Dennis.  There isn't a federal estate tax (or income tax, of course) benefit for most people given the size of the current exemption.  (The tax savings that used to come from having a bypass trust when the exemption amount was $600,000 and there wasn't portability.)  IMHO, attorneys overuse trusts now because the fee for drafting a trust is usually 3 to 4 times the fee for a will.  That said, there are some reasons people choose to have trusts including ease of asset management if the grantor is incapacitated, avoiding probate (the value of this is different by State; I don't think it's worth much here in Kansas where attorneys are not allowed to charge a percentage but rather must bill for time spent), and protecting privacy since probate is a 'public' process.  There's also the ability to protect children from themselves (through extended trust durations and specified disbursements, although this can also be done through a testamentary trust in a will) or from predators, a bad marriage, etc.  What really irritates me is that I'll see a new client come in with a Revocable Living Trust that he/she paid $3,000 for, and all of the assets the client owns (except the house) are pre-tax assets.  Makes me grouchy every.single.time.

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On 10/11/2022 at 9:46 PM, Sara EA said:

I have seen many people who really don't have much set these things up and really can't afford the 1041 annual tax filings.  This is a legal decision though and you are right to refer them to an attorney.  Just make sure s/he doesn't offer seminars.

I do not know enough about estate taxes to comfortably prepare 1041's, so I always refer clients to someone else when an estate is involved.  With that said, these clients would need to prepare a 1041 if the trust generated more than $600 in income, correct?  The 1041 would then generate K1's which would flow to their personal returns?  Is that correct?

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23 hours ago, Yardley CPA said:

I do not know enough about estate taxes to comfortably prepare 1041's, so I always refer clients to someone else when an estate is involved.  With that said, these clients would need to prepare a 1041 if the trust generated more than $600 in income, correct?  The 1041 would then generate K1's which would flow to their personal returns?  Is that correct?

It's a Grantor Trust, so no 1041.

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There may be a 1041.  It depends on what assets are placed in the trust and whether tax docs are reported in the trust's EIN.  If they are, the trust has to file.  There is an election on the 1041 to report everything on the grantor's return, so instead of a K1 there is a statement showing income and expenses.  Filing is still required though, or the IRS computer matching programs will discern a mismatch and generate a letter.

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Sorry ... I meant 401(k), IRA, 457, 403(b) ... retirement accounts that pass by beneficiary designation and cannot be held in a Revocable Living Trust ... basically seeing lawyers convince clients they need trusts when they really don't have any assets to fund said trusts ... a big pile of worthless paper in my humble legal opinion.  (My colleagues would skewer me.)  Mum's the word.  Don't rat me out.

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If the trust has more than $600 of GROSS income, then yes, a 1041 must be filed and K-1s issued to the grantors.  This would be the case if income-producing assets like bank and brokerage accts, etc. are titled to the trust  using the trust's EIN.  If rental properties are titled to the trust, rental and income and expenses go to the trust.  What are your clients putting into the trust? Does it have an EIN?

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On 10/17/2022 at 9:15 PM, Sara EA said:

If the trust has more than $600 of GROSS income, then yes, a 1041 must be filed and K-1s issued to the grantors.  This would be the case if income-producing assets like bank and brokerage accts, etc. are titled to the trust  using the trust's EIN.  If rental properties are titled to the trust, rental and income and expenses go to the trust.  What are your clients putting into the trust? Does it have an EIN?

Here is what the attorney told my clients:

Their trust is a "Revocable Grantor Trust" which does not file returns.  During their lifetimes the trust is indistinguishable from them for tax purposes and uses their SSN.  After they die, the trust becomes irrevocable and at that point returns may be required.  

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As long as everything in the trust is listed in their SS#s, that's true.  When a grantor trust has to file a 1041 is when income-producing assets are reported in the trust's EIN.  This can be bank or brokerage accounts or rental properties that get 1099s with the EIN.  Your clients may title their assets in the trust's name but as long as they use their SS#s, they are indeed indistinguishable from the grantors.  If that brokerage acct is reported in the EIN, IRS matching computers will be looking for a 1041.

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9 hours ago, Slippery Pencil said:

Revocable Grantor Trusts don't have EINs.  They obtain an ein when it becomes irrevocable upon death of the grantor.

A Revocable Grantor Trust can get an EIN. It's not required but they can get one and voluntarily choose to file separately. I have several clients who have chosen this route.

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