Re: Question regarding activity in a residual trust.

Dec 28, 2007 3 Replies

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oldman 18 years ago

I was reading the several post regarding Taxable income from Estate planning trusts.

Here are my questions now which are an extension of those questions.

In a revocable trust you can buy, sell trade securities and report income, capital gains and capital losses on the 1040. What happens after an estate is split and there is a survivor trust and essentially two residual trusts (one up to the limit of the decease's exemption currently $2 million and then the part if any in excess of the $2 million.)

In the case of the survivors trust it continues to be handled as before. However, in the case of the deceased residual trusts I know all of the income passes to the survivor due to the favorable tax rates vs the residual trusts (1041). What I would be interested to know what happens in the residual trusts if any securities are sold via a normal trade or if the companies are taken over via merger or acquisition. In essence what happens to the capital gains or losses in these transactions. Which of the funds remain in the residual trusts and which must pass to the survivor.

If I am not making my self clear please request clarifications.

Oldman

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Avrum Lapin 18 years ago

Snip

First look to the wording in the decedent's trust. In some older trusts and in some states where the decedent's trust says that the income goes to the survivor's trust the word income has been defined as only interest and dividends. Other trusts may allow or require distribution of Capital Gain (loss).

Note that this seems to be a controversial issue. I consulted a CPA, an estate attorney who consulted another CPA and an attorney who practices before the IRS (who consulted a 3rd CPA). The 1st CPA discussed the matter with her colleagues and came out in favor "if it appears on lines

1-8 of the 1041 it is income to be distributed", the second sounded wishy washy but favored the "interest/dividend only" approach, the 3rd came out emphatically on the side of interest/dividend only" Since the out of pocket wasn't much I opted for the majority opinion. Both attorneys told me not to worry sine the trust was probably too small to attract attention. Since no one sent me a bill, the advice may be worth what I paid for

In any case when filling out the 1041 you enter the capital gain (loss) and continue on Adjusted total income (loss) - line 17 on the 2006 form and then you go on to Schedule B, figure out the Income distribution deduction, enter that on line 18 and carry one. The end results in Taxable Income or loss (line 22) . The instructions tell how to proceed

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dpb 18 years ago

snipped-for-privacy@old.net wrote: ...

...

What _has_ to happen to income in the trust is dependent on the terms of the trust, not IRS rules.

Income inside the trust not distributed will be subject to the tax rates from the appropriate 1041 however it is generated. Hence, if is normal to distribute virtually all income to avoid the higher rates or to place investments in non-(current)-income-generating investments to avoid (delay) the tax burden. Consultation w/ estate planning professionals and tax advisors is recommended; not a subject for usenet advice beyond the rudimentary as too many variables and unknowns in the actual state of affairs are present.

So, essentially, a repeat of the previous advice.

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ed 18 years ago

Losses, Capital and otherwise, canot be distributed until the final year of the trust.

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