Question

1.  S, age 60, transferred $100,000 to a trust. The income is payable to A, age 60, during the life of S. The corpus is payable to B on S’s death. S retained the power to name a new remainderman. When S dies ten years later, what are the estate tax consequences of this trust?

Answer 1

Beneficiaries of Trust typically pay taxes on the distributions they receive from the trust's income, rather than the trust itself paying the tax. However, such beneficiaries are not subject to taxes on distributions from the trust's principal.

When a trust makes a distribution, it deducts the income distributed on its own tax return and issues the beneficiary a tax form called a K-1. The K-1 indicates how much of the beneficiary's distribution is interest income versus principal and, thus, how much the beneficiary is required to claim as taxable income when filing taxes.

Easy Asset Distribution

Sometimes, distributing the trust's assets is simple. If a single person is listed as the beneficiary of the contents of the trust, for example, the successor trustee simply transfers ownership of all assets to the sole beneficiary. Where the trust identifies all assets and designates direct transfer to specific beneficiaries, this also makes for easy distribution.

In any of these straightforward distribution situations, the successor trustee should still check with an estate planning attorney when determining the proper way to transfer titles to land and vehicles because this process may differ by state.

Asset Distribution by Percentage

Many people choose to leave some identified heirlooms to specific people, but most leave their heirs percentages of the estate. For example, one may leave their assets to their two children, divided 50/50. In this case, the successor trustee must evaluate the estate and determine the division of assets. Here are the important steps involved.

1. Determine the value of the estate.

To determine how to distribute by percentage, you must understand how much the estate is worth. You may need to obtain the assistance of art brokers, jewelers, real estate agents, forensic accountants, and other experts to determine how much the assets of the estate are worth. While the cleanest way to approach estate distribution might be to sell everything and then simply divide the profits, this may not be the best approach or what the trust agreement designates.

2. Meet with the heirs.

Meet with the heirs after the appraisals of the assets are complete, and then provide each heir with documented appraisals and discuss their preferences. This way, you can determine whether one heir might accept the $50,000 art collection while the other inherits the $50,000 cottage to divide the estate equally. You can also determine whether there are assets to which neither party assigns sentimental value that can be sold or that one or both heirs consider priceless. As the trustee, you must decide what you believe is best, as long as it complies with the terms of the trust. However, there is no need to upset beneficiaries unnecessarily.

3. Transfer ownership.

As the trustee, you have the power to transfer accounts, such as bank accounts and brokerage accounts, into the names of the beneficiaries. Similarly, if there is real property that will not be sold, you must transfer the title of the property to the proper heirs. Consult with an attorney or relevant state agency to ensure compliance with state and local transfer laws and rules.

4. Distribute remaining assets.

The estate will undoubtedly contain remaining assets, such as household goods, tools, and the like. You must also distribute this property to the heirs.

When distributing assets held in a living trust, you must follow the instruction given in the trust document. Some may be simple to execute while others require a longer process of appraising assets and discussing with the beneficiaries which assets they would like to include in their percentage of the estate. In any situation, you must also follow state laws for transferring accounts and titles.

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Conclusion :

1. Hence in the above case, A gets all the Revenue income and B gets items mentioned in the corpus of the trust. Hence Estate tax duty is levied accordingly.  

2. Since S has yet to decide on the remainderman, and their shares; the portions they receive would be subject to estate taxes.

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