Page 58 - Successor Trustee Handbook

CHAPTER 15

INCOME TAXES

This is definitely an area where you will need to work closely with other qualified
professionals -- principally, your accountant or tax preparer and your financial
advisor.

The most immediate issues that occur right after you assume your role as Trustee
involve: (1) handling the Trustor’s IRAs and company retirement plans (which may
not be owned and controlled by the Trust, but are probably controlled by and
accessible to you pursuant to the Trustor’s “Durable Power of Attorney for Property”
and/or Will); and (2) filing the Trustor’s income tax return for the immediate
preceding calendar year (if it has not yet been filed) and for the current year. With
respect to the IRAs, there may have been minimum distributions that the Trustor was
required to take in the prior or current calendar year and need to be taken by you
to avoid potential tax penalties. If the Trustor has died, then depending on the
Trustor’s age and the beneficiaries of his IRAs (and other retirement plans), there
may be certain distribution choices that need to be exercised anywhere from nine
months after the Trustor’s date of death, up to September 30 of the year after the
date of death. If the Trustor has died there may also be a number of elections that
need to be timely made on the income tax return.

Another income tax-related action that should take place as soon as possible is
obtaining a taxpayer identification number from the IRS for the Trust. While the
Trustor is living and acting as Trustee, the Living Trust is considered a “grantor Trust”
which does not require a separate taxpayer identification number or a separate
tax return; all income and expenses simply flow onto the Trustor’s personal income
tax return. However, once the grantor becomes incapacitated or otherwise
cannot serve as Trustee, or has died, the Trust is then considered a separate
taxpayer, which requires a separate taxpayer identification number and a separate
income tax return. The exception is when the Trustor and his or her spouse were
both serving as Co-Trustees and now the other is named to serve as sole Trustee; in
this case a new taxpayer identification number may not be required. Any time the
Living Trust divides into smaller individual trusts, these new “sub-trusts” may require
their own new numbers. For example, upon the death of the first spouse of a
married couple, the Living Trust may divide into “A, B and C” Trusts (see the
Chapter, “Estate Taxes”). The “A” (or Survivor’s) Trust usually does not require a
separate taxpayer identification number and income tax return, but the “B” and “C”
Trusts will. Upon ultimate distribution of the Trust assets (in the case of a married
couple, at the surviving spouse’s death), some beneficiaries may receive their
inheritance directly, while others may have their inheritance held in continuing
trusts (such as a young or spendthrift person, someone receiving needs-based
government benefits, or someone receiving his or her inheritance in a protected
“Personal Asset TrustSM”).
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