This may be too complicated to understand without an expert, but maybe someone here knows. My mother is having me help out with some estate issues related to my late grandfather and the question estate taxes has come up.
When my grandfather died in 2004, he left his entire estate in a trust. The trust was not supposed to pay out to his living children until after the death of his widow, and there were terms to that payout - it was not a straight liquidation of assets scenario. His widow died earlier this year and my uncle (the husband of my mothers sister) succeeded my grandfather's widow as trustee of the estate. My grandfathers children decided several years ago that when my uncle took over they would ignore/override the estate payout rules and just cash everyone out. There are some other minor issues but that is the core of the situation.
So the question is, where do estate taxes fit in? From what I can tell, most or all of my grandfathers estate is below the federal estate taxes threshhold. But that depends on what year is applied. Is it the year he died? Is it the year the estate starts paying out? And what state level taxes apply - where he died or is it dependent on residency at time of death and what if he maintained homes in two states? Or are the taxes something that will apply only on my mother's end?
Anyway, just trying to wrap my head around some of this stuff so I can talk to my mother about what she needs to be aware of. She's not really the type to want to hire someone for advice and does a lot of her own estate planning.
Yeah totally agree...you really want to hire a lawyer. Any estate worth having been planned is likely to be worth hiring a lawyer for.
My grandfathers children decided several years ago that when my uncle took over they would ignore/override the estate payout rules and just cash everyone out. There are some other minor issues but that is the core of the situation.
I am not a lawyer nor do I often pretend to be one but I don't think you can just ignore the rules set out in a trust. I suppose if everyone agrees and the trustee allows it it would be okay because there would be no one to sue over the issue. But the trustee would be violating the wishes of the trust maker.
As for the tax issues, see an accountant or tax attorney. It shouldn't take but a minimal fee (at $200 an hour +) to find out. :)
NOT EXPERT ADVICE (despite my profession):
On the fed level, if there is any federal tax liability, it will be for the year the change of money takes place. Federal tax statutes are basically pay as you go in that way, and only in certain circumstances ever have issues which extend into previous years (carryforward/back kind of thing) and some of the more exotic ones are almost never looked at.
State level, dunno.
Definitely go talk to a tax lawyer. I seriously doubt any issues you have will take longer than 15-30 minutes to solve. Don't even need a "good" lawyer. Any random one with tax experience should be able to solve.
Yes, you either need a lawyer who does estate planning work, or an accountant. I disagree with one bit of advice that has been given. Don't just get any hack who does dogbite cases one week and simple wills the next. You are looking for specific answers to tax questions relating to an estate planning trust. It would therefore be intelligent to get someone who actually focuses on trusts and estates work. I could see a solo practitioner type who does some simple wills from time to time possibly screwing this up.
From my (limited) understanding, estate tax is applied to the estate itself at the time when the person dies (actually, it may be when the estate is transferred). The trustees shouldn't have to pay taxes on any of it. YMMV, IANAL, etc.
Just to be clear, I mean that any beneficiaries don't have to pay on the amount received. It's taxed on the estate as it is transferred. Essentially, it comes out before the money is transferred, and a tax lawyer should be consulted for that, but it sounds like this was provided for in the trust itself.
My only life experience with this was when my aunt died. I was listed as the third trustee, but I never had to do anything because the first two were my grandmother and another aunt. I was considered third string, and I lived out of town by then, so there was no need to involve me. However, I was also a beneficiary.
This particular trust had to pay income tax on any money that wasn't taxed at the time of death, PLUS any money that was still sitting around in the two years or so it took to gather everything together, etc. There was no estate tax because the total amount was not over the estate tax line. As I understand it, though, you only get taxed on that amount (the amount that is over the estate tax line). So basically, there are two taxes to consider. The estate tax only applies if the total amount is above a certain amount (I don't know the number; it goes up constantly). Income tax and any capital gains taxes are the bitch, and that's why you need a tax lawyer, to sort all of that out at the time of distribution.
I'll second what Robert said. Estate tax, as in what's commonly called the "Death Tax", is charged and should be paid within 9 months of the death of the individual. That tax should have already been long paid for to both the feds and the state (if your state had a death tax as of the date of death), and the Trust left behind should be what's left after that tax.
A Trust, however, will need to file and pay Fiduciary Income Tax for any new income it makes off of investments or selling assets at a gain. This is similar to individual income tax, except it's against the estate itself and the trustees are responsible for taking care of it. This also may have both federal and state ramifications. This is most likely what you guys would need to look into dealing with if you're cashing out, as liquidating the assets of the trust may result in paying this tax on any realized gains. If the assets exist in multiple states you may end up needing to file and pay taxes in multiple states as well, depending on the state laws.
Depending on how the trust is laid out and what the assets of the trust are, you may or may not have options for mitigating the taxes you pay. Consulting a tax lawyer in your state (or states) would be highly recommended, although since you're not a trustee you might be limited to simply getting a consult on the hypothetical situation of what could happen based on whatever information you have about the Trust. It sounds like your uncle is already doing this (as he should), but if your mother doesn't trust him then she needs to lawyer up herself as you're not going to outguess the trained professionals on this subject.
Last edited by Reldan; 11-27-2011 at 04:33 PM.