NOTICE

The following sections discuss certain Internal Revenue issues. PLEASE NOTE THAT THIS IS FOR REFERENCE FOR OUR CLIENTS AND IS INTENDED TO BE A STARTING POINT FOR YOU IN YOUR DISCUSSIONS WITH YOUR TAX ADVISOR. This is not intended to be a comprehensive discussion but merely seeks to answer some basic questions which may arise.

SEE YOUR TAX ADVISOR!

When to Get a New Tax Identification Number
for a Revocable Living Trust

According to the Internal Revenue Service (IRS) the Trustee of a revocable trust should file annual income tax returns (Treas. Reg. 1.671-4), and obtain an employer identification number. (Rev. Rul. 63-178, 1963-2 C.B. 609) IRS Form 1041 when the trust is revocable.

HOWEVER, if the grantor or settlor of a revocable trust or his or her spouse is a trustee of that Trust, then the items of trust income and deduction are reported directly on the Settlor’s own tax return and the trust uses the Settlor’s Social Security Number rather than obtaining a separate taxpayer identification number for the trust. (Treas. Reg. 1.6012-3(a)(9)).

In general, if at least one of the Settlors are also the Trustee for the Trust, then the use of the Settlor’s Social Security Number is recommended.  If on the other hand someone other than the Settlor(s) is acting as Trustee (during one or more of the Settlor’s lifetimes), then the use of a separate employer identification number may be preferable.  Keep in mind that once a Revocable Living Trust becomes irrevocable, such as upon the death of the Settlors, that the Successor Trustee must usually obtain a  separate employer identification number.

Income Tax Considerations

In general, the creation of a revocable trust has no significant income tax consequences during the Settlor’s lifetime. Because the trust is revocable, its income is fully taxed to the Settlor under the grantor (Settlor) trust rules regardless of whether it is distributed or accumulated. (I.R.C. 676.) The transfer of property to a revocable trust generally does not constitute a taxable event or otherwise trigger the realization of gain.

Asset Holding Periods

The holding period of assets transferred to a revocable trust includes the holding period of the assets in the hands of the settlor. Once the trust ceases to be revocable (for example, on the settlor’s death), the holding period begins anew. (Rev. Rul. 73-209, 1973-1 C.B. 614)

Sale of Principal Residence

Generally, the tax advantages on the sale of settlor’s principal residence are retained even if the residence is held in a revocable trust. (I.R.C. 121, Rev, Rul. 66-159, 1966- C.B. 152; IRS Letter Ruling 8007050)

Deductibility of Attorney Fees

The costs of establishing and maintaining a funded revocable trust will be borne in part by the federal government because such fees are incurred for the management, conservation, or maintenance of property held for the production of income and are deductible for federal income tax purposes to a considerable extent. (I.R.C. 212) These costs are, of course, subject to the two percent floor on miscellaneous deductions, under the Tax Reform Act of 1986.

In addition, legal fees incurred in establishing a revocable trust should be deductible on the same basis as that on which trustee’s fees are deductible. In fact, it may not seem unreasonable to regard the entire charge made by the attorney as allocable to the establishment of an arrangement for the management, conservation, or maintenance of property held for the production of income, at least if the trust is to be presently funded.

Once again see your tax adviser.

Tags: Living Trusts by Greg Reese
No Comments »

In a recent post we talked about the limits of insurance coverage available for bank deposits in the event your bank, thrift, savings and loan or credit union were to fail.  The government “rescue” or “Bail-out” plan passed in early October increased the insurance limits from $100,000 to $250,000.

Our earlier blog was specifically focused on the amount of insurance available to folks who have their accounts titled in the name of a Revocable Living Trust.  You may recall in that blog, that the amount of insurance was calculated somewhat differently.

The insurance coverage for Living Trust owned accounts was calculated first by multiplying the number of Creators, or “Settlors” of the Trust times $100,000.  Then multiplying that number by the number of “Qualifying Beneficiaries”, to come up with your total insurance.

E.g.  If the Trust has a husband and a wife as the (2) creators or “Settlors” of the Trust, the first calculation is 2 x $100,000 = $200,000.  If the husband and wife have 3 children named as Successor Beneficiaries of the Trust, then the second part of the calculation is $200,000 x 3 (qualifying beneficiaries) = $600,000 TOTAL AMOUNT OF INSURANCE COVERAGE.  With the higher insurance limits passed in early October, these calculations will change as follows:

Under the new law the calculation will use the higher insurance limit of $250,000, and would therefore look something like this:

First calculation:  2 x $250,000 = $500,000

Second Calculation:  $500,000 x 3 (children as qualifying beneficiaries) = $1,500,000 TOTAL AMOUNT OF INSURANCE COVERAGE.

In addition, you may recall that there were two additional conditions imposed in order to qualify for the full amount of insurance as calculated above. 

1. The beneficies of your trust had to be “Qualified beneficiaries” , meaning the spouse, child, grandchild, parent or sibling of a Settlor.  
2. The beneficiaries names must be listed on your account paperwork kept at the bank.

The new law eliminates the use and definition of “Qualifying Beneficiary” so that now if you have a friend, relative such as Aunts, Uncles or Cousins, or even a charity, for example, named as a beneficiary of your trust, that the full additional $250,000 worth of insurance coverage for each such name listed will be available.

Tags: FDIC Insurance by Greg Reese
No Comments »