You, Your Trust and Taxes

We talk a lot about Living Trusts as an important part of estate planning. What we don’t talk about is a Trust and your taxes. But if you’re creating a Trust, thinking about transferring property, or naming a Successor Trustee, taxes are an important consideration. This is about your, your Trust and your taxes.

A Living Trust is typically a Revocable Trust, meaning that the person who’s creating it, the Grantor, may add or remove the Trust’s assets and beneficiaries at any time. The Grantor may even terminate or revoke the Trust at any time. Many people want to know about the tax implications of a Trust before they move forward with creating one.

The Trust is in the Grantor’s name and will be recorded in his taxes

Because the Trust is in the Grantor’s name, he remains entitled to receive the income and the principal of the Trust during his lifetime. As a result, the IRS still taxes the Grantor on the Trust’s income. Because this is still in the Grantor’s name, it uses his social security number to establish investments and bank accounts, so all of the Trust’s income is recorded on the Grantor’s tax return. It is not necessary to have a separate tax return for the Trust because everything is still in one person’s name—the Grantor’s.

Having a Trust means your heirs will avoid Probate

However, while the Grantor is taxed on the Trust income, the Trust’s assets are legally held by the Trust, which will survive the Grantor’s death. For this reason, the assets in the Trust do not need to go through the Probate process when the Grantor dies. This is one of the reasons we encourage everyone to create a Living Trust. You will be sparing your heirs the expense and the time-consuming process of going through Probate.

Special circumstances during Grantor’s life

If the Grantor becomes mentally incapacitated, the Successor Trustee designated in the Trust documents may choose to obtain a separate tax ID number for the Trust. This number is called a “Federal Tax ID Number”, an “Employer Identification Number”, or an “EIN”.

A Successor Trust may choose to obtain an EIN for the Trust in order to limit his own liability for the Trust’s income tax or to help fulfill his fiduciary duties. If the Trust is using an EIN, a separate tax return for the Trust will be required for each year. The Trust’s taxes will be filed on Form 1041 and would be filed by the same date as personal taxes. If it’s a simple estate, this may not be necessary. But even in straightforward situations, it often takes a year or more to settle the estate. There are cases where the Grantor is not incapacitated, and still may choose to establish an EIN for the Trust.

If the Grantor has complex personal taxes and would prefer not to report the income and losses of the Trust on his own tax return. He would still pay taxes on the income of the Trust but he would be paying those taxes under the Trusts EIN number.

In my own case, my parents lived into their 90s, and were active and healthy until the last year or so. We realized that there was some urgency in their signing their Trust, Powers of Attorney, Advance Healthcare Directives and Do Not Resuscitate Orders with their doctors while they still had testamentary capacity. They died within six months of each other, and my brother, the Successor Trustee, stepped up and managed their estate. It was very straightforward, but it still took more than a year to settle our parents’ estate. He established an EIN for the Trust and dealt with endless paperwork and bills that kept trickling in from Social Security, Medicare and miscellaneous providers.

Living Trust tax after Grantor’s death

After the Grantor’s death, the Trust remains in place and continues to hold legal ownership of all the Trust’s assets. If you’re the Successor Trustee, the Trust holds all of the assets that you inherit and you will be responsible for dividing among your family members, as per the Trust. The tax implications impact the outcome of both the Grantor and the beneficiaries.

• The Grantor’s final tax return is filed by the Trustee or Executor of the Grantor’s Estate, and it declares all the income earned by the Grantor through the Grantor’s death.
• However, any income earned by the Trust assets or principal after the date of the Grantor’s death is reported in a separate tax return for the Trust.

After death, the Trust converts from a Revocable to an Irrevocable Trust

The requirement that the Trust files its own tax return is a result of the Trust changing from a Revocable Trust during the Grantor’s life to an Irrevocable Trust upon the Grantor’s death. This makes perfect sense because it was Revocable before death—meaning that the Grantor can revoke, or make changes to the assets and beneficiaries. After death, of course, the Grantor can no longer make changes. The result: The Trust must file its own tax return each year.

What about estate taxes?

Thanks to changes in the estate tax laws, only those estates worth more than $11.4 million will owe federal estate taxes. This leaves most of us out, yet here in the affluent Bay Area, this extends to an increasing number of people.

California Document Preparers assists our clients in the preparation of Living Trusts. Our Living Trust portfolio includes a Power of Attorney and Advance Healthcare Directive. Most of our clients are surprised at how easy it is. Schedule an appointment today by contacting us at one of our three Bay Area offices. Our dedicated team is helpful, compassionate and affordable.

You, Your Trust and Taxes

We talk a lot about Living Trusts as an important part of estate planning. What we don’t talk about is a Trust and your taxes. But if you’re creating a Trust, thinking about transferring property, or naming a Successor Trustee, taxes are an important consideration. This is about your, your Trust and your taxes.

A Living Trust is typically a Revocable Trust, meaning that the person who’s creating it, the Grantor, may add or remove the Trust’s assets and beneficiaries at any time. The Grantor may even terminate or revoke the Trust at any time. Many people want to know about the tax implications of a Trust before they move forward with creating one.

The Trust is in the Grantor’s name and will be recorded in his taxes

Because the Trust is in the Grantor’s name, he remains entitled to receive the income and the principal of the Trust during his lifetime. As a result, the IRS still taxes the Grantor on the Trust’s income. Because this is still in the Grantor’s name, it uses his social security number to establish investments and bank accounts, so all of the Trust’s income is recorded on the Grantor’s tax return. It is not necessary to have a separate tax return for the Trust because everything is still in one person’s name—the Grantor’s.

Having a Trust means your heirs will avoid Probate

However, while the Grantor is taxed on the Trust income, the Trust’s assets are legally held by the Trust, which will survive the Grantor’s death. For this reason, the assets in the Trust do not need to go through the Probate process when the Grantor dies. This is one of the reasons we encourage everyone to create a Living Trust. You will be sparing your heirs the expense and the time-consuming process of going through Probate.

Special circumstances during Grantor’s life

If the Grantor becomes mentally incapacitated, the Successor Trustee designated in the Trust documents may choose to obtain a separate tax ID number for the Trust. This number is called a “Federal Tax ID Number”, an “Employer Identification Number”, or an “EIN”.

A Successor Trust may choose to obtain an EIN for the Trust in order to limit his own liability for the Trust’s income tax or to help fulfill his fiduciary duties. If the Trust is using an EIN, a separate tax return for the Trust will be required for each year. The Trust’s taxes will be filed on Form 1041 and would be filed by the same date as personal taxes. If it’s a simple estate, this may not be necessary. But even in straightforward situations, it often takes a year or more to settle the estate. There are cases where the Grantor is not incapacitated, and still may choose to establish an EIN for the Trust.

If the Grantor has complex personal taxes and would prefer not to report the income and losses of the Trust on his own tax return. He would still pay taxes on the income of the Trust but he would be paying those taxes under the Trusts EIN number.

In my own case, my parents lived into their 90s, and were active and healthy until the last year or so. We realized that there was some urgency in their signing their Trust, Powers of Attorney, Advance Healthcare Directives and Do Not Resuscitate Orders with their doctors while they still had testamentary capacity. They died within six months of each other, and my brother, the Successor Trustee, stepped up and managed their estate. It was very straightforward, but it still took more than a year to settle our parents’ estate. He established an EIN for the Trust and dealt with endless paperwork and bills that kept trickling in from Social Security, Medicare and miscellaneous providers.

Living Trust tax after Grantor’s death

After the Grantor’s death, the Trust remains in place and continues to hold legal ownership of all the Trust’s assets. If you’re the Successor Trustee, the Trust holds all of the assets that you inherit and you will be responsible for dividing among your family members, as per the Trust. The tax implications impact the outcome of both the Grantor and the beneficiaries.

• The Grantor’s final tax return is filed by the Trustee or Executor of the Grantor’s Estate, and it declares all the income earned by the Grantor through the Grantor’s death.
• However, any income earned by the Trust assets or principal after the date of the Grantor’s death is reported in a separate tax return for the Trust.

After death, the Trust converts from a Revocable to an Irrevocable Trust

The requirement that the Trust files its own tax return is a result of the Trust changing from a Revocable Trust during the Grantor’s life to an Irrevocable Trust upon the Grantor’s death. This makes perfect sense because it was Revocable before death—meaning that the Grantor can revoke, or make changes to the assets and beneficiaries. After death, of course, the Grantor can no longer make changes. The result: The Trust must file its own tax return each year.

What about estate taxes?

Thanks to changes in the estate tax laws, only those estates worth more than $11.4 million will owe federal estate taxes. This leaves most of us out, yet here in the affluent Bay Area, this extends to an increasing number of people.

California Document Preparers assists our clients in the preparation of Living Trusts. Our Living Trust portfolio includes a Power of Attorney and Advance Healthcare Directive. Most of our clients are surprised at how easy it is. Schedule an appointment today by contacting us at one of our three Bay Area offices. Our dedicated team is helpful, compassionate and affordable.

Tales From the ER: The Man with the DNR Tattoo

The following story from The New England Journal of Medicine illustrates the importance of not just creating an Advance Healthcare Directive and a Do Not Resuscitate (DNR) order, but making sure your family and healthcare providers are advised of and committed to your decisions.

An unconscious man with a DNR tattoo on his chest

A Miami medical team faced a legal and ethical dilemma when an unconscious patient was wheeled into the emergency room with “Do Not Resuscitate” tattooed on his chest–the tattoo seemed to be the patient’s way of identifying his end-of-life wishes. It didn’t end there: “Not” was underlined, and the tattoo included a signature. Not surprisingly, none of the team had encountered this situation before, and there was no way to validate the DNR or determine if it was legally sound.

The tattoo was created to provide clarity; what it actually created was confusion

The tattoo produced more confusion than clarity—fueled by the common belief that tattoos are the result of regrettable decisions made while intoxicated. While in theory this tattoo may have been a great idea, without any context, it backfired.

This patient had a history of pulmonary disease, lived at a nursing home but was found intoxicated and unconscious on the street and brought to the hospital. He arrived without identification, family or friends. The doctors had no idea what his end-of-life wishes were, but an infection had led to septic shock, which causes organ failure and extremely low blood pressure. When his blood pressure started to drop, the medical team gave him intravenous fluids, antibiotics and blood-pressure medication, buying time to decide whether to try to save his life or manage his pain and let him die, as per his DNR order.

A cautionary tale helps explain medical team’s dilemma

Doctors referenced a case published in 2012 in The Journal of General Internal Medicine about a 59-year-old patient who had a DNR tattoo on his chest. In this case, however, the patient wanted lifesaving measures to be taken if he needed them. The reason for the tattoo? He’d lost a bet playing poker. In his case, the tattoo was a joke, but the medical team couldn’t assume that the tattooed man in their own ER was also the butt of a joke.

In Florida, when outside of hospitals, DNR orders are printed on yellow paper and signed by a physician and the patient, or a surrogate. Inside the hospitals, doctors can talk to a patient or the patient’s family or friends to determine end-of-life wishes. Since this patient remained unconscious, the doctors consulted an ethics expert to discuss the legal and ethical issues. He determined that the doctors could assume that the tattoo reflected the patient’s wishes.

The tattooed man died the next morning

The patient died the next morning. Thankfully, social workers were later able to track down the man’s proper DNR paperwork which supported the DNR order, assuring doctors they had acted according to the patient’s wishes.

A DNR tattoo: No substitute for an Advance Healthcare Directive or Living Trust

The lesson we can take from this? A tattoo is not the best way to alert medical staff to your wishes. A better methodology is to keep the actual document in a pocket or wallet, and it does not replace a properly executed Advance Healthcare Directive.

Inform families, friends and doctor of your end-of-life wishes

If a family member or friend who is unaware of a patient’s DNR wishes calls the local emergency response team (EMT) via 911 or other system, it’s likely that this team will work to resuscitate the patient; EMTs are trained to save lives, not interpret DNR orders.

While we can all appreciate the humor in this story, it alerts us to the importance of making sure our family and doctor are aware of and support our decisions.

CDP’s Living Trust package includes both a Power of Attorney and Advance Healthcare Directive, where you name an Agent, the person who will make healthcare decisions for you if you’re no longer able to do this yourself. An important part of this document is a Do Not Resuscitate (DNR) order—which means you do not want a medical team performing Hail Mary efforts to keep you alive when you are clearly near the end.

Do you need to create or update your Living Trust?

Life changes often mean that it’s necessary to name a different Agent for your Healthcare Directive or Power of Attorney.  Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment. We’re helpful, compassionate and affordable.

Difficult Family Conversations About End-of-Life Planning

The reluctance or downright unwillingness to talk to parents and grandparents about the difficult topic of end-of-life planning is one that frequently arises in our offices. It ranges from “Mom’s a terrible driver and shouldn’t be behind the wheel, but nobody will confront her” to “Dad’s health is deteriorating, and we need to talk about downsizing, estate planning and preparing a Living Trust, but every time we try to talk to him he blows up.”

One client’s story illuminates the need for planning

“Brian’s” grandfather has been managing his cardiac health for many years–bypass surgery at 60, stents put in at 73 and again at 82. He is now 85 and still in good health, is active and busy. He just rebuilt his garage and a new boat dock, from the ground up, earlier this year.

Recent heart procedure left Grandpa with diminished physical capacity

But Brian’s grandfather recently underwent a procedure to have still more stents installed, and for the first time, he left the hospital not feeling significantly better. Instead of being back to 90% efficiency post-procedure, he’s now at about 50%. Brian and his family have always taken for granted their grandfather’s robust health, but this last procedure has been a wakeup call. They’re aware that their grandfather’s diminished capacity at 85 is going to affect his ability to care for himself, his wife and his property.

It gets more complicated: Meet Grace

Grandpa remarried about five years ago, and “Grace”, 83, is in shaky health. Her kids and other family members all live on the east coast. If Grandpa dies first, his Trust allows Grace to continue to live at his very high-maintenance, hilly, fire-prone, lakefront property for the rest of her life.

While Brian and his siblings are all very fond of Grace, they worry that she won’t be able to care for herself, much less the property, which is fairly rural. If/when Grace can no longer drive, she will be isolated. Brian is his grandfather’s Trustee, and he’s concerned that Grace will then become his responsibility, along with managing the estate.

Time to have “the talk” with Grandpa

Brian knows that he must have this conversation with his grandfather. He’s struggling with how to frame the conversation so it doesn’t sound like he’s trying to get rid of Grace after his grandfather dies. Brian wants to work with his grandfather to develop a workable solution. The sensible thing would be for the couple to downsize now, move to a retirement community that would care for both his grandfather and Grace as their needs require. But ask anyone who’s had to deal with aging family members–the sensible thing can be a tough sell.

End-of-life planning discussions never get any easier

Those with parents and grandparents in failing health need to encourage them to name a Power of Attorney and an Agent for their Advanced Healthcare Directive before they become incapacitated. Our Living Trust package contains both of these documents and thoughtfully assists families to prepare for eventualities. If creating a Living Trust is on your New Year to-do list, contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment. We are helpful, compassionate and affordable.