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Subject Author Date
Income tax on survivor spouse Stuart Bronstein 05-02-2008
Posted by Stuart Bronstein on May 2, 2008, 4:53 pm
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 I have a client whose husband died at the end of 2004. Their property
was divided between the survivor's trust and the decedent's trust.

In the survivor's trust was the home they lived in, and rental property
was in the other trust. The remainder interest in the home was then
sold for fair market value (the woman will live there for the rest of
her life). Those funds were used to purchase annuities, the income of
which is primarily used for medical bills, home care, etc.

The decedent's trust distributes to the surviving spouse all the trust
income. The new tax preparer got the properties backwards, and
originally did the taxes assuming the income from the annuities came
from the decedent's trust. When she re-did the returns with the money
coming from the right trust, she found the income tax was about $20,000
higher, on income of $90,000.

Does this make sense? Why would this be happenning? And can you think
of anything that can be done about it?

Thanks for your help and insights.

Stu

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Posted by Mark Bole on May 2, 2008, 8:35 pm
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 Stuart Bronstein wrote:
> I have a client whose husband died at the end of 2004. Their property
> was divided between the survivor's trust and the decedent's trust.
>
> In the survivor's trust was the home they lived in, and rental property
> was in the other trust. The remainder interest in the home was then
> sold for fair market value (the woman will live there for the rest of
> her life). Those funds were used to purchase annuities, the income of
> which is primarily used for medical bills, home care, etc.
>
> The decedent's trust distributes to the surviving spouse all the trust
> income. The new tax preparer got the properties backwards, and
> originally did the taxes assuming the income from the annuities came
> from the decedent's trust.

...and assuming that the income from the rental property came from the
survivor's trust? What type of trust is that?


> When she re-did the returns with the money
> coming from the right trust, she found the income tax was about $20,000
> higher, on income of $90,000.

Something is being taxed at trust rates, rather than individual rates
after a pass-through? You've made it clear we're only talking income
tax here...


> Does this make sense? Why would this be happenning? And can you think
> of anything that can be done about it?

Sorry, all I'm offering is more questions instead of answers. But to
answer the last question, Q: what can be done? -- A: don't compare
taxes from a set of returns where the properties are backwards!

-Mark Bole

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<< The foregoing was not intended or written to be used, >>
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Posted by Stuart Bronstein on May 2, 2008, 9:31 pm
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> Stuart Bronstein wrote:

>> The decedent's trust distributes to the surviving spouse all the
>> trust income. The new tax preparer got the properties backwards,
>> and originally did the taxes assuming the income from the
>> annuities came from the decedent's trust.
>
> ...and assuming that the income from the rental property came from
> the survivor's trust? What type of trust is that?

Like a typical survivor's trust it's a revocable, grantor trust. She
is directly taxed on all the income from it.

She's also taxed on the income from the decedent's trust, because she
receives it. But the tax preparer tells me that if that income is
attributed to the irrevocable trust and counted as a distribution to
her, the tax is much lower.

>> When she re-did the returns with the money
>> coming from the right trust, she found the income tax was about
>> $20,000 higher, on income of $90,000.
>
> Something is being taxed at trust rates, rather than individual
> rates after a pass-through? You've made it clear we're only
> talking income tax here...

It should all be pass-through. And the surprising thing is that I am
told that the tax is higher if it doesn't go through the trust, and
lower if it does.

>> Does this make sense? Why would this be happenning? And can you
>> think of anything that can be done about it?
>
> Sorry, all I'm offering is more questions instead of answers. But
> to answer the last question, Q: what can be done? -- A: don't
> compare taxes from a set of returns where the properties are
> backwards!

The thing is that the income is exactly the same, it all goes to her
and gets taxed to her. So I don't understand why there's be such a
big difference.

Stu

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by joetaxpayer on May 2, 2008, 10:52 pm
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Stuart Bronstein wrote:

> She's also taxed on the income from the decedent's trust, because she
> receives it. But the tax preparer tells me that if that income is
> attributed to the irrevocable trust and counted as a distribution to
> her, the tax is much lower.

You can see from 1041 instructions that trust rates are far higher than
individual rates. I can't imagine how there would be a situation with
more than a trivial amount of money that would have a different result.
Joe
www.blog.joetaxpayer.com

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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Stuart Bronstein on May 3, 2008, 2:09 am
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> Stuart Bronstein wrote:
>
>> She's also taxed on the income from the decedent's trust, because
>> she receives it. But the tax preparer tells me that if that
>> income is attributed to the irrevocable trust and counted as a
>> distribution to her, the tax is much lower.
>
> You can see from 1041 instructions that trust rates are far higher
> than individual rates. I can't imagine how there would be a
> situation with more than a trivial amount of money that would have
> a different result.

That's what I figured, too.

By the way, I don't think the trust tax rates should have anything to
do with it, because all income would be treated as distributed, so
fully deductible to the trust and includible in the income of the
surviving spouse.

Stu

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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