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Subject Author Date
Penalty for trust distributions by "related or subordinate" trustees jay1000 09-09-2007
Posted by jay1000 on September 9, 2007, 10:09 pm
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 I understand that it would be best to have a trustee for a
bypass trust or GST trust who is not "related or
subordinate" in order to make any distributions in excess of
"ascertainable standards". My question is what is the
penalty if there is no trustee who is not "related or
subordinate" and the trustees who are "related or
subordinate" make distributions that exceed "ascertainable
standards"?

Is the entire trust invalidated?
Does the estate have to pay retroactive estate tax?
Does someone have to pay income tax?

In searching this out, the requirement is fairly clear but
the penalty for non-compliance is very hard to find.

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<< that may be imposed upon the taxpayer. >>
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Posted by Stuart Bronstein on September 10, 2007, 6:58 pm
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> I understand that it would be best to have a trustee for a
> bypass trust or GST trust who is not "related or
> subordinate" in order to make any distributions in excess of
> "ascertainable standards". My question is what is the
> penalty if there is no trustee who is not "related or
> subordinate" and the trustees who are "related or
> subordinate" make distributions that exceed "ascertainable
> standards"?

The penalty is that the kids can sue the surviving parent
for taking out too much.

I suppose it would be possible for the IRS to tax the entire
value of the decedent's trust in the estate of the second
parent if they can show the restriction wasn't being
followed, but I haven't heard of that happenning.

> Is the entire trust invalidated?

No.

> Does the estate have to pay retroactive estate tax?

No. The issue is what qualifies for the marital deduction
and what doesn't. The decedent's trust holds property that
is not supposed to qualify for the marital deduction (it
actually saves taxes if you do that sometimes). But if the
survivor treats that trust as her own, it might be possible
for the IRS to treat it as her property and tax her estate
on it, even though the trusts are drafted to avoid that
situation.

> Does someone have to pay income tax?

Not more than otherwise.

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 cballard@tyyni.net on September 11, 2007, 4:41 pm
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> I understand that it would be best to have a trustee for a
> bypass trust or GST trust who is not "related or
> subordinate" in order to make any distributions in excess of
> "ascertainable standards". My question is what is the
> penalty if there is no trustee who is not "related or
> subordinate" and the trustees who are "related or
> subordinate" make distributions that exceed "ascertainable
> standards"?
>
> Is the entire trust invalidated?
> Does the estate have to pay retroactive estate tax?
> Does someone have to pay income tax?
>
> In searching this out, the requirement is fairly clear but
> the penalty for non-compliance is very hard to find.

If a beneficiary has the ability to distribute a
discretionary amount of the the trust to himself or herself,
the beneficiary may be treated as having a general power of
appointment over the trust, which would result in the assets
of the trust being taxable in the beneficiary's estate. The
ascertainable standard permits a surviving spouse to serve
as trustee of a credit shelter trust without having the
credit shelter trust included in her estate. This works
because the trust mandates that the trustee must distribute
the amount needed for health education and welfare--this
amount is supposedly "ascertainable", i.e., it is
theoretically an impartial number that can be calculated
independently, and is therefore not discretionary.

If the parties violate the ascertainable standard, it is
possible that the IRS could claim that the ascertainable
standard language in your particular trust was a sham and
that the entire value of the credit shelter trust could be
included in the surviving spouse's estate.

--Chris

<< ------------------------------------------------------- >>
<< 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 jay1000 on September 14, 2007, 12:35 am
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>> I understand that it would be best to have a trustee for a
>> bypass trust or GST trust who is not "related or
>> subordinate" in order to make any distributions in excess of
>> "ascertainable standards". My question is what is the
>> penalty if there is no trustee who is not "related or
>> subordinate" and the trustees who are "related or
>> subordinate" make distributions that exceed "ascertainable
>> standards"?
>>
>> Is the entire trust invalidated?
>> Does the estate have to pay retroactive estate tax?
>> Does someone have to pay income tax?
>>
>> In searching this out, the requirement is fairly clear but
>> the penalty for non-compliance is very hard to find.

Thanks for the answers. I finally heard back from my
attorney and she confirms that there could theoretically be
penalties for non-compliance but they would be rare.

<< ------------------------------------------------------- >>
<< 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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