Sub Trust

[Terry53029]

Long time client, father passed in 2019, and had a trust that created a irrevocable Sub Trust. Only asset is a brokage account. All 1099's issued under clients SS. He had gotten a EIN for the sub trust. did not tell me about the trust. Now he tells me his attorney told him about filing for the sub trust, and wants me to help him. Question do I file returns for the sub trust for 2019.20,21,22. I then would have to file amended returns for client adding K1. He has claimed all 1099's on his 1040, so he was not trying to hide income.

Any suggestion's would be welcomed.

Thanks

[BobKamman]

What was the name and SSN on the 1099 that your client was bringing you for 2019 through 2021?  Or was it the father who was the long-time client, and the son just walked in?  Were all of the father's assets in the trust, or was there an estate to probate?  Did it file 1041's ? 

[Terry53029]

My client is son, and all 1099's had his ss number. Seems as brokage dropped the ball, as the fathers assets were put in sons account at his death, and should have been changed to the Sub Trust. or that is what son has told me. When father passed a 1041 was done. (not by me) At this point I wonder if I should just do a 1041 for 2023, and see if IRS ever ask about other years, or do all years. Thanks for your input

[TaxGuyBill]

If the assets went into the son's account rather than the Trust's accounts, all is good from a tax perspective.  The son properly reported the income on his assets and the Trust doesn't have any income or assets to report.

From a legal/inheritance/trust point of view, there could be problems resulting from the assets in the wrong account.  But I don't see how that would affect current or prior tax returns.

[TaxGuyBill]

Now that I think about it, because the Trust legally SHOULD have the assets, this probably would be "nominee" income.  If that is the case, yes, all of the Trust returns should be filed if there is enough income for each year.  And I suppose you would need to amend the 1040s to remove them directly from 8949 to entering the K-1s.  Sigh.

[Terry53029]

Son said he told the brokage to put all the assets (his and the amount he inherited) in the sub trust name.   I would think as you said Bill, if funds were just put into his account there will be no problem, as the sub trust would have no income or filling requirement. If the brockage did put it into trust name, but did not change EIN from son to trust then what? will have to find out for sure. thanks for pointing that out @TaxGuyBill 

[BobKamman]

Are you saying that the son is nominee for the Trust, so the income reported to his SSN should have been backed out on his 1040?  Who is the trustee, anyway?  Are there other beneficiaries?  Did the father have any good reason not to let the son just inherit the assets with no strings attached?  Or was he just a Stubborn Old Buzzard?  And did the broker make a mistake, or did the son misinform them?

One problem I see is where the trust's capital gains are taxed.  If the trust gets around to filing a 1041, are the capital gains assigned to the trust (as state law often requires), or to the beneficiary?  You could have a situation where the trust now owes tax, but the son gets no refund because he is in a zero tax bracket for LTCG and qualified dividends.  Or, the trust could pay less tax on the same income - although this is unlikely. 

I suspect that if the whole story were known, you wouldn't want it to be known here.  

[Terry53029]

Will talk with son today, but right now I believe the assets should have been transferred to trust. There were only dividends ($20k to $30k per year, but no capital gains) Looks like I'll be doing the returns. Thanks for all the input. Appreciate your help, Thanks 

[BobKamman]

@TaxGuyBill The question is whether IRS matches K-1s from late-filed 1041s to 1040s for the same years.   I'm not even sure they match more than 10% or so, of current-year K-1s.  I think I would wait for the IRS audit before trying to explain it, if there is no tax difference.  

[sjrcpa]

Sounds to me like there is no trust any more. Son distributed the assets to himself.

If he, as Trustee, was allowed to do this then end of story.

If by doing this he screwed other beneficiaries, then he needs to get legal counsel on how to make it right.

[BobKamman]

It's fun to guess about what might have happened.  It might help other practitioners diagnose problems.  Is it time here to cherchez la femme?  Dad set up a trust for son so that it would remain separate property and not reached in a divorce?  Son was happily married in 2019?  Not so much now?  What kind of lawyer is telling him to go back and file as if the trust has been in existence all these years?  A divorce lawyer?  

[sjrcpa]

Maybe he didn't tell the lawyer that all the trust assets were already in his name.

Who Knows? There are a lot of missing parts in this story.

[Terry53029]

Hi Bob, he's single with two sisters. Dad's will stated that all beneficiary's have equal share of assets set up in sub trust. My client did, but did not inform me. I have asked client to get me a copy of his trust so I don't have to guess what kind it is. Hopefully it was set up like his dads, then there will be no issue. Again thanks for your input. 

[sjrcpa]

I hope you are saying: a subtrust was set up for each of the 3 children, with 1/3 assets to each. Your client blew his trust.

[BobKamman]

I'm not sure that "sub trust" is the correct term if what you have are just three separate testamentary trusts.  A "sub trust" would be established by the original (usually, revocable inter vivos) trust.  But it could be another example of fruit salad estate planning -- mixed apples and oranges.