Revocable Living Trust

[sl1900]

I have a new client that has used the free tax prep service from the AARP the past few years. She has her investments and IRA in revocable living trusts, with each trust having it's own EIN. The recipient's ID number on each 1099 is the trust EIN. 2018 was the first year she had the trusts. The AARP filed everything on her 1040, as though the trusts didn't matter or exist. And I might be overthinking this, but my research on this shows that, if the revocable living trust has been set up, has an EIN, then a 1041 is required with my client as the beneficiary. Am I correct about this?

[sjrcpa · Accepted solution]

A revocable living trust is ignored for tax purposes.

[Just-Lisa-Now-]

All my clients with revocable living trusts, they still have their SSN on the 1099s...is that common for a revocable living trust to have an EIN?

[sl1900]

Thank you. I greatly appreciate the help!

[qbteachmt]

This person assigned their IRA to the trust, or made the trust the beneficiary?

Because I don't think you can assign the IRA to the trust in this case. A revocable trust can't own the IRA, from what I understand.

[qbteachmt]

I found a nice, straight-forward, article for reference:

https://www.thebalance.com/assets-cant-go-revocable-trust-3505290

[BobKamman]

Without looking it up again -- I protect most of my clients from living trusts, so I don't deal with this question too often -- the trust can have an EIN but no 1041 filing requirement unless the trustee is not the grantor/beneficiary.  Back in the old days, it was more common to get an EIN even if not needed.  

You cannot put an IRA into a trust.  An IRA is already a trust.  You can name a trust as beneficiary of an IRA, but generally that is foolish and can cost thousands in taxes. If you look at the 1099-R for the IRA distribution, you will see her SSN.  

[qbteachmt]

For these distributions: "She has her investments and IRA in revocable living trusts, with each trust having it's own EIN. The recipient's ID number on each 1099 is the trust EIN."

When the IRA is renamed to the Trust as owner, that is complete distribution as a taxable event for her. This might be very ugly. My understanding is you name the Trust as Beneficiary, but do not Rename the IRA so that the Trust is the owner. Trust as Owner = distribution, not sheltered as a divorce renaming event would be.

I found this:

https://www.thebalance.com/ira-trust-a-special-type-of-revocable-trust-for-your-ira-3505399

It clearly describes this as "Trust is the beneficiary." Not the Owner.

[sjrcpa]

It depends. I see about 50/50 with SSN vs EIN.

[TaxGuyBill]

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@BobKamman wrote:

 -- I protect most of my clients from living trusts,

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Protect them?  Why are you against them?

[rbynaker]

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@TaxGuyBill wrote:

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@BobKamman wrote:

 -- I protect most of my clients from living trusts,

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Protect them?  Why are you against them?

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They have their uses in certain situations but are often "recommended" to people who don't need them by people who make money off of recommending trusts to people who don't need them. 🙂

https://www.kiplinger.com/article/saving/t021-c000-s002-why-you-do-not-need-a-living-trust.html#:~:t...

[BobKamman]

@TaxGuyBill  "Protect them?  Why are you against them?"

Because they don't live in New York and California -- where trusts may be a good idea because of archaic probate laws, and where much of the national media are located.  (They call their friends to get local advice for stories that they then spread nationally.)  

This is how the scam works:  Marketing companies call retirement-community landlines at random, convincing the elderly they need to avoid probate.  They don't tell them that trusts can be contested just as easily as wills, on the same grounds, and at least where I live, the cases are filed in probate court.  Once they sell the trust, they offer to help transfer all the assets into the trust.  Well, if you can't trust the people who sold you the trust, who can you trust?  At that point, the sales pitch comes out, "these are poor places to put your money, let us show you something much better."

Then there is the "you need a living trust to save on taxes" scam.  As mentioned above, people have lost huge amounts in taxes by naming trusts as beneficiaries of retirement accounts.  Estate taxes aren't so much of a problem these days, with higher exclusions, but anything you can do with a living trust you can do with a testamentary trust and it doesn't involve changing title.

Most people with trusts think that they can delegate trustee authority with a power of attorney.  In most cases, under state law they can't, but they get away with it anyway because the bank teller with a GED doesn't know any better.  Trusts are a necessary evil if you need a professional trustee, but most people should be concerned more with who manages their money when they are incapacitated, not when they die.  

Trusts are usually a good idea for people with real estate in more than one state.  But to do that right, you need legal advice in both places, and the "avoid probate" crowd overlaps a lot with the "avoid lawyers" crowd.  

[qbteachmt]

This topic is the first time I've read that someone put the IRA in their trust's name; that would have cost a pretty penny and whoever gave them that guidance should be sued for malpractice.

The main issue I've seen is the lack of retitling property or assets that have no provision for designating a beneficiary(ies) into the revocable trust. After death, the trust is found to be a shell.

[TaxGuyBill]

Ah, so it is primarily the predatory marketing of them when they are not useful.  That makes sense.

I was surprised that it seems easier than I thought to contest a Trust.  It seems a bit harder to contest than a Will, but still fairly contestable.

[qbteachmt]

I first learned about Living (revocable) trusts from my father, who held up Bing Crosby as his shining example. But then this happened:

"Over thirty-five years after Bing Crosby’s death, the California Court of Appeal put an end to the continuing battle over the Crooner’s right of publicity."

So, contestable, yes. A bit harder = yes.

[BobKamman]

@qbteachmt 

Bing Crosby's trustees were the plaintiff in that lawsuit -- it had nothing to do with contesting the beneficiaries.  A better example is Henry Ford II, whose living trust has been in and out of court for 30 years or more; or Averill Harriman, whose adult children sued their stepmother because of trust administration matters.  People who don't know how contested trusts end up in probate court, haven't been to probate court.  "Probate" is a dirty word after four centuries, but "contested" should be the one to avoid. 

Another problem these days, at least in states when a single trust is used for all marital assets and the spouses are co-trustees, is the splitting into two trusts when the first spouse dies.  The "A and B" or "survivor and decedent" trusts were meant to protect the estate-tax exemption back when it was a much lower amount.  People would die, the heirs wouldn't know what the trust required, tax practitioners never looked at the documents. There are still many such trusts in existence, and some new ones seem to be written that way.  Some people will sign 60 pages of anything, if you tell them everyone else is doing it.  And then they won't look at it again for several decades.  

[DCope]

Hi,

I have a Partnership generating rental income for two partners, an individual and her own Revocable Living Trust (so really just one person, the trust is in her own SSN, no EIN) and Lacerte won't allow me to create a trust with a SSN. I've read your tip stating a revocable living trust is disregarded for tax purposes but she wants a 50/50 split (between herself and the trust) and I obviously want to record this income so it will be taxed. Can you advise on how I should record the trust?

Thx,

 - D  

[IRonMaN]

A partnership requires having at least two partners.  You only have one.  You need to report the rental activity on a 1040, not a 1065.  Just because a client wants something doesn’t mean they can always get what they want.

[TaxGuyBill]

I think it is an option to treat the Trust as separate, but it would need an EIN (and a Form 1041 filed every year).

Why does the taxpayer want to do this???

[BobKamman]

"Just because a client wants something doesn’t mean they can always get what they want."

Former presidents excepted . . .