Simple or complex

[Strongsilence-CPA]

1. This survivor's trust has these provisions.  The trustee and the surviving settlor are the same person.  Is it a simple or a complex trust?

The trustee shall pay to or apply for the benefit of the surviving settlor… the entire net income of the trust… not less often than annually.”

The trustee shall pay… so much of the principal… as the trustee deems proper for the surviving settlor’s comfort, welfare, and happiness.”

The trustee shall pay… so much of the principal… as the trustee deems proper for the surviving settlor’s comfort, welfare, and happiness.”

2.If this is a simple trust, then all capital gains remain in the trust.  True/False?

[BobKamman]

What keeps it from still being a grantor trust?

[sjrcpa]

Was it a joint living trust (which I hate) and one person died?

Trying to figure out how the "survivor" is the settlor.

[sjrcpa]

Were distributions made?

If yes, were they more than the income?

[BobKamman]

@sjrcpa Joint living trusts are the usual choice in community-property states, because most people would have to split everything if they wanted separate trusts.  When I see a separate trust, usually with everything owned by the husband and nothing by the wife, it always reminds me that it hasn't been that long since marriage used to mean man and wife were one, and the man was the one.  

People who are so concerned about limiting their liability that they put each rental house in a separate LLC, are usually so unconcerned about exposing their assets to their spouse's liability that they go along with joint trusts.  

Under the old estate-tax rules, there were all these "A" and "B" trusts, and "Survivor" and "Decedent" trusts, that split the assets at the death of the first spouse so that each could get the maximum exemption.  That's not an issue for most couples these days, but they haven't reviewed and revised their trust because they had no idea why they were doing it in the first place.  

And when the first spouse dies, many couples don't bother with splitting the trust in two.  Or if they do, they are smart enough to put it all in the Survivor Trust, which is usually revocable.  There are no Trust Police, checking to make sure the instructions in the document are followed.  

[Strongsilence-CPA]

hmmm. not being as knowledgeable as I want to be, I think the answer is that nothing keeps it from being a grantor trust.  Since one of the grantors is alive it remains a grantor trust.  

It was marked as a simple trust by the prior CPA.  But those two provisions show that the grantor/trustee has discretion in distributions. So, is it a simple or a complex trust?

My central task is to determine whether capital gains should flow to her or remain in the trust.

Under RC §§671–678, I think all income might be taxed to the settlor.

[sjrcpa]

@BobKamman Thanks for the detailed explanation. I do not practice in a community property state and don't have many clients who live in one.

From where I sit, the joint trusts are a pain in the butt when the first person dies. I'd rather they split everything 50/50 while alive to put into 2 trusts.

Anyway, back to the OP, we don't have all the facts yet, and OP may not have them either.

[George4Tacks]

From your description, this is a simple trust. A simple trust must distribute all income. If it is NOT a simple trust, then it is a complex trust. That is what I learned a few decades ago. 

Just my 5¢ worth.

[Strongsilence-CPA]

I'm not sure what facts to give you which are relevant.

This is a Credit Shelter Trust

Community Property State

The income is required to be distributed.

The capital gains are discretionary.

I think I have the 1041 done correctly as it doesn't flow the cap gains out to the beneficiary.  They are retained and there is no tax to the trust.  

These are really interesting but I don't want to do them during tax season.

Be well.

[BobKamman · Accepted solution]

As Google AI tells us, "A credit shelter trust, also known as a bypass trust or AB trust, is an estate planning tool used by married couples to maximize their estate tax exemptions by separating assets into two trusts upon the death of the first spouse, allowing for tax-efficient passing of wealth to beneficiaries."

Which was a good idea 20 years ago, but archaic for most couples now.  So, which trust are you asking about?  And who told you how the assets were divided?  

Some couples were smart enough to include language, or amend the trust to state, "just put enough in the decedent's trust to keep the survivor from having more than the allowed exemption."  Maybe that's what you have.  Always read the trust.  Often, it can all go into the survivor's trust, which still qualifies as a grantor trust.

Sometimes these arrangements were made, not to maximize the estate-tax exemption but to keep his half for his family and her half for her family.  

Where are you finding capital gains, anyway?  Just from the increase in value since date of death?  Because it all gets stepped-up basis.  

[Strongsilence-CPA]

Thanks.

these trusts were set up, funded long ago. Tax returns have been filed for years so I didn't re-do the work done by others.

Good advice for when I encounter a new trust!

Capital gains are from stock sales, and I assume step ups were done.

[BobKamman]

Have you read the trust document?  Returns may have been done incorrectly for years because someone didn't take a good look in the first place.  The language you quote often comes from the decedent's trust, not the survivor's.  When did the first grantor die?  Have two returns been filed annually since then, because it created two trusts?  

[Strongsilence-CPA]

Bob

Would you do that work on March 24 or wait until after April 15?  For me, that is 4-5 hours of time that I don't have.

In any case, the larger question that I hear is:  do I have the expertise to do the work, and do I have the knowledge to evaluate the work of other CPAs?  These are good questions for me to ask myself.

[BobKamman]

It shouldn't take more than half an hour to figure out if the trust directions were followed when the first spouse died.  If the trust says split it in half, resulting in two halves, look at the first returns filed after the year of death and figure out who got which half.  Then it might take 4-5 hours explaining to the survivor that it was all a big mistake from the day they walked into the office of the trust salesman.  

[Strongsilence-CPA]

thank you Bob.