this may be a bit lentghy, please bare with me. This is far from being the average inheritance question.
in 2003 my father in law passed away, before his death, he set up a trust for probate purposes, there was a will leaving his five children the beneficiaries of the trust/estate.
all assets were to be divided equally, after taxes, debts, and administration costs.
the oldest daughter was named the trustee/executor. Also an attorney and a cpa were hired by my father in law before is death to help the daughter perform her duties correctly.
my father in laws gross estate was valued at 1,013,220.00 dollars, and his taxable estate was valued at 989,048.00 dollars.
my sister in law filed estate taxes, federal 706 , and California et-1 returns the estate returns indicated that no federal or state death taxes were due, or payable, according to the final account and report of the trust. And an estate tax closing document was issued on April 13 , 2005 by the IRS.
she also filed the trusts state and federal fiduciary returns as well as my father in laws final personal income taxes, state and federal, no tax owing on any of them.
there was a refund of 12,000.00 dollars due to the estate from the federal fiduciary return. She collected all assets of the estate.
also, according to the final account, the trustee paid all taxes, all debts, and all costs for the administration of the estate, in addition to paying herself for being the trustee, and paid the cpa, and the attorney for the duties they performed.
I do not have the trust document, or the will, but at first we were all told that there would be no tax owed from beneficiaries for their distributions. By the trustee and the attorney.
my understanding is that the estate consisted of the sale of his home, which went straight to the estate , several ira's, that had no beneficiaries named, so those, too, went straight to the estate, some mutual funds, no beneficiaries named, a couple c.d's, also, no beneficiaries named, and a few bank accounts, a couple life insurance policies, no beneficiaries named and personal property. If this is to be taxed, isn't it the trusts /estate 's responsibility to pay tax on these amounts before distributing any assets to the beneficiaries? Because everything reverted to the estate after his passing?
everything went straight into the trust and the trust filed the necesarry returns. so when we filed our taxes, we were under the understanding that none of the beneficiaries would owe tax, and we all filed our taxes for 2004, the year distributions happened.
after we filed our taxes April 15th 2005, we received a k-1 form in July 2005, stating we must each claim 119,000 as trust income.
in the final report, the attorney states that the trust only earned income receipts of 70,000.00dollars, but I thought that the fiduciary return was designed for the trust to report the trust's income... am I correct in my thinking?
also, since we received the k-1, we were considering what to do, but before we amended our return for that tax year, the IRS sent us a letter stating they were going to change our return, and had assessed penalties and interest on top of a 30,000.00 dollar increase to that years taxes.
they claimed at first it was due to trust income, I wrote back and explained it was an inheritance... they wrote back and said it was not an inheritance. I wrote back, sent copies of the final report, and now, they are claiming the trust was a pass through entity so the beneficiaries owe the tax, and are required to pay it now..
I have been online, asking Google questions about pass through entities, and all I come up with is s-corperations, c- corporations, partnerships, and limited liabilitiy companies, (LLC). Trusts and estates, are not included.
my father in law never owned a business in his life, never was a partner in a business, and was never involved in a s-corp, or c-corp... what are they saying?
how, if my sister in law did file all these taxes, are we responsible for an additional tax on this inheritance? And when, exactly is an inheritance , or trust considered a pass through entity? When, is an inheritance taxed to the beneficiaries?
I am so confused and angry I could just crawl under a rock... I really need help with this.
I was told by someone that I need copies of the trust document, and the will so I can fight this effectively, and am going to send a letter requesting these things from my sister in law, but, once I get them, what do I look for, in determining what the IRS is claiming? What do I look for to prove this was an inheritance, and in fact the estate was responsible for all tax? Please help me... I need answers.
I know that advice here is not considered legal advice, and will hold no-one responsible for their opininions or advice, please help... any and all responses will be greatly appreciated, good, bad, or ugly. Thank you in advance.