this may be a bit lentghy, please bare with me. This is far from being the average inheritance question.:confused:
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:confused: and angry :mad: 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.:confused: :confused:
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.:)

First, let me tell you that I am not an attorney or a CPA and I read your post fairly closely but not in great detail since I can see that this matter is beyond my expertise but I think I have a pretty good idea when someone needs professional assisitance from someone trained in the matters you mentioned.

I noted that that you stated as follows "Also an attorney and a cpa were hired by my father in law before is death to help the daughter perform her duties correctly."

I see no mention that you have employed or sought the advise of any CPA or tax attorney.

I recommend you seek your own legal and tax counsel and rather than a CPA, you may want to consult an attorney whose specialty is taxes. He can perfom many of the task that a CPA can perform plus provide legal representation.

I think you are asking very good questins and necessarily so, but even should an attorney or CPA respond here, I think you would feel much better if that attorney / CPA were actually retained and paid for by you.

It will cost you, but it will not cost you to ask prefessionals what you can expect your cost to be.

I have not retained an attorney yet, but when we first found out about the inheritance, we did talk to several people, h& r block, a couple local tax attorneys, and even the IRS, all said that unless we were directly named as beneficiaries of any iras, or cd's, we would not be taxed on the inheritance, because, if the ira's and cd's did not have a named beneficiary, then the estate would be responsible for any tax due.
Even the trustee, and the trusts attorney told us no taxes would be due from us, due to the fact of it being an inheritance.
I would like to thank you for responding to my question, and invite anyone else who would dare to tackle it, to respond, trust me , at this point all opinions, as long as they are done with respect , will be greatly appreciated.
You are a very nice person to even answer at all. Thank you, again.

I agree, I would have an estate lawyer or a tax attroney to read the will and see where everything is and if sister in law is doing what she's supposed to do as opposed to what she wants. Also the attorneys you hire should be independent of those already hired. They can get documents you can't get.

I will show this post to the CPA (who specializes in IRS audits) that I work with Wednesday when we all come back from vacation. I have some thoughts on it now, but will refrain to comment until I confer with her.

chippers, and mobea,
Thank you both for responding, I cannot tell you how much I appreciate any response.
This has been a trying time for our family, not only did we lose my father in law, eight days later we lost his girlfriend of 15 years, with ill health herself, and bound to a nursing home, after finding out he was gone, she passed away the very next day eight days after his death. We are all still greiving, and the last thing we need is this tax burden, though I think in the end, we will be responsible for it.
I know the IRS will get the money, whether it should have been paid by the estate and was reported on th estate taxes as part of the gross estate, or if it comes from us.
I have learned that there are two things certain in life, and those two things are death, and taxes.
We think what happened, was that one of the beneficiaries, a sister , hired a contractor to build a lavish, new home for her, and when he wanted money up front for the construction, she hounded the trustee for a distribution, breathing down her neck.
The trustee might not have paid tax on the inherited ira's before she distributed some of the estate, but it seems that because the ira's did not have a named beneficiary, the ira's were automatically part of the estate not inherited iras to any of the beneficiaries, and it seems the ira's should have been taxed to the estate when the estate filed it's estate return.
And since the final account and report claims the trustee filed all the necessary tax returns, again, the federal 706, California et-1, the final income taxes for state and federal for my father in law, and the fiduciary returns for trust income, the ira's should have been taxed somewhere along the lines, too, before distribution.
But if she didn't pay tax on those ira's, then we have to, I'm afarid.
I think that is why the IRS is saying the "trust" which is really the estate ,was considered a "pass through" entity. Because she didn't pay the taxbefore distributing.
chippers, like I said, I have not hired an attorney, yet. But I did talk to several tax professionals before any distributions were made to my husband, and all said that we should not have a tax burden as this was supposed to be considered an inheritance, and the trustee would be responsible for paying taxes before any distributions could be legally made because no-one was named as beneficiaries to any of the ira's ,cd's, or mutal funds , that those funds would revert to the estate, and be included in the groass estate, which they were according to the final account and report from the attorney.
But hiring a pro might not be a bad idea, maybe they can at least help reduce the penalties and interest, since we did not receive a k-1 form until months after our April
15th filing deadline.we had no idea the distribution would be taxable, and at what level, until then, much too late to file correctly.
Mobea, I do really appreciate anything you think you can tell me, and if the added info about the other sister demanding a distribution helps, then, good.
I cannot tell you how much I appreciate you offering to talk to your friend. Anything to enlighten me as to why and how this can happen might set my mind at ease.
I would hate to think that there's something wrong with what the trustee and the attorney and the cpa did in hadling this estate... I thought they were supposed to be there to protect all the estates beneficiaries, and not cater to one heirs demands.
I am angry that she could not wait to build her house, and wait for the trustee to do things right. If that is what happened.
Anyway, again, I thank you both for your response.
And mobea, I will be waiting, with bated breath for another response from you. You have all been so nice... I appreciate you not treating me like a fool... we trusted the tustee... she is family and we do not want any rift in the family over this thing.

p.s.
Never take life seriously, no-one gets out alive anyway!!

I'm very sorry for your losses. Your father-in-law set up this trust to to avoid problems like this, but alas, even with the best of intentions, an executor of an estate may have a hard time grasping the enormity of handling the financial matters of a trust because it is not something that one does on an everyday basis in life and they too are grieving. I will get back to you as soon as I can.

Thank you, you are very kind, and if I can say, I really love my sister in law 's very much, and I am not really angry at either of them.
I just am so bewildered about this, and wish I would just wake up... pinch me please... my husband does not want to ask any questions, afraid he might hurt the trustee's feelings, or make her angry with him for questioning her actions, and he loves his sisters too.
He was the black sheep, and after many years of trying to prove himself, he just wants peace in the family, now.
Anyway, hope you have a good day.

Vivski:

I hope Mobea can provide you with the answers you seek, but, In my opinion, you would be better served if you hired a competent tax attorney to reviw all the documents and represent you before the IRS. The money involved more than justifies the hiring of a tax professional and, since both a will and a trust is involved, that tax pro should also be an attorney.

Atlanta tax expert,
Thank you for your kind response. I know we should have done that in the first place.
But, my husband trusts his sister's word, and when she told him he would owe no tax, he believed her. Told me we didn't need to do that. Not to worry.
I, on the other hand, have had a knot in my stomach since the day my father in law passed away... I t was never a matter of trust with his sister, I just knew this could not be that easy.
But, one way or the other , I have faith that things will work out , maybe not the way I would like them to, but we are a couple survivors and we have been through worse, trust me.
Again, thank you for the advice... but what would you suggest I have when I talk to one? What documents do we need to have? The will? The trust document? The final account and report? Or all three? And what else might you suggest we obtain? Any suggestions would be appreciated.
b.t.w... I hope your day goes well. Never take life seriously, because no-one gets out alive anyway!

When you go to the attorney, bring EVERYTHING!

You are going to pay this man/woman several thousand dollars, so make sure he has access to every document available to you.

Thanks again. Who should I ask for the documents from, the sister, or the attorney?and in any way, are they obliged to hand them or copies of the docs to my husband if he asks?

As an heir to the estate, your husband has the right to request ANY documents associated with the estate.