Arizona Elder Lawyer

Revocable Trusts and Income Taxes

When an individual executes a revocable trust, and properly funds it by transferring her assets to the trust, she will continue to file her normal individual income tax returns. The assets maintain the same tax identification number even though a person has set up a trust. This tax identification number is her personal social security number. There are no changes related to tax information or reporting during her life.

For instance, if Jane Doe properly transfers her bank account from Jane Doe to Jane Doe as Trustee of Jane Doe’s Family Trust, the bank will issue any 1099’s to Jane Doe as Trustee of Jane Doe’s Family Trust. The taxpayer identification number has not changed. So, the income is reported on Jane Doe’s federal form 1040 and whatever state income tax form she regularly utilizes.

Moreover, if Jane Doe were to cease acting as trustee of the Jane Doe Family Trust while she is alive, and the successor trustee was Jack Doe, Jane’s son, Jack should not then change the taxpayer identification number from Jane’s social security number to his. That would be wholly improper. The taxpayer identification number remains Jane Doe’s while Jane is living. That way, the bank continues to send the proper tax information to both Jane and the taxing authorities.

As always, if you have any specific questions, seek legal advice from an attorney in your jurisdiction as any individual’s specific issues are unique to each person.

Estate and Gift Tax Issues for 2007

The article titled “Various Estate and Gift Tax Issues for 2006” is currently pertinent and accurate for 2007.  The applicable exclusion amount for estates is still $2,000,000.  The annual gift exclusion amount is still $12,000.  Those have not changed.

            The interesting thing about this area of law is that many of us who practice in this area did not believe that we would get to 2007 without another major adjustment to the laws.  I believe that Congress has no choice but to tackle this issue sooner rather than later.  They absolutely need to.  If they cannot get to a compromise on this at the beginning of 2007, they will show their continued incompetence to those of us who practice in this area and we will get more vocal.  It will be interesting to see what the end result will be. 

I believe that there will be compromise on the applicable exclusion amount for estates of $5,000,000 with annual adjustments up.  I do not know where the annual gift exclusion amount will end up.  But, I do believe it is absurd at the current level.  It needs to be dramatically increased in order to keep up with the realities of our economy. 

            On a bit of a different note, please consider giving to charities upon your death.  These do not need to be large gifts.  But, do consider giving to those you write annual checks to during life.

Various Estate and Gift Tax Issues for 2006

Anyone who dies in 2006 with an estate valued at $2,000,000 or more will die with their estate being subject to the federal estate tax.  There is no such thing as a federal inheritance tax.  A person’s estate includes life insurance proceeds as long as the deceased had any control over the account at the time of their death.  It also includes retirement account values.  Many people forget to include these assets when determining their estate’s approximate value during their life. 

The amount of a tax-free gift a person may make in 2006 is $12,000.  So, if you wish to give your best friend a gift, you can give her $12,000 without any tax consequences.  If you and your husband want to give your best friend a gift, each one of you can give her $12,000 for a total gift of $24,000.  If you and your husband want to give your best friend and her husband a gift, then the two of you can give the two of them $48,000 in 2006 with no tax consequences. You should file a gift tax return and make the proper elections.  A gift is not taxable income to the recipient.

A smart gift that has no limits is for one to pay another’s medical or education bills directly to the institution.  This only works if the person making the gift pays the institution directly.  It does not have tax-free status if the funds are paid to the person who is being benefited, even if that person turns around and pays the institution right away.

Don’t forget gifts to charities, either in life or at your death.  During life, not only do you get to see the use of your gift, you generally are able to deduct the value of the gift on your personal income tax return.  At death, it is a way of letting that charity know that you really hope it continues their good work and you cared so much that you left that legacy.