Short version: is an “irrevocable trust” (may not actually be, but labeled that way) for which the grantor maintains total control (I know, weird, see below) considered part of the state for estate tax purposes?
You may expect that I hope the answer is no, but the amount of the estate - even with the trust - is insufficient to pay estate tax. However, there are other considerations for which it does matter.
Long version:
My father passed away in April. Long ago, my grandfather (who is still alive, if it matters) established an irrevocable trust for my grandmother as the beneficiary as part of their estate planning. From his standpoint, it was definitely an irrevocable trust over which he had no control.
When my grandmother passed away several years ago, the trust documentation stated that the funds were to be distributed into “separate trusts” for my father and his brother. For those new trusts, they were each trustee and beneficiary (and labeled as grantor too, if that’s correct), as well as permitted to take fund out for their descendants.
In all the paperwork, this trust of my father’s is labeled as “irrevocable” which seems to just be based on how my gratherfather’s trust was labeled. And indeed, he may not have been able to revoke any of the terms, but as far as the funds go, he had basically total control to use them as he saw fit.
So is this “separate trust” my father controlled part of his estate for estate tax purposes? (Side question: is it really ‘irrevocable’ at all?)
Have you taken copies of the trusts for your father and his brother to an estate attorney - preferably one practicing in the State(s) where your father and brother reside? Individual states have different estate laws and tax estates differently.
I can’t answer your specific question, and I completely agree that this warrants a discussion with an estate planning lawyer.
That said, you indicated that this was something your grandfather set up. Depending on how long ago he set it up, the trust rules were different than they are today. It’s possible that the trust could be old enough to be valid under rules that a new trust couldn’t use were it to start today.
As a result, on the surface, it doesn’t surprise me that it seems to have a different structure than a more modern trust would.
I know you don’t want to spend money on a lawyer – who does? But before you cross that bridge you should consider at least in our location, Trustees are personally liable for things like unpaid taxes and bills if they distribute an estate before paying legal obligations.
Okay, I get the message that this is “talk to a professional” complicated. I expected that but it being Memorial Day weekend, I’ll have to wait a few days so I thought I’d see if anyone here had a distinct answer/opinion.
I’m wondering though whether this is really an issue for an estate lawyer or a tax lawyer/professional because my real question is regarding the step up in cost basis. I am in contact with with both my dad’s CPA and an estate lawyer helping me with the probate process (she not the one who set up this trust), so I can ask both.
Let me explain my specific concern here. Maybe someone can suggest the appropriate type of pro?
I’m quite confident that, being a trust, this isn’t part of his probate estate. For example, a revocable trust can be part of your federal estate tax estate but not go through probate. Same with accounts with beneficiaries.
When looking things up I found that the IRS recently released revenue ruling 2023-2, which said (paraphrasing, perhaps mangling) that said since irrevocable trusts are not part of the estate under tax code, they aren’t really “inherited” and don’t qualify for the step up in cost basis.
It sets up the scenario including “A did not hold a power over T that would result in the inclusion of T’s assets in A’s gross estate under the provisions of chapter 11” (A is the individual who set up irrevocable trust T).
This made me realize that my father, unlike every irrevocable trust grantor I’ve read about, had total control over the money in his. So I’m wondering whether this means it IS in his estate for federal tax purposes and whether I therefore DO qualify for the step up in basis. In this way it was much more like a revocable trust.
PS someone asked how old the trust is and laws may have changed. It’s not that old, a bit over 10 years.
In general, no - although some irrevocable trusts include language that makes them a part of the decedent’s estate. If the trust does not include that language, and therefore, is not a part of the estate, then any assets you inherit through the estate do not receive a step-up in basis - they retain the original basis that the grantor had.
The ability to invest and spend the funds in the trust is more associated with being the trustee than it is with the trust being revocable or irrevocable.
It depends on the language of the trust. If it was originally an irrevocable trust when your father inherited it, unless your father recently had changes made to the trust language to include it in his estate, it’s probably not included in his estate, and the assets will not get a step up in basis.
I would urge you to consult with an attorney familiar with estate tax law.
Not an expert but these two statements seem to be in conflict.
If your father is the trustee, bene, and the grantor, and enjoys the ability to fully withdraw funds, then such would seem to better fit the definition of revocable and would otherwise generally be included in one’s estate. The one comment that gives me pause is you state, “take funds for descendants” would also would seem to conflict with him being the beneficiary. If he was only able to take funds out for his descendants, then this sounds like a Generation-Skipping Trust and it would indeed avoid your father’s probate and would indeed be irrevocable.
Not an expert but these two statements seem to be in conflict.
Yes, that’s where I’m getting lost too. I get that the answer here is to talk to a pro. I knew nearly nothing about trusts until the last month or so.
From my grandfather’s standpoint, it was a fairly standard irrevocable trust, with my grandmother as the beneficiary.
But when she passed, the money went to my dad “as a separate trust” (to quote the document), but it didn’t function as a trust in any way that I see it defined. It was basically his to do with as he wanted. Limits, if any, were pretty minor.
So I agree with your confusion and will seek qualified advice.