Trusts & Estates Law/Irrevocable Grantor trust Taxes
My husband is the grantor of an irrevocable trust formed this year for the benefit of his mother. The assets in the trust were originally hers, then placed under his name for a week, then into the Family Trust. He pays out the income earned to her. Upon her death, anything remaining would go to his sister and himself. My question is am I able to file a 1041 and schedule K-1 to reflect the income to his mother so she pays the taxes on the income? We are at a higher tax rate and thus would pay much more income tax if it is added to our 1040, and we aren't receiving the income. Thanks so much.
If it is truly irrevocable (the grantor has no control over the management or relationship to the trustee) then you won't get any options. An irrevocable trust means that you can't make any changes. The trust itself when it was set up would have either accepted the default tax application or stated an alternate.
There are basically two ways this could go. The trust could pay its own taxes, at 39.6% of everything over $9600 (Federally#. Or the Grantor, your husband is obligated to pay all the taxes. The beneficiary #your mother in law# cannot be obligated to pay the taxes.
I'm overstepping propriety right now in that you didn't ask for this review of your situation, so if you don't want any input on your plan/goals then stop reading here.
It sounds like you don't have a paid, disinterested, 3rd party, trustee managing the trust #"He pays out the income earned to her."#. If you and/or your husband are managing the trust it is NOT, by definition an Irrevocable Trust. It doesn't matter what the title says.
This plan also does not provide any tax benefit, in fact from what you have explained in your question it is obvious that taxes are a concern and this plan does not address that in any good way. It may be tax disadvantaged.
When the assets were transferred to your husband for a week that created the estate event. If that was more than $12,000 in value, there is a gift tax that is due.
I'm not sure who advised you of this plan. I would get my money back. You have not gotten what I imagine you actually were looking for.
If you were hoping to avoid medicaid taking her entire estate to pay for long term care #The classic medicaid trust/ spendthrift trust# you missed that too. These deals can be unwound from years before.
Of all this bad news, I can see a glimmer of hope, one benefit that you have over others that have gotten sucked into the Irrevocable Trust scheme. That is that you don't have anyone fighting you to keep it in the trust. Many people actually get a paid trustee to manage the trust and then realize how wrong their plan was. Nothing more difficult to overcome than someone that has his livelihood on the line and has the total value of the trust available to spend to keep his job. At that point it is far too late to make a better choice. The trustee will oppose you trying to to something more effective. In your case, at this point if the trust simply ceased to exist and the assets were removed from it. . . you could make a better plan.
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