Bypass Trust distributions

B

Barry_H

New Member
Jurisdiction
California
Greetings. Within a bypass trust established when one spouse was deceased if a distribution is made to the final trust beneficiaries (2 kids in this case) while the spouse is still alive is this considered a reportable gift ?

I know that any distribution from the spouses trust assets over $15k would be a reportable gift. It's only on the bypass trust I'm trying to get confirmed. I know once the surviving spouse passed the Bypass trust assets are inherited witb no estate taxes (and not a gift) but was t sure if there is different treatment if spouse is still alive.
Thank you in advance
 
Sorry, you need to retain the services of a licensed attorney.

If you're smart, you'll refrain from asking questions about IMPORTANT legal/financial matters from strangers.

If you act on bad advice solicited from strangers, you alone will pay the price exacted by taxing authorities and governmental agencies.
 
army judge said:
Sorry, you need to retain the services of a licensed attorney.

If you're smart, you'll refrain from asking questions about IMPORTANT legal/financial matters from strangers.

If you act on bad advice solicited from strangers, you alone will pay the price exacted by taxing authorities and governmental agencies.
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Thought this was a cut and dry question. We did have a lawyer involved but will probably be leveraging a new one going forward if required. Posing a legal question on a legal forum does not seem to be a stretch. I will solicit additional legal advice as required. I do appreciate the sound advice to enlist legal assistance as required.
 
Barry_H said:
Posing a legal question on a legal forum does not seem to be a stretch.
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Usually it's not a stretch when we are given sufficient information on which to base a comment. We don't know the terms of the trust nor the powers or duties of the surviving spouse.

However, property in the bypass trust doesn't belong to the surviving spouse, but he or she has the right to use it, and receive income from it, for life.

Assuming that the income from the bypass trust is sufficient enough to allow gifts of more than $15,000 per person then the surviving spouse would have to file a gift tax return but there would be no tax until the lifetime gift tax exclusion is exceeded.

Unfortunately, you also refer to "distribution" which adds confusion to the issue. A gift and a "distribution" are two different things, So, what are we talking about here? A gift from money the bypass trust earned for the spouse or a "distribution" of what from where?
 
Thank you for the response. I do realize that a gift is different from a distribution. While the surviving spouse has some right to use bypass funds the final beneficiaries will be the 2 kids. If the surviving spouse gives her kids more than $15 k (out of her Trust- A it's a given that IRS form 709 has to be filed to report that gift so no question there

My question is specific to the Bypass Trust assets (spouse is trustee) and if a distribution is made OUT of the Bypass trust to the kids (say $50 k FROM B Trust checking account) if there would be a gift reporting requirement tied to this if spouse is still alive when this is done. I know that when the last surviving spouse dies the B Trust is inherited estate tax free so no question there (and no"gift" reporting on the bypass trust inheritance)

Net question is with a Bypass Trust (B) that is properly segregated from spousal assets (in A Trust)
if the final intended beneficiaries receive an allowed early distribution.from the bypass trust assets is there any "gift reporting" or is it just effectively receipt of inheritance early (prior to spouse dying)

Thank you for taking time to read and try to clarify for me.
 
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Barry_H said:
My question is specific to the Bypass Trust assets (spouse is trustee) and if a distribution is made OUT of the Bypass trust to the kids (say $50 k FROM B Trust checking account) if there would be a gift reporting requirement tied to this if spouse is still alive when this is done. I know that when the last surviving spouse dies the B Trust is inherited estate tax free so no question there (and no"gift" reporting on the bypass trust inheritance)
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You may be postulating something that the surviving spouse is not permitted to do under trust law (which is beyond my knowledge).

Read this:

Wills and Probate

You'll need to consult with professionals who know more about this than I.
 
If you believe there will ultimately be no tax estate tax due, then why not just report it? (I'm not suggesting that you should report it, rather, I am merely asking a question based on logic.)
 
Thank you for the response and link - I appreciate it. I'm Just putting a quick recap below in event additional guidance might be available from others

The surviving spouse is the trustee of B Trust (and has rights to distributions with certain limitations) but does not technically own these assets. If she took money out of the B Trust and put it into her Trust asset and writes a check to kids it would clearly require gift reporting using IRS form 709 and would be cut & dry.

The scenario here is if the surviving spouse (as trustee of the Bypass trust) distributes to the final beneficiaries (2 kids) $50 k of principal (corpus) from The bypass trust directly, if this is simply considered an early inheritance (no gift reporting) or would be construed as now being part of the wife's trust and require reporting as a gift. On the surviving spouses death, all of the assets do pass estate tax free to the kids and there would not be any gift reporting involved. The question is if $50 k is distributed to the kids while the spouse is still alive (bypass trust terms allow) if this has any gift reporting requirements or simply views as early inheritance distribution.
 
Zigner said:
If you believe there will ultimately be no tax estate tax due, then why not just report it? (I'm not suggesting that you should report it, rather, I am merely asking a question based on logic.)
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Greetings. The use of the bypass trust was to minimize estate tax and we have already done gift reporting on surviving spouse assets and are close to the cap on the estate tax exemption allowed ($11.7 million) - no additional portability election amount available. The Bypass trust assets are by definition exempt from estate tax (as not part of spouse estate). If this is problematic we will just wait to move the assets until the surviving spouse passes.
 
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Barry_H said:
The scenario here is if the surviving spouse (as trustee of the Bypass trust) distributes to the final beneficiaries (2 kids) $50 k of principal (corpus) from The bypass trust directly, if this is simply considered an early inheritance (no gift reporting) or would be construed as now being part of the wife's trust and require reporting as a gift. On the surviving spouses death, all of the assets do pass estate tax free to the kids and there would not be any gift reporting involved. The question is if $50 k is distributed to the kids while the spouse is still alive (bypass trust terms allow) if this has any gift reporting requirements or simply views as early inheritance distribution.
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First of all, does the trust document expressly allow her to withdraw from principal. The article I posted earlier implies that the trust would have to allow such a withdrawal. If it doesn't she would not be in compliance with trust laws. I don't know what the consequences would be but if I had to guess, I would guess that the withdrawal from principal would first be taxable income to her with possibly a penalty for doing so.

Going past that for a moment, once she has the money, turning it over to anybody else would, indeed, be a reportable gift if over $15,000.

You noted that the money would be paid out of the trust checking account. Doesn't matter. It would still be a withdrawal by her before it goes to the ultimate recipient.

I may be comparing apples to elephants here but if I had an IRA, and I was younger than 59 and 1/2, and my IRA had check writing privileges, and I wrote a check from the IRA account directly to my beneficiary, it would be a taxable distribution to me (despite my not first taking possession of the money) with the 10% penalty, and then a gift to my beneficiary, which would then be reportable if over $15,000.

I've gone as far as I can go here. I suggest you talk to a tax pro, given the potential tax consequences for the surviving spouse.
 
Thank you very much for the response. The trust does allow the spouse to withdraw up to 5 % of trust annually so no issue on that front. In terms of staying in compliance with bypass trust stipulations.

The key issue here is if the bypass trust transfer to the final bypass trust beneficiaries (within limitations of trust) before the surging spouses death would effectively result in a reportable gift or if it would simply be an allowable distribution of some of the assets to the intended final beneficiaries (and not subject to gift reporting). I was advised by our CPA (and our original lawyer who I'm not too comfortable with) it would not be considered a gift but just trying to get some confirmation. If anyone knows a good Bay Area estate lawyer they would be willing to refer also would be appreciative. Not trying to be cheap here but rather to understand ramifications if money moved prior to spouse death. Fortunately know that if we do no withdrawals if will all be estate tax free on the second spouse death (and that's still option we can stick with) but if earlier transfer possible would be desirable IF it doesn't (1) jeopardize the bypass trust exemption (pretty sure it does on this count (2) it would not constitute a gift from the spouse (as we're already at upper limits of reported estate exemption of 11.58 million). Moved this in 2020 due to California Prop 19 property tax law change to preserve lower tax rate) plus to take advantage of higher estate tax exemption limits currently in place (irs I understand has already Clarke's will not claw back if limits latter reduced (already sunset in 2025 if not extended. This was a calculated action.

Thank you again for the feedback. I'll follow up with another CPA too as this may ultimately be more of a accounting question assuming all trust stipulations honored in doing any withdrawals. Will di so ONLY if not considered a gift.
 
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I'm not a CPA and I'm not a lawyer and it's been 49 years since I stayed at a Holiday Inn.

I do understand what you are asking and I'll repeat my opinion for the two cents that it's worth.

The $50,000 she takes out of the trust is likely taxable income to her. Then when she gives away her money it's a gift to whoever she gives it to and is a reportable gift if over $15,000 per person.

It is definitely not an early payment of the beneficiaries' inheritance.

This isn't an accounting question. It's a tax question. A CPA who does tax returns once a year isn't likely to be well versed in the tax aspects of a trust. I suggest a tax attorney who practices tax law all year around.

A tax attorney (tax counsel) usually participates on this site and I was hoping that he would weigh in on this by now. But it looks like he hasn't been around since last month so you'll need to find one on your own.
 
The Holiday Inn comment made me chuckle. I do have a CPA but have worked in software realm for last 24 years not in accounting. The $50 k in the example for sure would never be taxable to a spouse and she can in fact take money principal out tax free. so no open question on my side there). It is as you a tax question ( but that's also a section of the CPA exam) but you are right this is not a run of the mill H&R Block tax return scenario.

Open net question is still if a distribution to the residual bypass beneficiaries while the spouse is still living would be construed as a gift (and require IRS 709 reporting) or if it's effectively just an early distribution to the residual beneficiaries and does not require gift tax reporting. I do know that if we do nothing and wait until the surviving spouse dies none of the assets in the bypass would be subject to estate tax and this might be safest approach. Appreciate the responses so far as I try to educate myself on options
 
Asking the same question repeatedly isn't going to get you a different answer.

Even if her withdrawal of $50,000 is not taxable, it becomes her money as soon as she withdraws it. Whatever she gives to the beneficiaries is a gift, reportable if over $15,000 per person.

You do understand that writing the check from the trust's checking account doesn't change that, right? It's the same as if she wrote herself the check, put the money in her personal checking account and then wrote checks to the recipients.
 
I was not clear on that last point that writing a check from the bypass trust to the final residual beneficiaries would constitute a reportable gift by the spouse which was the question I was trying to get definitively clarified. I think I'll just leave the bypass undisturbed so as to not muddy the waters. Thank you again for the responses.
 

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