Tuesday, November 8, 2011

There is No Such Thing as a Simple Trust

Trusts -- many people think they are a must. Why? To avoid probate, to keep things simple. Ahhh, what people don't know can hurt them. There is no such thing as a simple trust. Oh sure, the language used to construct the structure of a trust can be simple.

Husband and wife create a living revocable trust, fund it, husband dies and it becomes irrevocable on when the first spouse dies, requiring distributions to survivor.
This is common language associated with the so called simple trust. However, things become much more complicated when the administration of a trust is reviewed. Here is a true story I heard while attending the 45th Annual CLEW Tax workshop.
Same scenario as listed above, however, the surviving spouse never took the annual distribution out of the trust....over 20 years. Upon the second spouse's death serious tax issues emerged. The unclaimed income created income tax issues (it was never reported), and leaving it in the trust was viewed as contributing to the principal of an irrevocable trust. Plus, probate was required to received the 20 years of distributions out of the trust that were never taken.
Folks, this is why there is no such thing as a simple trust. They serve a purpose, but should not be embraced lightly. Seek legal and tax help upon creation as well as each year after to make sure appropriate administration is followed. The IRS is not known to be forgiving.

No comments: