Spousal Trusts and 1041 Forms

[Ringers]

Here is the situation:

The husband and wife separated their assets (stocks) and each formed a trust naming each other as sole beneficiary in order to maximize the Federal Estate Tax exclusion when either spouse died.

While they were both alive, the trusts were grantor type trusts and ignored for tax reporting purposes.

The husband died  Jan 10, 2015  and a 706 Form was filed using his individual entire Form 706 exclusion for his Trust, which then became irrevocable.

 

My question is, does a 1041 form get filed every year for this Trust in addition to the wife's 1040 form to transfer all of the dividends, capital gains, etc to her personal return or is there anything in the regs. (have not found anything so far) that would allow the wife to just report the income from the Trust accounts on her personal return as sole beneficiary (as was done by the family when both trusts were grantor trusts and revocable before husband's death) without having to file a 1041 each year?  The basis of all assets in the Trust have already been stepped up to DOD value.

 

 

[DANRVAN]

Sounds like a bypass trust was setup so husband's assets would not go into wife's estate.  Did you prepare the 706?  Have you seen the trust documents?

[Ringers]

I did not prepare the 706 but I have a copy of it.  Husband's estate was $5.1M.  The Trust document was a single trust for each spouse each showing the other as sole primary beneficiary, so the beneficent interest in the husband's now irrevocable trust is the wife.  While it will not be difficult to prepare a 1040 for the Trust each year and transfer the income to the spouse via the K-1, I am just wondering if there is any provision in the code for bypassing the 1041 paperwork.

 

[Roberts]

Yes, a 1041 needs to be produced every year that assets are in the trust from here on out. Even after the spouse dies, the trust could go on for years. I do 1041's for about 10 different trusts where the child is the recipient but they only get the income every year - the interesting thing is that some of those children are in their 60's now.

You have to do a 1041 because they are no longer her assets - they are the assets of the trust.

[Ringers]

Thank you Roberts.  That was my thought also, but I appreciate the verification.  This is what makes this board GREAT!