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inheirtance or taxable income????????

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vivski

Junior Member
What is the name of your state? nm
my father in law passed away in california in aug 2003, my sister in law is the trustee of the estate.
before he passed, he set up a revocable trust which became irrevocable upon his passing.
he left a gross estate of 1,014,000$ and a taxable estate of 990,000$.
according to the first and final report dated aug 2003 through aug 2005,the status of the trust was good.
it says that the trustee had collected all assets belonging to the trust, filed and paid all taxes and had paid all debts, and trust expenses, allowing the trust to be terminated and the remaining assets distributed to the heirs.
there was also trust income receipts of 70,000$ included in the gross estate.
the final report claims that the trustee filed estate taxes, form 706, and california form et-1, she received an irs tax closing statement in aug of 2005.
also, she filed fiduciary returns, as well as the fathers final personal tax return.
there is to be one more fiduciary return to be filed, or might have already been filed ,to wind up the estate.there is a reserve of 15,000$ held aside in trust for any unexpected expenses.
in the final report, it says that the trustee is responsible for paying all federal, state, and foreign death taxes, debts, last illnesses, and funeral expenses then distribute the principle to five beneficiaries evenly, inluding herself, all five, children of the father.
the money in his gross estate came from bank accounts, savings,cd's,life insurance,the sale of his home, and a couple ira accounts, but all were included in the gross estate.
after three years the irs is questioning the money my husband received as an inheirtance, calling it trust income.
we are confused, there was a will, and a trust that went through probate, and we were told that since the trustee paid all the taxes, any distributions to the benenficiaries would be tax free.
the question is, since the trustee paid estate taxes, state tax, fiduciary tax, and the personal income tax (state and federal) for the father,why can then, the irs come after us for more tax on the inheirtance?
everything i have read, including irs publications say that there might be tax owed and that either the estate ,or the beneficiary must pay, but it is never taxed to both.
and since all his assets were reported on the estate returns as income,and taxed by the estate tax, doesnt that mean that the inheirted money is free from tax to us?
my husband didnt know what to do with his share, so he deposited it into his bank account, no investments, at all .the bank reported the intrest earned on the money deposited, and we also reported that interest earned to the irs.
my understanding is that any investments or intrest earned on an inheirtance is taxable to us, but the original inheirted money is not.
since the trustee administered the estate under scrutiny of an attorney, a cpa, and the california probate court, can the irs really come after us for more taxes? it doesnt seem fair, and reminds me of double taxation.
please tell me the answer, because i'm confused about this whole thing and a little angry that no-one told us this might happen.
thank you for any response.
p.s. i first posted this on the will, trusts and inheirtance forum, but they told me to post it on the tax forum....please help**************...:confused: :eek:What is the name of your state?
 


LdiJ

Senior Member
What is the name of your state? nm
my father in law passed away in california in aug 2003, my sister in law is the trustee of the estate.
before he passed, he set up a revocable trust which became irrevocable upon his passing.
he left a gross estate of 1,014,000$ and a taxable estate of 990,000$.
according to the first and final report dated aug 2003 through aug 2005,the status of the trust was good.
it says that the trustee had collected all assets belonging to the trust, filed and paid all taxes and had paid all debts, and trust expenses, allowing the trust to be terminated and the remaining assets distributed to the heirs.
there was also trust income receipts of 70,000$ included in the gross estate.
the final report claims that the trustee filed estate taxes, form 706, and california form et-1, she received an irs tax closing statement in aug of 2005.
also, she filed fiduciary returns, as well as the fathers final personal tax return.
there is to be one more fiduciary return to be filed, or might have already been filed ,to wind up the estate.there is a reserve of 15,000$ held aside in trust for any unexpected expenses.
in the final report, it says that the trustee is responsible for paying all federal, state, and foreign death taxes, debts, last illnesses, and funeral expenses then distribute the principle to five beneficiaries evenly, inluding herself, all five, children of the father.
the money in his gross estate came from bank accounts, savings,cd's,life insurance,the sale of his home, and a couple ira accounts, but all were included in the gross estate.
after three years the irs is questioning the money my husband received as an inheirtance, calling it trust income.
we are confused, there was a will, and a trust that went through probate, and we were told that since the trustee paid all the taxes, any distributions to the benenficiaries would be tax free.
the question is, since the trustee paid estate taxes, state tax, fiduciary tax, and the personal income tax (state and federal) for the father,why can then, the irs come after us for more tax on the inheirtance?
everything i have read, including irs publications say that there might be tax owed and that either the estate ,or the beneficiary must pay, but it is never taxed to both.
and since all his assets were reported on the estate returns as income,and taxed by the estate tax, doesnt that mean that the inheirted money is free from tax to us?
my husband didnt know what to do with his share, so he deposited it into his bank account, no investments, at all .the bank reported the intrest earned on the money deposited, and we also reported that interest earned to the irs.
my understanding is that any investments or intrest earned on an inheirtance is taxable to us, but the original inheirted money is not.
since the trustee administered the estate under scrutiny of an attorney, a cpa, and the california probate court, can the irs really come after us for more taxes? it doesnt seem fair, and reminds me of double taxation.
please tell me the answer, because i'm confused about this whole thing and a little angry that no-one told us this might happen.
thank you for any response.
p.s. i first posted this on the will, trusts and inheirtance forum, but they told me to post it on the tax forum....please help**************...:confused: :eek:What is the name of your state?
I strongly recommend that you take all of the paperwork and get a consult with a local tax attorney. There is simply too much money involved in this situation to take any risks. I would not want to attempt to advise you unless I was able to read all of the documentation.
 

vivski

Junior Member
ok, anybody else have any answers?

thank you for the reply...i have been told by others that the estate is responsible...but wouyld like to know from others what they think...any replies will be appreciated.:D
 

LdiJ

Senior Member
thank you for the reply...i have been told by others that the estate is responsible...but wouyld like to know from others what they think...any replies will be appreciated.:D
I understand, but the way that the trust was worded and set up can be critical to the answer. That I why I wouldn't answer your question without being about to review the documentation.

In addition, if the trust issued K1s to the beneficiaries when it distributed the assets, then that complicates things as well.
 

tranquility

Senior Member
I do a lot of trust and estate work and I agree with LdiJ. I didn't answer the question in the first place because I know there is simply not enough information to make a determination. We would go back and forth repeatedly and, at the end of the day, we still would not have communicated enough. Sorry, but for this question you need to pay and see someone who can look at the facts. It may very well be expensive. Sometimes things are hard and you need experienced and knowlegable people to find out the results.
 

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