Estate authority over Trust

[WhistleBlowerFA]

What is the name of your state? North Carolina
I'm the Administrator of the Estate of an individual who died intestate. He did have a Revocable Trust, to which he named another individual as Trustee. The Trustee didn't notify any of the institutions; that were named beneficiaries of the Trust, that they had been left grants from the Trust. Although the Trust explicitly charged that Trust; in the Trust document, with the responsibility of paying the taxes on the Trust's income, the Trustee hasn't paid any of those income taxes. After receiving letters from the IRS; as Administrator of the Estate, requesting payment of these taxes, I contacted these beneficiaries about the grants that were left for them in the Trust. This was the first time that they had been made aware of these grants. Two of these institutions contacted the Trustee about legal actions to require him to comply with provisions of the Trust, and the Trustee subsequently sent them checks for their grants. The last beneficiary institution; which is the residual beneficiary of the balance of that Trust, hasn't gone beyond excepting the Trustee's assertion that there are no funds left in the Trust. Based on the bank documents that I have gathered in shared with the beneficiaries, there should still be several $100,000 left in the Trust.
I'm going to have to bring suit against the Trustee, to force him to comply with the provision requiring him to pay the taxes, however I am also wondering; what happens to the balance of the funds in the Trust if the residual beneficiary elects not to accept, or compel compliance of delivery of the residual funds. Do these residual funds become a part of the Estate, if the residual beneficiary does not accept those funds?

 

[Taxing Matters]

I'm going to have to bring suit against the Trustee, to force him to comply with the provision requiring him to pay the taxes, however I am also wondering; what happens to the balance of the funds in the Trust if the residual beneficiary elects not to accept, or compel compliance of delivery of the residual funds. Do these residual funds become a part of the Estate, if the residual beneficiary does not accept those funds?

The assets would not simply revert to the testate unless the the trust instrument says that they become assets of the estate if the residual beneficiary does not want the distribution. When decedent died, the trust became irrevocable and the trust owned the assets that were in the trust, not the estate. From that point on, the beneficiaries are determined by the terms of the trust, which may include a power to the trustee to designate an alternate beneficiary if the named beneficiary does not want to take distribution of the gift given to him. If there are charity beneficiaries, the trustee may be able to simply make additional gifts to those other charities, for example. The trustee would want to consult an attorney to determine what to do if the trust instrument is not clear as to who is the alternative beneficiary.

 

[Zigner]

What is the name of your state? North Carolina
I'm the Administrator of the Estate of an individual who died intestate. He did have a Revocable Trust, to which he named another individual as Trustee. The Trustee didn't notify any of the institutions; that were named beneficiaries of the Trust, that they had been left grants from the Trust. Although the Trust explicitly charged that Trust; in the Trust document, with the responsibility of paying the taxes on the Trust's income, the Trustee hasn't paid any of those income taxes. After receiving letters from the IRS; as Administrator of the Estate, requesting payment of these taxes, I contacted these beneficiaries about the grants that were left for them in the Trust. This was the first time that they had been made aware of these grants. Two of these institutions contacted the Trustee about legal actions to require him to comply with provisions of the Trust, and the Trustee subsequently sent them checks for their grants. The last beneficiary institution; which is the residual beneficiary of the balance of that Trust, hasn't gone beyond excepting the Trustee's assertion that there are no funds left in the Trust. Based on the bank documents that I have gathered in shared with the beneficiaries, there should still be several $100,000 left in the Trust.
I'm going to have to bring suit against the Trustee, to force him to comply with the provision requiring him to pay the taxes, however I am also wondering; what happens to the balance of the funds in the Trust if the residual beneficiary elects not to accept, or compel compliance of delivery of the residual funds. Do these residual funds become a part of the Estate, if the residual beneficiary does not accept those funds?

Why do you believe that you would have standing to bring suit against the trustee?

 

[adjusterjack]

Why do you believe that you would have standing to bring suit against the trustee?

Why do you believe he wouldn't?

 

[Zigner]

Why do you believe he wouldn't?

Because the trust is responsible for paying the taxes for the income to the trust.

 

[Taxing Matters]

Because the trust is responsible for paying the taxes for the income to the trust.

I'd want to read the actual trust document and the IRS notices that the OP has received to figure out what the situation is. There are several possibilities, and depending on which of them it is, the OP may well have a good lawsuit against the trustee. Hopefully the OP has consulted a tax attorney to figure that out.

 

[Zigner]

Fair enough.

 

[jeffmatt]

What is the name of your state? North Carolina

I am also wondering; what happens to the balance of the funds in the Trust if the residual beneficiary elects not to accept, or compel compliance of delivery of the residual funds. Do these residual funds become a part of the Estate, if the residual beneficiary does not accept those funds?

Be sure and check with an NC attorney.

For starters, you stated the trustee told the residual beneficiary there is nothing left. I am assuming the beneficiary is relying on this statement. If the statement is untrue, the beneficiary has a claim to the funds. It could be that if the beneficiary was shown there is a lot of money, it will change its attitude and go after it.

I'd be thinking about first, proving there really is money there to be had, and if so, whether the property escheats or not.

Once it is known who is next line (i.e., the estate or the government), an action in interpleader could be brought, naming as defendants the trust's residual beneficiary and those who are next in line. By joining both sets of claimants as defendants, it puts the ownership squarely in issue for the court to decide.

 

[WhistleBlowerFA]

Be sure and check with an NC attorney.

For starters, you stated the trustee told the residual beneficiary there is nothing left. I am assuming the beneficiary is relying on this statement. If the statement is untrue, the beneficiary has a claim to the funds. It could be that if the beneficiary was shown there is a lot of money, it will change its attitude and go after it.

I'd be thinking about first, proving there really is money there to be had, and if so, whether the property escheats or not.

Once it is known who is next line (i.e., the estate or the government), an action in interpleader could be brought, naming as defendants the trust's residual beneficiary and those who are next in line. By joining both sets of claimants as defendants, it puts the ownership squarely in issue for the court to decide.

Thank you all for your comments which are very useful.
I have provided all of the beneficiaries copies of the bank statements showing what the trustee withdrew from the trust account; which was all of the funds in the trust. I have also advised them of the amounts that the other beneficiaries; have told me that they receive from the trustee, which is how I have come to the information that the trustee still has several Hundred thousand dollars; of trust funds that should still be available. However, prior to the death of the individual who set up this trust, the Trustee inform me that he had a low-income job. The Trustee's family members have advised me that he has been doing some extravagant spending, since he took control of the trust.
I have also contacted a tax Atty. who has advised me that the Estate would be liable for the taxes that the Trust doesn't pay.
The action in interpleader sounds like the most appropriate approach to resolving this issue, since my primary concern here is recovering the legal expenses in compelling the payment of the taxes.

 

[Taxing Matters]

I have also contacted a tax Atty. who has advised me that the Estate would be liable for the taxes that the Trust doesn't pay.

The decedent had a revocable living trust. Thus, the trust had no taxes to pay as all the income of the trust would land on the trust grantors income tax return instead. And the moment the decedent died, the trust becomes an irrevocable trust, separate and apart from the estate. That means that any tax on the trust's income going forward would be the responsibility of the trust itself. The estate, on the other hand, owes any income tax the decedent owed right up to the point of the decedent's death (including tax owed on his final income tax return for the year he died). It would also owe income tax on any income the estate itself earns. So in the ordinary course of things, the trust would not be called upon to pay income tax for the estate unless the decedent owed back taxes that he had not yet paid at the time he died. If he did have tax liabilities he owed at the time he died, the lien that the the IRS and state tax agencies would have on his assets would allow them to go after the trust assets to collect if the estate didn't pay.

NC has no estate or inheritance taxes, and the federal estate tax only applies to estates that exceed $11.58 million for decedents dying in 2020. So it seems unlikely that federal estate tax is at issue here, and if it is then the estate is quite large and you definitely want the help of both a tax and probate attorney.

That leaves me wondering exactly what tax the IRS is billing you for that the trust would be called upon to pay. What are the taxes involved and what exactly does the trust direct the trustee to do with regard to paying those taxes? Did the decedent die owing income tax?

 

[WhistleBlowerFA]

The decedent had a revocable living trust. Thus, the trust had no taxes to pay as all the income of the trust would land on the trust grantors income tax return instead. And the moment the decedent died, the trust becomes an irrevocable trust, separate and apart from the estate. That means that any tax on the trust's income going forward would be the responsibility of the trust itself. The estate, on the other hand, owes any income tax the decedent owed right up to the point of the decedent's death (including tax owed on his final income tax return for the year he died). It would also owe income tax on any income the estate itself earns. So in the ordinary course of things, the trust would not be called upon to pay income tax for the estate unless the decedent owed back taxes that he had not yet paid at the time he died. If he did have tax liabilities he owed at the time he died, the lien that the the IRS and state tax agencies would have on his assets would allow them to go after the trust assets to collect if the estate didn't pay.

NC has no estate or inheritance taxes, and the federal estate tax only applies to estates that exceed $11.58 million for decedents dying in 2020. So it seems unlikely that federal estate tax is at issue here, and if it is then the estate is quite large and you definitely want the help of both a tax and probate attorney.

That leaves me wondering exactly what tax the IRS is billing you for that the trust would be called upon to pay. What are the taxes involved and what exactly does the trust direct the trustee to do with regard to paying those taxes? Did the decedent die owing income tax?

The decedent passed away near the end of a one year, without filing his tax return for the previous year. I had the tax returns; for both years, prepared by a tax preparing firm, and there were income taxes due. In addition, there were property taxes due prior to the time of his death. The bulk of his income went directly into his trust account, and I have filed tax returns; for the estate; outside of the trust, for all of the income that went into his estate accounts.

The trust document states; in the section titled “disposition of property:” that “(T)he trustee shall care for and manage the trust estate and collect the income derived therefrom, and after the payment of all taxes and assessments thereon and all charges incident to the management thereof, shall dispose of the net income therefrom, and the principle thereof, as follows:”. [emphasis added]. Based on this statement; in the trust, a tax attorney has advised me that the trust is responsible for paying the taxes and expenses associated with the income that went directly into the trust prior to the decedent’s death.

The IRS has sent notifications to the decedent about payment of these taxes. I receive all of the decedent’s mail, as the administrator of his estate; which is primarily responsible for paying his debts. A tax attorney has advised me that per the statement cited above, the estate has been made a creditor of the trust, and the trust is responsible for paying the unpaid taxes and associated expenses.

Please advise if you have an opinion contrary to one provided by my tax attorney.

 

[Taxing Matters]

Please advise if you have an opinion contrary to one provided by my tax attorney.

I think it's not that clear. But your tax attorney might be right. The trust language you provided is not very well written; I wouldn't draft a trust that way. It uses archaic stuffy language and the sentence is too long. Put in more plain English, it apparently says: "The trustee shall care for and manage the trust assets, collect the income from the trust assets, pay the taxes and assessments on that trust income, and pay all the expenses incident to management of the trust." This is pretty typical trust stuff, but usually this kind of provision is meant to require payment of tax assessments and expenses of the trust itself. Written properly, it would be more clear that this is what the trustee is supposed to do.

With a revocable trust the income that is generated by the trust assets during the lifetime of the trust grantor is treated under federal tax law as income of the grantor, not the trust. While the trust is revocable, under the tax law the trust is invisible. Because the income prior to death goes on the grantor's return (and the trust does not file a return) the tax is not assessed against the trust. The grantor is the one legally obligated to pay it under the tax law, not the trust. If the provision you quoted from the trust is meant to pay only the assessments against the trust then the trust would not be obligated by the terms of the trust to pay income tax assessments of the grantor. The phrase "after the payment of all taxes and assessments thereon" appears to refer to payment of tax on the trust income but does that also mean tax on the trust income when the trust itself is not the one liable for payment of that tax to the government? Further, my guess is that not all the income on the grantor's return was from trust assets. If the grantor had income from other than the trust the trust certainly would not be required by that sentence to pay the tax on that non trust income.

That's not to say that the government couldn't reach the trust assets to collect the tax if the estate didn't pay up. It may well be able to do so.