Usually when a husband and wife create a revocable living trust, whether a joint family trust or two individual trusts, the trust document contains language designed to take maximum advantage of the estate tax exemption. When the first spouse dies, there is language within the trust to create a Family Trust from the amount equal to the estate tax exemption, and to pass any excess to the surviving spouse in a Survivor’s Trust. (There are no tax consequences of transfers between spouses). Sometimes this is called an A-B trust arrangement or the Family Trust is called what it is, a Credit Shelter Trust. If the value of the estate does not exceed the estate tax exemption, all of the trust assets are in the Family trust.
Frequently the surviving spouse is the trustee of the Family Trust, as well as the Survivor’s Trust. The trustee of the Family Trust has an initial responsibility to identify the assets of the trust. If an individual revocable trust becomes the Family trust, identifying the assets of the trust is simplified. It is also necessary to review all paperwork carefully for any accounts that may not have been placed in the trust. There should be an Assignment of Personal Property and assignments of any business interest which would have been signed when the trust was created or amended. If the trust is a joint family trust and the trust assets are held 50-50 between the spouses, the trustee must designate which assets transfer to the Family Trust and the Survivor’s Trust, and see to it that the retitling takes place.
The trustee can name a co-trustee and/or successor trustees.
It is important to establish the value of the assets in the Family Trust as of the date of death of the deceased trust maker. While income and principal can be paid out for the benefit of the surviving spouse, there are usually remainder beneficiaries who will inherit what remains of the assets of the Family Trust. The ultimate heirs will take the remaining assets with an income tax basis, the fair market value, as of the deceased trust maker’s date of death. It is possible to find historical records of prices for stocks and bonds, but more difficult to establish the fair market value of real estate, an ongoing business, valuable collectibles, antiques, etc. years after the death. The trustee is responsible for obtaining the appraisals.
When the Family Trust comes into existence, it is irrevocable, and must have its own taxpayer identification number, an Employer Identification Number (EIN) obtained from IRS. There is an annual tax return due on a Form 1041 Fiduciary Income Tax Return.
With the newly issued EIN, the next order of business is to open a checking account in the name of the Family trust. Using a separate checking account prevents co-mingling trust assets with non-trust assets, and preserves the value of the estate tax exemption. If the assets of the Family Trust are mingled with the assets of the Survivor’s Trust, it is possible that all the assets will be considered to be the property of the survivor, subject to estate tax on the death of the survivor. This obviates an important purpose of establishing revocable trusts in lifetime – maximizing the estate tax exemption.
The American Taxpayer Relief Act of 2012 made permanent the concept of “portability” by which a surviving spouse can use any estate tax exemption not used by the first spouse to die. To preserve the right to portability, it is necessary to file an Form 706 Estate Tax Return, even though no estate tax may be due. The Estate Tax Return is a relatively complicated form, not available with Turbo Tax, and a professional tax preparer who is experienced with the form should be consulted. If there is any prospect that the surviving spouse’s estate could exceed the individual estate tax exemption, the Estate Tax Return should be prepared and filed within nine months of the first death. If the surviving spouse wants to make gifts using the deceased spouse’s unused gift tax exemption amount, a Form 709 Gift Tax Return should also be filed.
The language of the original trust document will define whether the trustee must formally notify the remainder beneficiaries that the Family Trust has been created, and whether an annual accounting for the trust assets will be due to the beneficiaries.