Trusts and taxes
Q : Help! My husband died at the beginning of last year. We have a living trust so I know there is no probate and nothing needed to be done about the trust. However, I am panicked about our taxes. Do I need to do anything different this year for filing them? He took care of things, so I just don't know what I need to do. A : First, remember that Monterey County was declared a disaster area due to our recent flooding and the income tax filing deadline is extended to May 15, instead of the usual April 15 deadline. This gives us all some extra time to file our returns. That said, you should speak with your tax advisor sooner rather than later and discuss your filing requirements.
In your situation, you would normally need to file a final joint return in which your tax advisor will include a notification to the IRS that the return is the “final” return for your husband who is now deceased. Going forward, you will be filing alone. Again, speak with your advisor about the documents and income information they need to get your returns completed. My CPA provides me with a booklet that gives me information from last year's returns and asks for the updated information needed for my current year's returns.
Also, even though you did great planning and have a trust, it does not necessarily mean there is “nothing” to do regarding administration of the trust upon your husband's death. It is true you most likely will not need a probate, but there are some steps that need to be taken regarding the trust administration. These steps may include filing an affidavit with the county recorder relative to any real estate owned and other notifications that may be needed as a result of his passing. There may also be some tax planning to consider within the trust. Consult with your attorney to see if you should, or could, take some actions regarding the trust administration that will benefit you going forward.
Some trusts require that you split your assets into separate trusts and this should be done timely. If so, going forward you may need to file a separate tax return for one of those separate trusts. Best to consult with your advisors so you can get things off to a good start.
A question that comes up frequently regarding trusts and taxes is whether or not beneficiaries of trusts will owe taxes on the assets they receive. For example, mom and dad have died and now the trust says to distribute all their assets to the children. The children want to know if they will need to pay taxes. The answer is that, normally, distributions from this kind of “terminating” trust are considered principal distributions and not income taxable to the beneficiary. At times there may be some capital gains or income incurred by the trust which can cause some income tax obligations to the beneficiary. Usually, capital gains or income taxes are not significant but it is important for a beneficiary of any trust to wait to hear from the trustee about their personal tax implications. The trustee will file an income tax return for the terminating trust which generates a K-1 showing the beneficiary's income tax obligation. The K-1 tax information must be included in the beneficiary's personal income tax filing.
Again, in your situation, a K-1 does not apply, but you need to discuss any administrative duties you may have relative to the trust with your attorney and tax advisor.
Liza Horvath has over 30 years of experience in the estate planning and trust fields and is a licensed professional fiduciary. Liza currently serves as president of Monterey Trust Management. This is not intended to be legal or tax advice. If you have a question, call (831) 646-5262 or email liza@ montereytrust.com