Has a Tax Professional Reviewed Your Trusts, A Primer

Has a Tax Professional Reviewed Your Trusts, A Primer

Has a Tax Professional Reviewed Your Trusts 

It is not uncommon for US Persons to have one or several domestic and foreign trusts. Depending on the complexity of a person’s estate plan, will impact the necessity to have one or more different types of trusts in place. At the most basic level is the revocable trust – which taxpayers use to hold assets such as rental or personal property — and to reduce probate fees subsequently down the line. There are many other different types of complex trusts as well, which tend to be irrevocable trusts and are much more complicated. There are intentionally defective trusts, dynasty trusts, domestic and offshore asset protection trusts, and different types of charitable trusts. Sometimes, after a trust has been prepared, the taxpayer’s asset allocation, goals, and family circumstances will change. This change in life circumstances may require him to go back and review — and possibly modify or change/update the trust. Let’s look at a few important facts about your trust and why sometimes it helps to have a tax professional go back and review it.

Updated Trust and Estate Laws

Estate and trust laws do not exist in a vacuum. The laws are ever-changing, and it is important to make sure that your trust is up-to-date so that it is compliant with any updated or modified estate and tax laws. For example, you may have set up certain trusts in order to take advantage of the exemption amount at that time, but if the exemption has increased significantly it may impact the initial purpose of the trust — and it may have become outdated for your needs.

New Kids to Add Trust

In general, most revocable trusts will account for new children so that the assets are split evenly amongst the current (and new) kids. With that said, it is important to update the trust after having more children so that at the time of administrating the trust no one is feeling uncomfortable or left out if their name is not specifically identified in the trust.

Kids from Another Marriage QTIP

If your initial trust was established in order to protect your children and now you have remarried — there may be a concern about how to divvy up the assets in the future. Now that you have a new spouse, who has his or her own children from a prior marriage, you will want to make sure that your children from the prior marriage are taken care of accordingly. This may result in you considering establishing a QTIP trust.

Significantly Increase in Asset Value (FLPs)

Depending on how long it has been since you initially established your trust, your net worth may have increased significantly. If this is the case, you may have to consider more complex estate planning tools such as irrevocable trusts, charitable trusts, and Family Limited Partnerships (FLPs) in order to best manage and secure your assets.

A QPRT for the Elderly

QPRTs are common for elderly or incapacitated taxpayers who own their own him. For example, if you are now elderly but wanted to leave your home for the next generation, but you also want to reside in the home, the simple revocable trust me no longer be sufficient. Instead, you may want to consider a QPRT (Qualified Personal Residence Trust)

New Trust for Charitable Purposes

If you have more net worth and or are in a more charitable mood, you may want to consider creating a charitable trust in order to donate assets or funds to different charities. There are various tax benefits to doing this, and various types of charitable trusts to consider in order to accomplish your immediate and long-term goals.

Your Offshore Trust is Draining Your Wallet

It is not uncommon for US taxpayers who believe they may be sued or otherwise find themselves in financial distress and want to open an offshore trust in countries such as Nevis or the Cook Islands. Later, they may decide that they no longer require this trust since oftentimes the fees can be very high. If the scenario that served as the catalyst for initiating an offshore asset protection trust is no longer a threat, they should consider revisiting the trust — although there may be some limitations when the trust is irrevocable and the laws of the foreign country where the trust was established.

Inherited Assets (Multiple Wills, Codicils, Trust)

Once a person inherits assets either in the United States or abroad, it is important to account for those assets in an estate plan, especially when it is a subsequent marriage. In general, inheritance is categorized as separate property. Thus, when spouses inherit property they will want to be careful not to comingle the separate property with community property unless that is the ultimate goal. It may require amending or updating the trust.

Foreign Spouse QDOT

When a person has a foreign spouse, the tax rules, exemptions and exclusions are different, and they do not operate as beneficial for the foreign spouse (lower and limited exclusion amounts). Therefore, taxpayers with foreign spouses may want to consider creating a QDOT. There are s pros and cons to creating a QDOT – including fees to oversee the trust – but especially in situations in which taxpayers are high net worth, they will want to consider this type of trust in order to minimize (or at least postpone) taxes for the surviving spouse.

International Assets and Reporting

As a side note, when a person inherits international assets such as foreign accounts, assets, and investments — it is important to make sure those assets are being probably reported on various international information reporting forms such as the FBAR and Form 8938. The failure to do so may result in significant fines and penalties, especially in a situation in which the decedent did not properly report the assets when they were under his or her control. The IRS has developed various amnesty programs that can assist taxpayers with getting into compliance for themselves and their estates.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.