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The Plain English Attorney

We sat at the kitchen table reviewing their father’s trust. Mr. John Smith (not his real name) had passed on a week earlier, finally succumbing to cancer. While his children had prepared themselves, Mr. Smith had prepared even more. He had one of the best trusts around, created by a California attorney two years earlier through a company called The Estate Plan. “My father wanted to keep settling things as simple as possible,” the daughter said. “That’s why he basically liquidated everything and put it into a checking account in the name of the trust.”

“That will really make things simple,” I said. “As long as all of the medical

 and other bills are paid, there’s no reason not to distribute the funds within the next few weeks. Are you sure that all he had was the one bank account and it was in the name of the trust?”

“Well, yeah,” the daughter replied. “Except for these three stocks he wanted to hold on to. They’re in his name, not the name of the trust… is that a problem?”

I tried not to sigh too visibly, realizing that while the trust could be settled in the next few weeks, it may be months or up to a year before the stocks were distributed through the probate process.

Once you have a revocable living trust in place, you have to make sure all of your assets work with your trust. In other words, you have to make sure your revocable living trust is funded properly. A revocable living trust will keep all of the assets in the trust from having to go through probate. Therefore, to avoid probate completely, you have to make sure all of your assets are in the trust or are set up to transfer into the trust upon death. Just having the documents is not enough.

One of the most frustrating aspects of making these changes is the often inexperienced personnel at banks or financial institutions who insist that the trust needs to have a separate taxpayer ID. The fact is a separate taxpayer identification number is not needed for a revocable trust while the trust remains revocable. And in the insistence of a financial institution that a separate ID number be established with the IRS will only create persistent yet erroneous requests for 1041 Trust Tax Returns from the federal government.

While I try to not deal with legal gobbledygook, I understand that many of my clients reading this may have use of this article in dealing with financial institutions. And so at least for this article, here is the legalese that can be shown proving that a separate Taxpayer ID number is not required:

Treasury Regulations, Subchapter A, Section 1.671-3, states as follows 

 “Attribution or inclusion of income, deductions, and credits against tax”

(a) When a grantor or another person is treated under subpart E (section 671 and following) as the owner of any portion of a trust, there are included in computing his tax liability those items of income, deduction, and credit against tax attributable to or included in that portion.

For example:

(1) If a grantor or another person is treated as the owner of an entire trust (corpus as well as ordinary income), he takes into account in computing his income tax liability all items of income, deduction, and credit (including capital gains and losses) to which he would have been entitled had the trust not been in existence during the period he is treated as owner.”

In other words, all income is reported on the individual’s 1040 tax form and not on a separate 1041 tax form for the trust. Forcing your clients to apply for a separate taxpayer identification number in order to properly fund their revocable living trust will result in annual paperwork from the Internal Revenue Service demanding a separate tax return for the trust. This will result in lost time and money for your clients responding to the IRS (probably on an annual basis) simply to inform the IRS that no separate tax return is required while noting the particular financial institution(s) that insisted a separate taxpayer identification number was required.

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