We Take a Stab at Some Of Our Common Legal Questions

FEBRUARY 21, 2011 VOLUME 18 NUMBER 6
We get asked plenty of general legal questions. We try to give helpful answers, recognizing that we can not give specific legal advice to non-clients (and particularly to questioners from outside Arizona, where we are licensed to practice law). Often our best answer is “check with a local lawyer familiar with the appropriate area of law.” Unsatisfying, but it really is the right answer in many cases.

Still, we want to get general legal concepts out to the public. Why? Because we think it makes non-lawyers recognize when the legal problem they face is too complex for self-help, and it even helps make the questioner a better client when they do get to the lawyer’s office.

What kind of legal questions can we answer? very general ones. Like these, which are some of our most common questions:

Does my living trust need a new tax ID number? The best way to answer this is probably to explain when a trust doesn’t need its own “Employer Identification Number” (EIN — even if the trust isn’t an “employer,” that’s the kind of tax ID number it will get).

General rule: every separate entity requires its own TIN, whether that is a Social Security number (for you) or an EIN (for your corporation, trust, LLC, or whatever). First major exception to the general rule: if your trust is revocable, and you are the trustee, for tax purposes it is not a separate entity at all — you don’t need an EIN and, in fact, you shouldn’t get one.

Now let’s make it a little more complicated. If your trust is irrevocable, or you are not the trustee, the rules are a little harder to parse. The key question is whether your trust is a “grantor” trust. If it is, and if there is only one grantor (or one married couple), then it does not need an EIN. If it is not, or if there are multiple grantors, it must have its own EIN.

Note that whether or not the trust needs (or is even permitted to get) an EIN is not the same question as whether it has to file a separate tax return. That one is more complicated, and we’ll save it for another day.

Can a revocable trust be named as beneficiary of an IRA? Yes, but be careful. This is something you should discuss with your attorney or your accountant (or both).

Before we talk about naming your trust as the beneficiary, we have a question for you: what are you trying to accomplish by naming the trust as beneficiary? If your trust divides equally and distributes outright among a fairly small number of beneficiaries upon your death, why not just name those beneficiaries on the IRA as well as in the trust? Then you don’t have to figure out the rules on naming a trust as beneficiary, and you don’t have to keep wondering if you’ve done it right.

Maybe you have a child who is ill, or a spendthrift, or needs to have his inheritance placed in trust. In that case — and in a few other cases — it can make sense to name your trust as beneficiary of your IRA. Now you need to become familiar with the difference between what lawyers usually call “conduit” trusts and “accumulation” trusts. The former require distribution of any money received from the IRA’s minimum distribution requirements each year, and the latter allow (but do not require) the IRA distributions to accumulate. The distinction is important; the accumulation trust will require distributions on the basis of the oldest possible beneficiary of the trust. That is the result in most cases where a trust is named as beneficiary.

These same rules apply, by the way, for other tax-qualified accounts, like 401(k) and 403(b) plans. Some advisers will tell you it is not even permitted to name a trust as beneficiary of an IRA or qualified plan. They are wrong, but the rules are a little difficult to figure out in individual cases. Also, some account custodians (that is, the bank or financial institution where the money is held) may limit or even prohibit trusts as beneficiaries.

How does community property work in Arizona? Nine U.S. states are usually listed as the “community property” states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico recognizes community property, and Alaska allows couples to choose community property treatment of their joint assets.

But what does it mean to have property held as community property? In Arizona, it means that the property is jointly owned, that each spouse has an equal interest, and that either spouse has the right to manage the property on behalf of the community.

When one spouse dies, his (or her) half int0erest in the community property normally passes according to his will or, if he did not sign a will, to his children (including those who are also children of the surviving spouse). To avoid that result couples are permitted to specifically designate their property as “community property with right of survivorship.” If that title has been used, the surviving spouse receives the entire community asset on the first spouse’s death. Note that the different community property states treat the right of survivorship differently, and we are only describing Arizona’s approach here.

It is also possible for a portion of an asset to be subject to community rights. This might happen, for example, if one spouse brought the property into the marriage but mortgage payments were made during the period of marriage from community income or assets. This kind of calculation is usually much more important in divorce proceedings than upon the death of one spouse.

Property received by inheritance or gift, and property owned before the marriage, are not community property — they are the separate property of the recipient or owner. Couples can choose to convert their community property into separate property, and can even agree that property acquired in the future will be treated as separate property.

Thanks. But I have a different question to ask. Go ahead — pose your question as a comment here, and we’ll try to answer it. Don’t be too surprised if we tell you that it is too specific, or requires knowledge of another state’s laws, or we can’t answer it for some other reason. But we’ll try to be helpful.

One word of caution: do not give us a detailed fact pattern and ask us for advice. We simply can not provide individual legal advice — free or even for a fee — based on unsolicited e-mails or comments. You will not have any lawyer/client privilege for your recitation of the facts, and we will not be able to help with that kind of inquiry. We do welcome your general questions that give us a chance to explain legal principles, though.

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12 Responses

  1. When a revocable trust is broken do the recipients named, as in grandchildren or just the remaining son receive the remains of the property named in the trust. He is also the trustee.

  2. Mr. Beasley:

    “Broken” isn’t actually a legal term, and that makes it hard to answer your question. A lawyer would have to consider:

    1. The terms of the trust itself.
    2. The circumstances under which the trust was terminated, or found to have been invalid, or modified, or whatever it is that you have characterized as “broken.”
    3. Local law governing disposition of trust assets and income upon termination (perhaps).
    4. The family relationships of all the players (perhaps).

    It sounds like you will need to seek legal advice from someone familiar with trust law, preferably in the area where the trust is being administered. Good luck as you try to work through your question.

    Robert Fleming
    Fleming & Curti, PLC

  3. C Brooks

     /  January 27, 2012

    My parents set up a living trust as joint trustees and used my fathers SSN Dad died, Mom survives but is incapacitated, I am the successor trustee. Some investments still need to be put into the trust and retitled Dio I need to get a new TIN? or what do I use?

  4. On these facts, and making reasonable assumptions about the nature of the trust (e.g.: that it’s revocable, even though your mom may not be able to revoke it as a result of her incapacity), you should be able to use her SSN. You might have a vigorous argument with the banker and broker, though — and it ultimately might be easier to just get a new EIN and talk to your accountant about how to file tax returns. A good lawyer (or a good accountant) could walk through the issues with you, and we recommend you get advice from a professional in your locale.

    Robert Fleming
    Fleming & Curti, PLC
    Tucson, Arizona

  5. I have a trust within my Will made in Arizona naming my son as beneficiary and to recieve 4% of my principal each year from the trustee (my niece), and a lump sum for a house if she chooses. Does she need a EIN?

  6. Mr. Burriss:

    We’ve taken a stab at a general answer to your question in this week’s (April 16, 2012) Elder Law Issues: http://issues.flemingandcurti.com/2012/04/15/eins-for-trusts-the-questions-just-keep-pouring-in/

    As always, please remember that what you see on web sites like ours — and including ours — is not specific legal advice but general information. You should talk with your own lawyer and/or accountant to make sure that you have complete information.

  7. S Powers

     /  January 27, 2013

    Can a Partnership LLC transfer funds to a Qualified Disability Trust for someone that is handicapped and on Social Security Disability and treat the Qualified Disability Trust as a member?

  8. Mr./Ms. Powers:

    We suspect that the answer to your question is probably “yes,” but it will depend somewhat on the trust itself, the LLC documents, and your state. Talk to an experienced attorney in your community about your situation and your goals. If you don’t know one, you might check with the Special Needs Alliance to see if they have a member near you — most of them will have experience with qualified disability trusts. Good luck.

    Robert Fleming
    Fleming & Curti, PLC
    Tucson, Arizona

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