From: dattier@ddsw1.mcs.com (David W. Tamkin)
Subject: grantor trust in post-mortem administration period
Followup-To: poster
Organization: Contributor Account at ddsw1, Chicago, Illinois  60657
Distribution: usa
Date: Mon, 31 Aug 1992 19:48:02 GMT
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Pardon the netiqutte violation of my posting to groups where I haven't read.
Nothing on the subject is in the existing news spool here, and I'm at loose
ends because of conflicting advice.

I *will* read these groups for a while to look for answers; I've directed
follow-ups to email only because email arrives her far faster than netnews.

This is principally a federal income tax question, but if legal matters are
involved, Illinois law prevails here.

My father passed away February 11, 1992, still married to my mother.  His
grantor trust is supposed to be divided after his death into marital and
residuary portions -- no surprise there.

I took our business to the CPA firm where I used to work.  To my surprise,
the estate person there said that we should not divide the grantor trust
(which he said was now called an "administration trust") until after the IRS
accepts the estate tax return.  The trust indenture says that "commencing
with the date of death of the Settlor" the trustee should distribute all
income of the marital and residuary trusts to the settlor's wife, but he said
that income of the administration trust is not income of the marital or resi-
duary trusts and the phrase "commencing with the date of death of the Sett-
lor" just means commencing with the funding of those two trusts.  [An old
friend who does similar work concurred; both are attorneys as well as CPA's.]

So he suggested that we would be nuts to take income out of the administra-
tion trust.  The estate tax return is due November 11; the IRS won't send the
acceptance letter early if we file early; if we keep the trust in administra-
tion until January, 1993, and my mother lives on her own income, then her
income plus forty-two days of my father's can be on a joint 1040 and the
income on my father's investments for the rest of 1992 will be taxed as a
separate taxpayer on the administration trust's 1041.

But the big advantage is that the growth in the administration trust before
division will be allocated among the residuary and marital portions, and
whatever ends up in the residuary portion is that much more that will escape
estate tax at my mother's death.  He told me that there would be no throwback
because the administration trust would be treated like an estate, as it is
for paying estimated income tax, though it will still get only a $100 exemp-
tion on its 1041 and will still be subject to Illinois's replacement tax
(estates are exempt from replacement tax).

So I planned accordingly.  My parents had filed separate income tax returns
for 1991 because of my father's medical bills, and paying 1992 estimates to
match their total 1991 separate tax seemed ridiculous under the circumstan-
ces.  Their 1991 overpayments were sufficient to match 25% of 1991 total
separate federal icome tax for April 15, 1992, and I calculated the April
Illinois estimate the same way, but for the June payment I annualized their
income.  Since my father's investments had not contributed from February 12
through May 31, and since interest rates have fallen since 1991, the June
estimates were based on reaching 45% of the tax on annualized 1992 income
and the April and June payments together fell well below 50% of the total
separate 1991 tax.

So I wanted to calculate the September 15 Illinois payment in time to pay it
today (August 31) in order to include a deduction for it in annualizing for
the September 15 federal payment.  Now I've hit a bunch of snags:

1. The attorney rewriting my mother's will and her grantor trust says she be-
lieves my mother should take the income to which she is entitled, even during
the administration period.  [She knows of cases where an income beneficiary
who had the right to income but didn't take it was deemed to have made a gift
(non-excludible for gift tax) of a future interest to the remainder benefi-
ciaries and wasted some unified credit on it, but none of those were adminis-
tration trusts; on the other hand, she hadn't heard that a decedent's grantor
trust in its administration period was specifically excepted.]  Now, my
mother can still fix that because 1992 isn't over yet, but if that's the
case, the June estimate was way too low.  I know that a beneficiary is con-
sidered to receive income from a trust in the tax year with or within which
the fiduciary's tax year ends, but apparently for annualizing estimated tax
the beneficiary can't pretend that all the income was paid to her on December
31, and since she is one of the trustees she can't even pretend that it was
paid to her on the distribution dates, can she?

2. The first attorney now is less sure about there being no throwback.  If
my mother has to report a throwback in 1993 of all undistributed income of
my father's trust from its administration period, she might as well take the
income out in 1992, because by leaving it in and throwing it back we'd be
gaining nothing for her eventual estate tax return, adding a lot of paper-
work, bloating the heck out of her 1994 estimates (well, I could annualize
those, but I'm so sick of that -- maybe exception 1 on the 2210 doesn't
require meeting the previous year's 4970 tax?), and wasting the Illinois
replacement tax that the administration trust would pay on undistributed
income for 1992.  He said that legislation is pending to repeal throwbacks;
for me, "pending" isn't enough.  But without the undistributed income, the
value of my father's trust's portfolio has probably been *falling* during the
administration period, and if she takes it out in 1992, we're in a penalty
situation for the June estimate.

So would there be a throwback?  Is the administration trust really a separate
taxpayer or will its income end up on my parents' 1992 1040 anyway?  If it
will, can she annualize her (actually THEIR, since my father was alive for
part of the year) 1992 estimates on the basis of receiving income from my
father's trust on the distribution dates, not on the trust's dates of receipt
nor ratably from the day after his death to the end of the year?

Thank you all for whatever assistance or advice you can provide.

David W. Tamkin   Box 59297   Northtown Station, Illinois  60659-0297
dattier@ddsw1.mcs.com    CompuServe: 73720,1570    MCI Mail: 426-1818
Newsgroups: misc.taxes