A Question re: Family Trust Gifting, Please...

[Don Ro]

'Morning, gents...a little assistance, please.
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My mother is still alive but is not lucid...father died in 2010.
Our family trust is an RLT and my sister is our family's trustee.
I just received a $7,000 gift check from the trust. Last year's gift - and the previous three year's - was $13,000.
Accompanying the check was a letter from my sister which directed the bank to gift the four of us children as such:
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"Please issue checks from the XYZ Family Trust in the amount of $7,000 to each of the following parties, as a gift for tax year 2014.
The amount of this year's gift is less than previous years so as not to incur larger capital gains which would cause additional taxes on Mrs. ABC's (my mother) personal tax return."
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Signed, (my sister)
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Can someone explain this to me?
I ask because my sister has demonstrated herself to be untrustworthy in our personal relationship over the years.
If all is sound, I'll feel relieved.
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Thanks for any assistance.
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Best regards,
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Edit: You're correct - previous year's gifts were $13,000
Thanks.

[McLovin]

One issue is that the tax free gift limit is $14k, not 15k. And over the past few years you've been receiving 15k, its been even lower.

But I don't know the effect of that. Or if it can be "made up for" by giving less this year.

I don't understand how lowering the gift could lessen you moms capital gains, though.

[Don Ro]

"I don't understand how lowering the gift could lessen you moms capital gains, though."
~~~~~~~~
I'm not sure, either ... thus my Q.
Thanks.

[ossiblue]

Originally Posted by McLovin

One issue is that the tax free gift limit is $14k, not 15k. And over the past few years you've been receiving 15k, its been even lower.

But I don't know the effect of that. Or if it can be "made up for" by giving less this year.

I don't understand how lowering the gift could lessen you moms capital gains, though.

^^Ditto^^

I don't understand the logic of the reduced gifts as all gifts of money to children are subject to the $14K (currently) annual exemption. It is the giver who faces a possible tax liability should the gift exceed that amount in that they would have to pay a gift tax on any amount that exceeds the exemption. Possibly, your sister misunderstood the law and believes the total amount of the gift to each of you is what is subject to taxation when it is the amount to each, separately, that is excluded. So, if there are three children, the trust can give $14K to each for a total of $42K that is not subject to gift tax.

My only guess is that whoever is preparing the tax return may be including the money as part of capital gains distributions which are subject to tax and not excluding the gifts, as allowed by law. You need to talk to whomever is preparing the tax return for the trust.

I am not a cpa nor an attorney so there may be something I'm missing but that is my understanding. It doesn't make sense to reduce the gifts in order to reduce the personal income tax liability of the gift giver, unless they have reached the lifetime limit on exclusions which is close to $2m, total.

[Don Ro]

For the past three years each child (four of us, including my sister, the trustee) has rec'd $13,000. That's $156,000 total.
I may have to contact the bank tomorrow (Monday) to get the low-down.
Again, my sister is not an honorable person, to say the least. But I'd like to know that she's innocent of any "self-dealing", etc.
If she's pulling something, I'll have to run this and other previous trust matters through the No. Dakota court system.

[ossiblue]

Originally Posted by Don Ro

For the past three years each child (four of us, including my sister, the trustee) has rec'd $13,000. That's $156,000 total.
I may have to contact the bank tomorrow (Monday) to get the low-down.
Again, my sister is not an honorable person, to say the least. But I'd like to know that she's innocent of any "self-dealing", etc.
If she's pulling something, I'll have to run this and other previous trust matters through the No. Dakota court system.

I think this is a wise move^^.

I am in a similar situation in receiving annual gifts from a trust in which my father is the trustee. He is also, by the way, an attorney who specializes in trusts/estates and much of my response is based on conversations regarding tax laws and trust/gift disbursements. He is well aware of IRS regulations and gift limitations, that's why your sister's story doesn't seem to make sense.

Oddly enough, one of my siblings is in line to become the trustee, after the passing of my father, and the remaining siblings (myself included) are a bit fearful of something similar to what you are experiencing happening. Though the trust requires the annual disbursements, you never know what a trustee who has an axe to grind will do.

No need to know if your sister is up to something, but please let us know what you find out regarding the excuse given about capital gains.

[Don Ro]

But would the bank send this letter of hers along with this $7,000 bank check - in the bank's envelope - if something in her letter was not accurate/true?

[ossiblue]

Originally Posted by Don Ro

But would the bank send this letter of hers along with this $7,000 bank check - in the bank's envelope - if something in her letter was not accurate/true?

AFIK, the bank takes orders from the trustee or, at least, must do the bidding of the trustee. They are merely the holders/distributors of the money. The inclusion of the letter is probably just a "pass through" of the information they received from the trustee. If something is inaccurate regarding the reason for the reduction, I doubt if they would interfere--it's not their issue. She could have just as well sent a letter to reduce the amount to $7k with no reason. I also doubt that your sister's relationship with the bank is personal enough that someone would contact her and point out the inaccuracy. I would think, however, that if you contacted them and asked about the accuracy of the reason, they would explain the tax laws and clarify the details, in a general sense.

One other thing. Often, in a trust, the capital gains is used to pay for elements of the trust--repair of real assets, payment of tax assessments, for example. Perhaps, this year, some of the money that would have been disbursed was used to maintain the assets of the trust which, in turn, can be depreciated and reduce the tax liability, thus there was less to gift. This is common, and may be the reason why the gift was reduced for this tax year.

[Don Ro]

Yes, I figured as much...and I'll be doing that tomorrow.
Thanks for your input, L.J.

[ossiblue]

Originally Posted by Don Ro

Yes, I figured as much...and I'll be doing that tomorrow.
Thanks for your input, L.J.

I added something to my last post you may not have read. It may be relevant.

[Don Ro]

Two years ago I was exchanging emails with my sister (the trustee) in a moderate spirit of benevolent discourse...regarding life, family, etc.
At that time, I happened to phone my brother in No. Dakota (we hadn't spoken in a few years) and he told me something re: the family trust.
At the time of my father's death in April, 2010, he and my mother had just purchased a new Buick and a new pick-up.
My brother told me that our sister contacted him to see if he wanted the pick-up because she wanted the Buick.
So they went online - so my brother's story goes - and found "fair market value" for the two vehicles. He claims that both he and my sister then deposited monies for the two vehicles into the trust and took possession of them.
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A few days later, I emailed my sister and asked how much she and my brother paid for the vehicles and if she could provide documentation that, indeed, monies were deposited into the trust.
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That was almost two years ago and I've not heard a word from her since...snail mail, email, phone, text, carrier pigeon.
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Now, it's my understanding that if/when a beneficiary request an accounting of a trust, the trustee must provide that - by law.
That particular measure on my part is on my 'to do' list.

[Don Ro]

"I added something to my last post you may not have read. It may be relevant."
~~~~~~~~
I read that - Thanks!

[widgeon13]

The larger cap gains would relate to having to sell assets in order to make the increased $$ payments to each recipient. Sounds like there is only enough to distribute $28,000/4=$7,000 to each, from the trust before having to sell other assets to get more cash to get the distributions up closer to the $14,000 limits.

Selling assets would necessitate paying cap gains on the difference between cost base and current price of the asset. Since the market has gone up, that amount could be substantial.

[Don Ro]

Hmm...you wise man, Paul.
Thanks.

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I really don't want any problems with this situation...my sister or the trust.
I do suspect that by her and my brother taking possession of the two vehicles w/o contacting the other siblings, constitutes "self-dealing" on her part and is a cause for legal action.
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I have exchanged emails with the No. Dakota State University professor who wrote the ND law regarding trusts.

[widgeon13]

Sounds like your sister is straight up on this but keep in mind that if she is the only designated trustee she can do most anything with the money as long as it is seen as benefiting your mother. That leaves a lot of lattitude there.

Do you get to see trust financial statements? If so, I would ask for some end of the year accountability and also ask to see the tax returns.

I had a similar situation with our mother but my sister and I were designated as co-trustees so we both got statements and reviewed end of year tax returns.

[Don Ro]

I'll make some notes and have some Q's for the bank rep. tomorrow.
Thanks Paul...and all.
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Edit: Oh, yes...each year I get a print-out from the bank on the investment portfolio.
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But I have asked my sister how much she is paying herself to handle matters and she has not responded.

[widgeon13]

I believe that assets can be gifted as well but I'm not sure if there is a change in the cost basis (bump up to date of transfer) or if it stays the same as when it was purchased in your mother's portfolio. That would be a question to ask an accountant familiar with these situations.

[greglepore]

If assets need to be liquidated to fund the gifts, then there could be capital gains taxes incurred by the trust. Not the case with gifts made from cash on hand.

BTW, the per year limits only mean that no gift tax return needs to be filed nor is there any offset against the lifetime 5 mil estate tax exclusion. Gifts can be any size and are never taxable to the recipient, nor to the giver, other than as an offset against the exclusion.

[Neilk]

Originally Posted by widgeon13

Sounds like your sister is straight up on this but keep in mind that if she is the only designated trustee she can do most anything with the money as long as it is seen as benefiting your mother. That leaves a lot of lattitude there.

Do you get to see trust financial statements? If so, I would ask for some end of the year accountability and also ask to see the tax returns.

I had a similar situation with our mother but my sister and I were designated as co-trustees so we both got statements and reviewed end of year tax returns.

If you don't need the cash immediately, why not have them gift $13k worth of stock or make up the shortfall with stock?

[HiBeam]

Whether your sister deposited monies into the trust for the "purchase" of the cars or not, she clearly engaged in self-dealing by violating her fiduciary duty.
And that is actionable at law! - to say nothing of her possibly not even depositing monies and just claiming the cars from the trust.
I can surely see why you do not trust her - I wouldn't either! How on earth did she become the trustee?

Self-Dealing legal definition of Self-Dealing

Self-Dealing
The conduct of a trustee, an attorney, or other fiduciary that consists of taking advantage of his or her position in a transaction and acting for his or her own interests rather than for the interests of the beneficiaries of the trust or the interests of his or her clients.

Self-dealing is wrongful conduct by a fiduciary. A fiduciary is a person who has duties of Good Faith, trust, special confidence, and candor toward another person. Examples of fiduciary relationships include attorneys and their clients, doctors and their patients, investment bankers and their clients, trustees and trust beneficiaries, and corporate directors and stockholders. Fiduciaries have expert knowledge and skill, and they are paid to apply that knowledge and skill for the benefit of another party. Under the law, a fiduciary relationship imposes certain duties on fiduciaries because a fiduciary is in a special position of control over an important aspect of another person's life.

One important duty of a fiduciary is to act in the best interests of the benefited party. When a fiduciary engages in self-dealing, she breaches this duty by acting in her own interests instead of the interests of the represented party. For example, self-dealing occurs when a trustee uses money from the trust account to make a loan to a business in which she has a substantial personal interest. A fiduciary may make such a transaction with the prior permission of the trust beneficiary, but if the trustee does not obtain permission, the beneficiary can void the transaction and sue the fiduciary for any monetary losses that result.

The laws pertaining to self-dealing are found mainly in case law, judicial opinions, and some statutes. Case law authorizes the recovery of monetary damages from the self-dealing fiduciary.