Author: Landon Long, Senior Attorney at Evans & Davis and WealthCounsel member
A new client comes to your office with their father’s individual trust in hand and asks for assistance with the administration following Dad’s death. After expressing your condolences for Client’s loss, you begin the intake meeting.
You learn the following facts: (1) Client is one of two children and the sole successor trustee of Dad’s Trust; (2) Client’s mother (Mom) is still alive but has slightly diminished mental capacity; (3) Dad’s Trust establishes a marital trust with appropriate disclaimer language to fund a family bypass trust to maximize federal estate tax savings; (4) Mom, during her lifetime, is the only income beneficiary of the marital trust and bypass trust; (5) Client and Client’s sibling are equal residuary beneficiaries of Dad’s Trust after Mom’s death.
You discover Dad’s Trust owns several bank accounts, a permanent life insurance policy, and half of a primary residence (the other half of the residence was deeded to Mom’s individual trust). Dad also had a small individual retirement account from his earlier career working for a large corporation.
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Twenty years ago, after leaving the large corporation, Dad started a concrete business, ConcreteCo, LLC (ConcreteCo). ConcreteCo has several large contracts with the State of Utopia and various municipalities, and does large-scale commercial work for dozens of industrial contractors. ConcreteCo has a high degree of name recognition in Utopia and is Dad’s largest asset.
You find in Dad’s estate planning binder a duly signed and authorized Assignment of Interest transferring all of his membership interest in ConcreteCo to Dad’s Trust, and the Operating Agreement that reflects the same. An evaluation of ConcreteCo completed last year indicates the value of ConcreteCo puts Dad’s total taxable estate just under the federal estate tax exclusion.
From a trust administration standpoint, this is beginning to look like a straightforward case. As you are reviewing Dad’s binder, however, you stumble upon a wrinkled tax document behind the “Corporate Documents” tab, and in the upper left-hand corner you see the number “2553.” This discovery just made your (and Client’s) job slightly more difficult. Fifteen years ago, prior to the creation of Dad’s Trust, ConcreteCo elected to be taxed as a Subchapter S corporation (S-corp) under the Internal Revenue Code. Now what?
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