A Successor Trustee’s First Legal Decision
Seemingly simple decisions can cause unexpected difficulty administering an estate. Among these is the decision whether to utilize an attorney or accountant to file for and obtain a taxpayer identification number (TIN) for a trust.
Most revocable trusts change their tax and legal status upon the death of the last surviving grantor. Sometimes called a settlor, the grantor is the person that generally creates and contributes property to a trust that benefits the grantor during his or her life. During the life of the grantor, particularly if the trust is revocable, the trust is considered a “grantor” trust under the Internal Revenue Code. The significance of being classified as a grantor trust is that the trust does not have a separate tax existence; the grantor is not required to obtain a separate Taxpayer or Employer Identification Number (TIN or EIN), and the trust is not required to file a separate tax return. The grantor affixes his or her social security number to assets requiring a TIN for the trust, and files only a personal income tax return.
Upon the death of the grantor, however, the IRS requires that the trust, which is now irrevocable, utilize a different TIN. Simply, a trust cannot use the social security of a dead person. If the trust has taxable income, the trust may also be required file a separate income tax return. Thus, a successor trustee will typically file for and obtain a new TIN for the trust shortly after the death of the grantor. This application process is relatively simple, and common for attorneys and accountants familiar with trusts, the grantor trust rules in the Internal Revenue Code, and the distinctions between the the original revocable trust and the resulting irrevocable trust.
Because the proper name and characterization of the trust on titles and accounts is important, attorneys will usually prepare for the successor trustee a Certificate or Memorandum of Trust, which permits financial institutions to properly title assets, and follow the instructions of the successor trustee. These documents often identify the correct TIN. Filing for and obtaining the TIN, and preparing the Certificate or Memorandum of Trust is usually completed the same day, or within a few days of completion of the necessary forms, for a nominal fee: easy breezy nice and easy.
Increasingly, however, successor trustees are either filing for the TIN themselves, or relying upon professionals with neither accounting nor legal expertise to request and obtain the TIN. The results can range from frustrating to devastating to the estate plan.
Consider the following examples of mistakes attorneys increasingly observe:
- The successor trustee goes to the bank in order to access the bank account. The helpful teller advises the trustee of the need to obtain the TIN, and “assists” the successor trustee in applying online for the TIN. The account is closed, and a new account is opened with the new TIN, and the trustee is given a piece of paper showing the TIN, and sent on his or her way. The successor trustee goes to the next bank, broker, or financial advisor holding or managing trust accounts. Confident that everything will go smoothly, the trustee presents the death certificate and the TIN to the institution with a polite request to liquidate the account. The institution refuses, advising that they do not have everything needed. The institution is unclear what the title of the trust is or should be, and what authority the successor trustee has regarding the account. After several attempts the successor trustee is forced to contract an attorney to prepare documents that could have been prepared initially, which would have prevented the delay and frustration.
- The attorney in the foregoing example reviews the paperwork provided by the teller and realizes that the application is completed incorrectly, and that as a result the IRS will likely request the filing of Form 1041 trust income tax returns from the date of the creation of the trust through the present tax year. In a “pay me now or pay me later,” series of alternatives, the attorney offers to correct the improperly completed application.
- The attorney in the foregoing example reviews the paperwork, but cannot determine whether the application for the TIN was properly prepared. The teller prepared the application online, but did not print out a hard copy of the application. Concerned that improper preparation of the application will result in expense or loss to the trust, for which the trustee or heirs may seek to hold the attorney responsible, the attorney either (1) refuses to utilize the TIN and recommends abandonment of the TIN, charging the client for preparation of a new application, and paperwork abandoning the prior TIN, or (2) the attorney requires the trustee to sign an acknowledgment that use of the TIN may cause loss or expense, which releases and indemnifies the attorney from loss resulting from continued use of of the TIN.
- The teller in the previous example identifies the grantor of the trust, now deceased, as the responsible party, since the grantor created the trust. IRS correspondence is directed to the deceased grantor at the grantor’s last residence. Because the property is promptly sold, the successor trustee is not advised that a Form 1041 income tax return must be filed. When the successor trustee learns that a return should have been filed, the trustee is forced to pay the tax liability, and resulting penalty and interest, from his personal assets since the trust assets were distributed.
- A successor trustee completes the application to obtain a TIN for the trust online, and proceeds to administer the trust estate. The IRS sends letters demanding Form 1041 income tax returns for fourteen tax years. The letters, unfortunately, are sent to the deceased grantor’s home, pursuant to the application, which home was promptly sold by the successor trustee. The successor trustee is later contacted by a revenue agent. With the assets of the trust long distributed, the trustee pays from her own funds an attorney and accountant to resolve the matter.
- A family friend helps the successor trustee obtain a TIN, but writes down the TIN incorrectly. Neither the friend nor the trustee realize the error. The IRS contacts the taxpayer when a return is filed using the incorrect TIN. An accountant is retained to investigate and resolve the problem.
Each of the foregoing represent actual cases. The application for a TIN may seem simple, but the terms used in the application, and the precise information requested can be confusing. The fact that the application can be prepared online may cause some to believe that the application is either very easy to complete, or that proper completion is unimportant. Neither assumption is correct.
Well-meaning professionals, such as tellers, bankers, insurance agents, brokers, and financial planners, and helpful friends may assume that they are are in safe waters completing the form for a customer or friend. IRS rules require that third parties that complete the application identify themselves, and abide by record-keeping requirements, which rules the well-intentioned often fail to observe. Failure to observe these rules may make impossible immediate solutions to online technical glitches or typographical errors, thereby delaying administration of the estate. Perhaps the ultimate tragic irony to the immediacy offered by the online application process is that failure to follow the third party disclosure, record preparation and record keeping rules may mean that a good TIN takes longer to obtain online than if it had been applied for by traditional mail.
Professionals should also be aware that there may be liability for applications prepared improperly, and that the professional insurance may or may not cover any loss. Non-lawyers and non-accountants are properly cautioned that the completion of the forms, and the accompanying advice, may constitute the unauthorized practice of law, or exceed the scope of the professional’s licensing.
Simply, retain an attorney or accountant to seek and obtain the TIN.