Totten Trust (In Trust For) bank account -Gift tax question

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Latest post 09-23-2010 2:24 AM by Taxagent. 4 replies.
  • 08-15-2010 10:52 AM

    Totten Trust (In Trust For) bank account -Gift tax question

    Can someone please confirm my understanding :

    1. There is no Federal gift tax implication on the creation and funding of a Totten Trust ("In Trust For"=ITF) bank account .

    2. That these ITF accounts  are treated as "POD" accounts (Payment on Death),i.e funds belong to the original contributor/s of money .

    3. Such accounts avoid probate ,hence on presentation of a death certificate the funds would pass on to the ITF  beneficiary.

    4. In the case of a joint bank account, funds would pass to the ITF beneficiary only on the death of the second joint account holder (assuming the joint bank account  includes survivorship ?

     

  • 08-17-2010 4:21 PM In reply to

    • Drew
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    Re: Totten Trust (In Trust For) bank account -Gift tax quest

    Laymans take: You are generally correct as to 1,2,3--could run into state exceptions.

    But as to 4--if its JWROS the other party could effect a gift transfer at any time prior to death as well--be careful of how account is titled and state laws--in some states a JWROS account might be viewed as a convenience account for its creator if not carefully titled.

    And in my state, PA , passage at death of either would be assumed to be 1/2 in each persons name for inheritance tax purposes (for accounts in place more than 1 year, if there are 2 names on account)

     



  • 09-21-2010 1:50 PM In reply to

    • Drew
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    • Joined on 03-30-2000
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    Re: Totten Trust (In Trust For) bank account -Gift tax question

    Well perhaps--but the creation of a conventional POD  or TOD account does not require use of K-1s and  1041s,  the income gets reported to the creator . And I suspect you mean "totten trust" in context of a POD or TOD . There is no pass thru until death of maker.

     

    And at a state level the tax impact on a joint account  transfer at death could be quite different--a big deal say in PA if second holder is NOT a family member and one is looking at 15% inheritance  tax. !  And its worse via a POD or TOD!

     

    But what is it you seek to accomplish?

     

     



  • 09-23-2010 2:24 AM In reply to

    Re: Totten Trust (In Trust For) bank account -Gift tax question

    Alex Naegele:
    In general, there are no federal tax consequences on the creation of a trust. 

    That is technically correct. The creation of a trust by itself does not trigger any federal tax consequences. However, depending on the terms and conditions of the trust and who the beneficiaries are, FUNDING the trust may have some tax consequences.

    Alex Naegele:
    However, the fiduciary of trusts must file form 1041 with the IRS which details the income, losses, and gains of a trust. 

    A Form 1041 is not required for a Totten trust arrangment. A "Totten trust" is a banking arrangement in which funds are placed in a bank account by the grantor "in trust for" some other person. The "trust" is revocable by the grantor at any time, thus allowing the grantor to get the money back. Once the grantor dies, the money in the account passes to the beneficiary of the trust. The New York Court of Appeals (NY's highest court) approved of the use of these trusts even though they did not meet the technical requirements of NY trust law, thus allowing the funds to pass to the beneficiary outside probate. It is this case that gives the Totten trusts their name.

    Because the arrangement is revocable, Totten trusts are treated as grantor trusts and thus the grantor is taxed on the income from this arrangement until he dies. Rev. Rul. 62-148, 1962-2 C.B. 143. Because of this, the funds in the account are also going to be included on the grantor's federal estate tax return, if he has enough assets to be required to file one.

    As a result of being a grantor trust, a Form 1041 is not required. Instead, if the trustee follows the appropriate procedures, the income will only need to be reflected on the grantor's individual income tax return (Form 1040) and the need for the trust to file a separate Form 1041 is eliminated. See the discussion of this starting on page 11 of the 2009 Form 1041 instructions.

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