Navigating the Minefield of Settlements: A Primer on Tax Issues for the Probate and Trust Litigator

In tough economic times, there are more disputes over wills and trusts. This is because more people know their rights and the legal documents are more complex. As a result, lawyers who handle these cases are seeing more business. I’ve helped these lawyers with tax issues in these cases. This article is meant to help them spot tax issues and make sure they’re dealt with in the legal agreements.

In Florida, it’s allowed to settle disputes over wills and trusts. This can save a lot of money and help families resolve long-standing issues. But sometimes, the tax consequences of these agreements aren’t considered until it’s too late. This can cause problems for the lawyers involved.

It’s important for lawyers to realize that every change in a will or trust can have tax consequences. These may be good, bad, or neutral for the people involved. There are many different types of taxes that could come into play, and it’s important for lawyers to be aware of all of them.

Basically, lawyers who handle will and trust disputes need to be aware of the potential tax issues and make sure they’re dealt with in the legal agreements. This article talks about why it’s important for lawyers to work with tax professionals when dealing with certain legal agreements. It uses an example of a man who passed away and left behind a $10 million estate, and how his assets were divided among his family. The article emphasizes the need for lawyers to involve tax professionals early on to avoid any surprise tax consequences. Before Duke passed away, his son Jim gave substantial gifts to Duke’s children using a legal document that did not actually allow him to do that. Now Samantha is suing Duke’s granddaughter Mindy because Samantha was left out of important family assets. Samantha believes that Mindy convinced Duke to change his documents before he passed away. Duke’s children are also suing Daisy, claiming that she pressured Duke to give her a large portion of the family’s money, even though Duke didn’t want her to have it. In simple terms, if Duke’s assets pass to his spouse or a trust for her benefit, no estate tax will be owed when he dies. If there is a dispute over the assets, the parties may consider distributing some of the trust assets to resolve the disagreement, but this could trigger gift taxes. However, because Duke’s spouse is 98 years old, it may be worth considering terminating a portion of the trust early to avoid higher estate taxes later. If Duke’s children win the argument, the money in the trust will be split between them, Duke’s grandchildren, and Samantha. But it’s not clear how the costs for settling the dispute will be paid. It’s important to figure out where the money will come from and how it will be divided up. This needs to be discussed with the people handling the taxes and income for the estate and trust. Duke’s estate will have to pay taxes if his grandchildren receive a portion of the assets. The amount of taxes can be reduced if Duke’s unused exemption is allocated to the assets given to his grandchildren. However, if the agreement gives the grandchildren less than what was allocated for taxes, it cannot be fixed. It’s important for the estate to work with a tax professional to figure out the best way to handle this. When there’s an agreement that affects a grandchild’s inheritance or someone from a lower generation, called a “skip person,” the highest estate tax rate, called the GSTT, needs to be taken into account. This applies not only to biological grandchildren, but also to beneficiaries who are skip persons because of their ages. If a partner is more than 37 and a half years younger and is a beneficiary of a trust, a GSTT can result.

If dealing with a GSTT trust that existed before September 25, 1985, be careful about any contributions or distributions from the trust, as it could lose its exemption if handled incorrectly.

In terms of income tax, if someone wants their inheritance to be a specific item that has gone up in value, they may have to pay capital gains tax on it. The agreement should specify who is responsible for paying those taxes. If the agreement changes the amounts received by each beneficiary, the amounts received should still be exempt from income taxes, like a gift or bequest. However, if the distributions would otherwise be taxable income, the beneficiary will be taxed on it. After a person’s estate has been taxed, there may be a need to change who gets the money from a trust. If the trust is changed, the person’s spouse may have to pay gift taxes on the money they receive. It’s important to get a ruling from the tax authorities before making any changes, to make sure everyone knows what to expect. As long as the changes are part of a real disagreement between the family members, there shouldn’t be any gift tax issues. If Samantha disagrees with the gifts made by Jim using a power of attorney, it could affect the amount of tax owed on his estate. The value of the gifts would need to be included in the estate tax return, and it could impact other parts of the estate. If the tax return has already been filed, it may need to be changed. Tax issues can be complex and can affect negotiations and agreements between parties. Each situation is different, and it’s important to consider all the tax implications when settling disputes. Linda S. Griffin is a lawyer in Clearwater who specializes in wills, trusts, and taxes. She’s really good at what she does and has a lot of fancy certifications. She wrote an article with the help of some other people, and it’s all about estate planning. This article is part of the Real Property, Probate and Trust Law Section.

Source: https://www.floridabar.org/the-florida-bar-journal/navigating-the-minefield-of-settlements-a-primer-on-tax-issues-for-the-probate-and-trust-litigator/