Navigating the Tax Landscape of Trust Administration
By Attorney Christian Schneider, J.D.
Trust administration is a critical period of transition. When a loved one passes, a revocable living trust, which may have operated quietly for years, undergoes a significant legal transformation. In many cases, the trust does not simply remain a single entity. For married couples especially, the death of the first spouse often triggers a division into multiple subtrusts, such as a Survivor’s Trust (typically remaining revocable) and an irrevocable Family or Credit Shelter Trust.
For families in the Pacific Northwest, navigating this division requires a clear understanding of federal requirements alongside the distinct state tax regimes.
The Architecture of Subtrusts and Irrevocability
Upon the death of a trustor, one of the first steps of administration is to implement any tax savings plans. If the trust calls for creating subtrusts, the assets must be properly allocated.
While the Survivor’s Trust often continues to use the surviving spouse’s Social Security Number, any irrevocable subtrust created at this stage, such as a Family Trust, must obtain its own federal Employer Identification Number (EIN). This marks the creation of a separate tax-paying entity. From this moment on, the successor trustee is responsible for filing fiduciary income tax returns (IRS Form 1041) if the trust generates more than $600 in annual gross income. Similarly, after the death of a surviving spouse or a single trustor, the entire trust structure transitions to being irrevocable.
Income Tax vs. Estate Tax
While federal income tax rules are consistent, the estate tax landscape varies among states. For example:
- Oregon Estate Tax: Oregon maintains one of the lowest estate tax thresholds in the country at $1 million. If the total value of the decedent’s assets (including real estate, life insurance, and trust assets) exceeds this amount, a Form OR-706 must be filed. Oregon also taxes trust income at the state level (Form OR-41).
The Strategic “Step-Up” in Basis
One of the most valuable tools in trust administration is the “step-up” in tax basis. For both federal and state purposes, assets held in a trust typically receive a new basis equal to the fair market value at the date of death.
For example, if a trustor purchased property in the Willamette Valley decades ago for $150,000 that is now worth $900,000, the successor trustee may be able to sell that property with little to no capital gains tax. Obtaining professional appraisals immediately following a death is vital to “lock in” this tax-saving benefit for the appropriate subtrust.
Proactive Preparation: What You Can Do Now
Successful administration begins long before it is necessary. To protect your family, consider these strategic steps:
- Subtrust Funding Strategies: For married couples, ensuring your trust includes formulas to maximize state-level exemptions can save your heirs hundreds of thousands of dollars. Properly “funding” a Family Trust after the first death is a key step in shielding assets from state estate taxes later on.
- Jurisdictional Planning: If you own property in both Oregon and Washington, your trust must be structured to navigate two different sets of state laws to avoid complex multi-state filings or ancillary probate.
- Asset Documentation: Keep updated records of “basis” (what you paid for an asset) and current valuations. This allows your successor trustee to move quickly when timing is everything.
- Retirement Account Coordination: The SECURE Act generally requires most non-spouse beneficiaries to empty inherited IRAs within 10 years. We can help you coordinate your trust with these rules to minimize the “tax hit” your children might face.
Partner with an Experienced Attorney
Trust administration often involves multiple moving parts—especially when a trust divides into subtrusts with different tax rules and objectives. Proper handling of fiduciary income taxes, estate taxes, and capital gains taxes is essential to avoid unnecessary liability.
At Myatt & Bell, we help clients navigate trust administration and estate tax planning in Oregon and Washington, including the complexities of trust funding, tax reporting, and multi-state compliance.
If you are serving as a trustee or planning your estate, contact our office today to schedule a consultation and ensure your trust is tax-effective and administered efficiently.
Rose Elsensohn
Client Service Coordinator
Tell us something fun about you!: I’m the youngest of 5 kids, we all grew up in Oregon and Washington but I’m the only member of my family who stayed in the PNW.
Most memorable place you have vacationed?: Chicago, I had so much fun exploring the city, checking out the aquarium and field museum, and of course eating deep dish pizza!
What do you like to do just for fun?: I’m a nerd at heart so I love playing video games, even more so when I get to play them with my friends.
Fruit Pizza Recipe
I love make desserts with fresh fruit in the spring and summer time and this one has always been a crowd pleaser when I bring it to parties or Barbeques. You can use whatever fruit is in season or you prefer and it’s super easy to throw together. It’s best to use fruit that is either bite size as is like berries or grapes, or fruits will keep well even after being cut, like kiwis, peaches, and mangos. Try to avoid fruit that will brown quickly like apples or bananas unless you plan to treat them for browning first.
Crust Ingredients:
- 1 + 1/2 cups all-purpose flour
- 1 + 1/2 teaspoons cornstarch
- 1 teaspoon baking powder
- 1/4 teaspoon salt*
- 1/2 cup butter softened to room temperature (*if using salted butter, skip adding the extra 1/4 teaspoon of salt)
- 3/4 cup granulated sugar
- 1 room temperature egg
- 2 teaspoons vanilla extract
Topping Ingredients:
- 1 8 oz block of cream cheese softened to room temperature
- 1/4 cup butter softened to room temperature
- 1 + 1/4 cup powdered sugar
- 2 teaspoons vanilla extract
- 2-3 cups of assorted fruit cut into bite-sized pieces
Directions:
- Mix the dry ingredients for the crust together in a bowl (Flour, cornstarch, baking soda and salt if you are using unsalted butter)
- Using a stand mixer or a handheld mixer, beat the sugar and butter together on a medium-high speed until very pale and creamy. This should take around 3-5 minutes. Add the egg and vanilla to the butter and sugar mixture and mix until combined.
- Slowly add the dry ingredients to the wet ingredients and mix just until fully combined. Once dough has formed, wrap it in saran wrap and chill in the fridge for 1-2 hours.
- Preheat your oven to 350 degrees and remove dough from the fridge. Press the dough onto a greased pizza pan or pie dish until it’s about 1/3 inch thick. Bake for 15-20 minutes just until the edges are slightly browned. (If you have extra dough, you can shape them into round balls and make sugar cookies and eat as is or turn them into mini fruit pizzas!)
- Remove crust from the oven and allow to cool completely before decorating. While the crust is cooling, wash and cut fruit as needed and make cream cheese topping.
- To make the cream cheese frosting, combine softened butter, cream cheese, powdered sugar, and vanilla extract in a mixing bowl and mix until smooth, making sure there are no lumps.
- Once the crust is cool, top with a thick, even layer of the cream cheese topping. Arrange fruits in desired pattern on top of cream cheese topping, being sure to press the fruit very lightly into the topping. Allow to cool in the fridge for at least one hour so the cream cheese topping can firm up, then cut into slices to eat and enjoy!
Meet Rose
Estate Planning & Peace of Mind
Have you found yourself making excuses for why not to get your estate in order? Maybe you’re convinced that you really don’t need estate planning. If you have assets and loved ones, you need an estate plan. Having an estate plan that is right for you ensures your loved ones are taken care of and that the transition is as easy as possible.
Attend one of our complimentary estate planning webinars and see for yourself. Having your estate plan prepared and understanding the why’s behind the importance of estate planning can bring you the peace of mind you have been needing.
From Our Clients
“Myatt & Bell gave excellent advice, set up our trusts, and helped us fund them. A job well done and highly recommend.” – Melissa
“Staff is very responsive and professional. Took the time to answer questions and ensure we had the resources needed to set up our trust.” – Tiffany P.
Families choose Myatt & Bell to design their estate plans with honest optimism and meticulous attention to detail.
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