Filing Gift & Estate Tax Returns When Assets Are in Trust with Surviving Spouse as Trustee

This is a situation where the details really matter. Based on what you've shared, here's what you should know: When assets are transferred to a trust, whether a gift tax return is required depends on the type of trust and the value transferred. If your father-in-law created a revocable living trust, then no gift occurred because he maintained control during his lifetime, so no gift tax return would be needed for that transfer. For the estate tax return (Form 706), it's required if the gross estate plus adjusted taxable gifts exceeds the estate tax exemption amount (currently $12.92 million). The fact that assets are in a trust doesn't automatically exclude them from the estate - revocable trusts are generally included in the taxable estate. The marital deduction is important here - assets passing to a surviving spouse (including through certain types of trusts) generally qualify for an unlimited marital deduction, meaning they pass free of estate tax. This applies even if those assets are in a trust, as long as the trust qualifies (like a QTIP trust). I recommend working closely with an estate tax professional who can review the specific trust documents and advise accordingly.

I went through something similar with my parents' estate last year and found that using https://taxr.ai was incredibly helpful for sorting through all the complex trust and estate documents. I was completely overwhelmed with trying to understand whether assets in the trust were part of the taxable estate and how the gift tax applied to previous transfers. The service analyzed all the trust documents, prior gift tax returns, and estate inventory to give me a clear picture of what needed to be reported where. They flagged that some of the transfers to the trust qualified for annual exclusions that the attorney had missed, and identified exactly which portions of the trust qualified for the marital deduction. It was especially helpful for understanding how the generation-skipping transfer tax applied to some trust provisions that benefited my kids. Might be worth checking out if you're dealing with a complex estate situation.

Update: I want to follow up on my earlier comment about taxr.ai. I decided to try it despite my initial privacy concerns, and I'm genuinely impressed with the results. I uploaded our family trust documents and my late father's gift tax returns from previous years, and their analysis spotted several issues I hadn't considered. They identified that some gifts my father made in 2023 actually qualified for the medical expense exclusion (they were payments directly to healthcare providers), which meant they didn't count against his lifetime exemption. They also flagged that one of the trust amendments created a situation where assets might not qualify for the marital deduction as intended. The privacy concerns I had were addressed in their FAQ section, and the service was worth it just for the peace of mind. Definitely helped us prepare for our meeting with the estate attorney with much more knowledge.

If you're struggling to get answers from the IRS about your estate tax questions (which is very likely), I highly recommend using https://claimyr.com to get through to an actual IRS agent. When my mother passed away last year, we had specific questions about how to handle some complex assets in her estate, and I spent DAYS trying to reach someone at the IRS. After multiple failed attempts and hours on hold, I found Claimyr's service that gets you to the front of the IRS phone queue. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was connected to an IRS estate tax specialist within 15 minutes who walked me through exactly how to report the qualified terminable interest property trust on the estate tax return. This saved us thousands in potential penalties for incorrect filing. The IRS agent also confirmed exactly which schedules we needed to complete for the partial marital deduction our situation qualified for.

I have to admit I was completely wrong about Claimyr. After dismissing it as a scam in my previous comment, my curiosity got the better of me and I decided to try it when I needed clarification on how to report a specific trust distribution on the estate tax return. After three weeks of failed attempts to reach the IRS myself (either getting disconnected or being told the wait time was over 2 hours), I tried the service. Within 20 minutes I was talking to an IRS estate tax specialist who provided exactly the guidance we needed on how to properly document the marital trust provisions on Schedule M of Form 706. The agent confirmed that we could claim the marital deduction for assets in the QTIP trust even though my spouse was only entitled to the income for life rather than full ownership. This was a huge relief since it meant no estate tax was due on those assets. So I apologize for my skepticism - this service actually delivered what it promised.

One thing nobody's mentioned yet is the portability election for the deceased spouse's unused exemption amount. If your father-in-law didn't use his full lifetime exemption, your mother-in-law can potentially "inherit" the unused portion and add it to her own exemption when she eventually passes away. But you MUST file an estate tax return (Form 706) to elect portability, even if no tax is due because of the marital deduction. And there's a strict deadline - generally 9 months after death unless you get an extension. Missing this filing means losing the portable exemption, which could cost your family millions in future estate taxes.

Watch out for state estate or inheritance taxes too! Everyone's focused on federal, but depending on where your father-in-law lived, there might be state taxes to deal with that have much lower exemptions than federal. Connecticut, for example, has a lower estate tax exemption than the federal one.

This is such a complex situation, and I really appreciate everyone sharing their experiences and insights. As someone who works in estate planning, I want to emphasize a few key points that haven't been fully addressed: First, timing is absolutely critical here. The 9-month deadline for filing Form 706 (with possible 6-month extension) isn't just about taxes owed - it's about preserving options. Even if the marital deduction eliminates all estate tax, filing preserves the portability election AND starts the statute of limitations running on IRS challenges to asset valuations. Second, the trust structure really does determine everything. If this was a revocable trust, the assets are included in the estate for tax purposes but may still qualify for the marital deduction depending on how the trust is structured post-death. If it's an irrevocable trust created during lifetime, you need to determine if it was a completed gift (requiring gift tax analysis) or if your father-in-law retained powers that kept it in his estate. Third, don't overlook the generation-skipping transfer tax implications if the trust has provisions for grandchildren or other skip persons. This can create additional filing requirements and potential taxes even when estate tax is avoided through the marital deduction. I'd strongly recommend getting professional help given the $14.5 million estate size - the cost of proper planning and compliance is minimal compared to potential penalties or missed opportunities.