Legal Question in Tax Law in California

taxation on trust funds

Question: Will my mom need to pay taxes on the money she receives from my dad's estate (taking the circumstances below into account)?

Circumstances: When my parents divorced in 1995, the CA court ordered my dad to pay monthly alimony to my mom until his death, at which point she'd be given a lump sum of $500,000 (he was meant to maintain a life insurance policy to cover this). After his death, we learned that he had a $2M insurance policy, but didn't list my mom as a beneficiary, instead setting up a trust to receive the funds and distribute as needed. However, the trust makes no mention of my mom's court-ordered payout.

My dad's new wife is the surviving trustee. Fortunately she is an honorable person and is going to pay my mom the $500,000 as was previously agreed.

But, being that my mom is not mentioned in the trust, and was not a direct beneficiary on the insurance policy, how will the IRS perceive this? Will they see this as a taxable ''gift'' from my dad's new wife? Or will they respect the 1995 court order that says my mom was to receive the payout and therefore deem it as [non-taxable] life insurance money?

Thank you!


Asked on 10/16/08, 9:04 pm

1 Answer from Attorneys
R.C. Lim The Law Offices of R.C. Lim

Re: taxation on trust funds

It is difficult to be sure from the facts you have stated, but it sounds like she will be able to keep the money as the transfer is taxable on him upon his death and not the other way around.

If you would like to discuss this matter in greater detail, please call my office to arrange a consultation.

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Answered on 10/16/08, 11:19 pm


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