Taxation; Trusts; Fiduciaries; Beneficiaries

Subject:

Requested by: Honorable James S. Currie Commissioner of Banks

Questions: Does the creation of a trust fund under a "pre-need burial contract", which generates dividend income, result in any intangibles, income, gift or inheritance tax liability?

 

1.  
2. If so, who is liable for filing returns and paying such tax liability?

    

Conclusions: Yes, it may.

 

1.  
2. a. The trust fund represented by money on deposit in a bank is subject to intangibles tax. If deposit is in a checking or regular savings account, the bank pays the tax and charges the trust account. If the deposit is represented by a certificate of deposit, the trustee may file the return and pay the tax or remit the tax to the bank, which then pays it. Money on deposit in a North Carolina savings and loan association is not subject to intangibles tax.

    

b.

If the trust has dividend income in excess of $1,000, or has any taxable income, the trustee must file a return and pay any tax due (unlikely under the facts), but since the trustor at all times has access to the entire fund, he must report dividends accessible to him, and pay any tax due thereon.

c.

If the trustor and the cestui que trust are the same person, there is no gift and no gift tax; if they are different persons, there is a gift when the fund vests in the estate of the cestui at his death, and the trustor/donor is responsible for any gift tax due.

d.

The trust fund used to pay for a decedent’s funeral expenses is either an asset of his estate, or is payment of a debt of the estate by a third person such that the payment is not deductible in determining his taxable estate. In either event, the size of his taxable estate is increased by the amount of the trust fund, and taxes due on the estate are the responsibility of the personal representative of the decedent.

The Commissioner of Banks has asked whether, and to what extent, intangibles, income, gift and inheritance tax laws impact upon "pre-need burial contracts" entered into pursuant to the provisions of Article 7A of Chapter 65 of the General Statutes.

A "pre-need burial contract" is a contract "which has for a purpose the furnishing or performance of funeral services, or the furnishing or delivery of personal property, merchandise, or services of any nature in connection with the final disposition of a dead human body to be furnished or delivered at a time determinable by the death of the person whose body is to be disposed of, but does not mean the furnishing of a cemetery lot, crypt, niche, mausoleum, grave marker or monument." G.S. 65-36.1(3). When such a contract is entered into, money paid pursuant to it to any person, partnership, association or corporation for the rendition of such services is "held to be trust funds", and the person or entity (obviously a "funeral home", or "funeral director") is "declared to be a trustee thereof". G.S. 65-36.2(a). The trustee must deposit the funds within 30 days after receipt "in the name of the trustee as trustee", and "shall be held together with the interest, dividends, or accretions thereon, in trust", and the deposit must be with a "financial institution" (by definition, "a bank, trust company or savings and loan association"). G.S. 6536.1(2); G.S. 65-36.2(a); G.S. 65-36.4. "The trust fund itself shall be solely liable for all taxes on said fund and its interest, dividends, increases and accretions". GS. 65-36.2(a). All payments made under the agreement remain "trust funds" until the first of two events occurs: (1) the death of the person for whose service the funds were paid and the full performance of such services by the trustees; or (2) refund to the person who paid the funds, upon his written demand. For convenience, the person referred to in (1) will be called the "beneficiary" and in (2), the "depositor". They are often, but not always, the same person. G.S. 65-36.2(b), G.S. 65-36.4.

If funds remain on deposit when the beneficiary dies, and the contracted services are performed, the financial institution then pays the amount contracted for, and any balance remaining "shall be paid to the estate of the beneficiary". G.S. 65-36.2(c).

A form contract has been prepared and is in general use, and it seems to track the statute. It appears from the statute and the contract that the funeral home or funeral director contracting to provide the service is the trustee, the fund is the corpus, the depositor is the trustor and the beneficiary is the cestui que trust, all in the conventional sense.

With regard to intangibles tax, if the trust fund is deposited in a checking or regular savings account with a bank, it is "money on deposit" subject to G.S. 105-199, in which case the bank files the return, pays the tax and recovers the amount paid by charging the account of the trust. If the deposit is represented by a certificate of deposit, then the trustee may file the return and pay the tax, or may remit the tax to the bank, which then pays it. In either case, the trustee would be entitled to call on the fund as the source of payment. G.S. 105-207; G.S. 65-36.2(a). Finally, if the deposit were with a North Carolina savings and loan association, the deposit would be subject to no tax at all. G.S. 105-212.

With respect to income tax, G.S. 105-161(a) imposes a tax upon "the taxable income of . . . trusts, including: (1) . . . income accumulated or held for future distribution under the terms of the . . . trust . . ." Returns are required to be filed by the trustee of each trust where "the gross income . . . is in excess of one thousand dollars", or where the trust has "any taxable income".

G.S. 105-161(e). However, dividends which are "distributable to a beneficiary" are deductible, and the "depositor" may until the death of the "beneficiary" always obtain the entire fund, including accretions. The depositor, in that sense, is also a beneficiary even where he and the prospective decedent are different persons. Thus, it seems most unlikely that the trustee will ever have income over $1,000, or have any taxable income such that he would be required to file a return or pay tax. If he did, the trust fund itself would be liable for the tax. G.S. 65-36.2(a).

However, since the depositor always has access to the fund, before the beneficiary dies, he would be required to report and pay tax on all accretions. G.S. 105-161(d)(8); G.S. 105-163. He, too, would be entitled to look to the fund for payment of his liability. G.S. 65-36.2(a).

With regard to gift taxes, if the depositor and beneficiary are the same person, there is no tax because one cannot make a gift to oneself. If they are different persons, there is no gift until the death of the beneficiary when the fund vests irrevocably in the estate of the beneficiary, or for its benefit. It is rather unlikely, however, that the fund will even then be sufficiently large to incur any significant liability. G.S. 105-188.

With regard to inheritance tax liability, if the beneficiary and the depositor are the same person, the fund is a part of his gross taxable estate. G.S. 105-2. If they are different persons, there seem to be two possible consequences: (a) either there is an instantaneous transfer to and from the decedent at his death, so that the fund is part of his gross taxable estate, or (b) there is a transfer to, but not from his estate, in the sense that a third person paid and estate obligation which is therefore not deductible as an expense of the estate. Both (a) and (b) seem to produce the same, or virtually the same taxable result. G.S. 105-2. Of course, the individual responsible for filing the inheritance tax return, and paying any tax due, is the decedent’s personal representative. G.S. 105-23; G.S. 105-28.

Relative to federal income, gift and estate taxes, the results do not seem to be remarkably dissimilar. However, a trustee, depositor or other individual who may incur federal liability should obtain the opinion of the Internal Revenue Service on his specific situation.

Rufus L. Edmisten Attorney General

Myron C. Banks Special Deputy Attorney General