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A trust was created in California, US whose settlor was living in Oregon, US when he/she passed. The trust assets have been liquidated and all creditors and medical debts paid. Are there any other financial obligations that need to be met (state, federal, or ortherwise) before the final division and disbursement can take place? Is there any death tax on a trust valued at under 300K that is meant to be divided 3 ways?

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    I'm voting to close this question as off-topic because it belongs on money.stackexchange.com – BlueDogRanch Nov 16 '18 at 2:23
  • The existence of an obligation to pay taxes is as much a legal question as a money one. I think it is on topic even if it isn't the only forum where this issue could be raised. Lawyers are routinely involved in tax issues associated with end of life. – ohwilleke Nov 16 '18 at 3:18
  • The presence or absence of a legal obligation to pay taxes or other financial obligations is a legal question, and belongs here. This should not be closed. – David Siegel Nov 16 '18 at 3:37
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The estate tax cutoff is more than $11 million, so there is no estate tax obligation. There is also no state estate or inheritance tax obligation in this case.

You indicate that all medical debts have been paid, so I assume that there are no Medicaid liens outstanding.

The trust is required to pay state and federal taxes on any income earned during the period when it was not a "grantor" trust for tax purposes (e.g. when it was not revocable, usually all income arising after the death of the person establishing the trust until the trust is fully distributed to the beneficiaries).

Whether or not any income was earned depends upon how the trust was managed. It would be common for a trust of that size that was liquidated when the stock market was rising to have enough income to owe some income taxes.

The federal tax form involved is form 1041 and there is a counterpart state form (Oregon income taxes, not California income taxes would apply.) These tax forms are generally too difficult for someone who isn't a tax professional to complete. I do my own, but I'm a lawyer with a significant tax component to his practice. So, a professional accountant should be hired to prepare and file the final Form 1041 for the trust from trust assets. The trust may or may not have to actually write a check for taxes due in connection with this form. Often when distributions are made in the same year that income is earned, the tax burden is shifted from the trust to the beneficiaries, who each receive a Form K-1 in connection with their receipt of trust distributions that is part of Form 1041.

Certain assets received by a trust are called "income in respect of a decedent" and count as trust income. These assets include a final paycheck of a decedent (usually small, but sometimes including a large bonus or commission or contingent fee payment), and any retirement assets distributed to the trust (such as IRA or 401(k) liquidations).

Capital gains taxes are due only to the extent that the sales prices exceed the date of death values. But, if there was substantial appreciation of financial assets from the date of death to the date of liquidation, it wouldn't be unusual for there to be some capital gains taxation due.

Another hold up could be the final tax return (Form 1040 and the corresponding Oregon State tax form) of the decedent. This must be filed if any tax is due from the decedent's last year of life, or if any refund is payable from the decedent's last year of life. The tax due would be trust expense and the refund would be a trust asset.

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