Has IRS issued clarification on 67 (e) (1) regarding final estate & trust costs are not misc deductions; therefore can be deducted on beneficiary’s return?

[maglib]

yeah but never a 1041 filed....  only the grantor tax letter... and always taxed at individual level on all income of the Trust.   What are your thoughts on do we just start filing a 1041 for the 1st time and go forward?

[Anonymous_]

My thoughts are simply "that's what I would do if it I were in the same position". Just my opinion but if I were you, I would proceed as you just outlined.

[maglib]

I'm thinking the difference between her tax rate and the trust was probably deminimis in the past.  

[maglib]

any other issues you can think of on this?

[Anonymous_]

Not really. I mean, what, exactly, is the worst case scenario?

An audit involving the 1041 (and those are extremely rare) disputing whether she should be filing as a non-grantor?

Doubtful, but you're going to report all of the income, anyway, so they would be left to dispute only the deductibility of the expenses, which it appears you have already litigated (i.e., it is a issue that has already been settled).

[maglib]

yeah but the tax rate of a trust vs. individual and is there not an issue with distributions?  Trustee is a big bank paid withm my mom non-paid and gets a copy of the return annually.... they should bear some liability.  I would think the bank trustee should have been preparing the k-1....  I'm going to research more as if the grantor info letter was sufficient in her case or not.  Thanks for all your time.  

[Anonymous_]

No problem and best of luck. I'll leave you with the warning that you will, most likely, get responses that are on opposite sides of the issue, not only because it's rather complex, but because there are financial interests/potential liability involved (e.g, the bank will not want to admit it has mismanaged the trust for years nor be held responsible for making the wrong decision as to the type of trust they were managing).

[maglib]

Here I was always told it was a grantor trust.....  and never thought otherwise until now.....  helpd my mom prepare it annually and was told by the paid trustee that no k-1 was needed that the grantor tax letter was sufficient in her case. Amazing when audited, the IRS passed it without question.  I guess the fact that it says grantor tax letter made me comfortable enough.... WHOOPS!  My bad to just continue doing what was done in the past too and since audit passed, I never thought a thing.  I also have notes that an irrevocable trust can be treated as a grantor or non-grantor Trust,  never stop reading.

[maglib]

@tagteam   The Trustee is now relooking it over....  they last theoretically reviewed it in 2015.  They are not providing any laws as to why they claim it is a grantor trust....  it is not a special needs trust which is an exception (special needs trusts are in essence non-grantor but get reported as grantor trusts, issue is that still favorable treatment for SNT's? as there is a break even when treating as it's own entity and getting to claim expenses subject to higher tax rates can be better than treating as a grantor trust).....  Their legal team can't get back to me till after tax season. I hired someone to look over the trust agreement, they also agree that it should have been treated as a non-grantor trust all these years and that the Trustee messed up...  They said it it could be a defective grantor irrevocable trust....  now I need to read about those but, I highly doubt the attorney set it up in 1985 that way!

[Anonymous_]

Yeah, it's sort of difficult to comprehend why the trust would be set up in either of those two ways.

An IDGT (or IDIT as some call it), is essentially an estate planning tool used to remove assets from a person's estate (and place them beyond creditors, in most instances). An SNT, to my understanding, is typically set up so the beneficiary has supplemental income but won't be disqualified from receiving government benefits (also, she was not on SSDI, so the trust doesn't qualify for QDist status). This doesn't appear to fit in either category.

[maglib]

actually the SNT should have been what was set up.... she had been getting SSD at time of Trust so I do not comprehend how she was eligible with the wrong type of Trust in place... sadly everyone involved back then is dead....  the original documents at the bank were burned in a fire...  Sad situation.