Questions about tax returns for a newly created Irrevocable Trust.

[leeleses]

Again, it's a newly created Irrevocable Trust.

There's two condos and a little money in the trust.

In the past before the trust, one condo was rented out and as such had a Schedule E attached to a 1040 form.

This year repairs were needed to the non-rented condo, and the repair bill was paid partly from funds in the trust and partly from the owner who owned the condo before it was placed in the trust.

So, who completes the 1041, the grantor or the executor?

And whose return(s) does the new K1 get attached to?

What version of TT is best suited for this tax situation?

Thank you!

[jtax]

This is complicated stuff. You are probably best off seeking the advice of the attorney who drafted the trust or a CPA/EA who deals with irrev trusts everyday.

That said if you use TT the right version is the desktop only TT Business. (NOT Home & Business). https://amzn.to/48XuERr

TT Business does not hold your hand as much as regular TT, so you really need to know what you're doing.

A couple of comments about your specific questions about in irrevocable trust owned real estate. This assumes this is a non-grantor irrevocable trust. If the grantor is still alive and the details of the trust make it a grantor trust, then things are different. 

1. The 1041 is prepared by the Trustee. Not the grantor. Not the executor. Unless of course the same person is wearing multiple hats. But the trustee is the one responsible

2. Ask your CPA/EA but I think the rental real estate gets valued for depreciation purposes on the day the trust became irrevocable. An appraisal is best, but you might get away with an town assessment if the  town keeps values up to date (many don't).

3. The rental is treated like any other rental starting on the date of the trust became irrevocable.

4. Need more info about the non-rental property. Is it actually rental property but just not ready for rental? Or is a beneficiary using it? Or is it held for investment only?

5. Re: K-1s. Beneficiaries who receive INCOME from the trust get K-1s showing the amount and type of income (or expense). Usually this means money was distributed from the trust to the beneficiaries and was an ongoing thing year after year (not just one or two payments). For example if the trust has no deductions if the trust has $50k in interest income and distributes $15k to Joe, then Joe gets a k-1 showing $15k of interest income, which is reported on Joe's 1040. The trust files a 1041 showing $50k of interest income and a distributable net income (DNI) deduction of $15k for total taxable trust income of $50k-$15k=$35k. The trust issues a K-1 to Joe showing the $15k of interest income.

[jtax]

Just to clarify the value for deprecation purposes probably the date the trust became irrevocable if the real estate was contributed before that date. Otherwise it is likely the date the real estate was contributed to the trustee.  (Technically the trust doesn't own anything or really exist. The trustee is his or her role as trustee is the legal owner. This is different from, say, corporations that do have a separate legal existence from the shareholders/directors.)

[leeleses]

Thank you SO much for all of this information!

[leeleses]

4. Need more info about the non-rental property. Is it actually rental property but just not ready for rental? Or is a beneficiary using it? Or is it held for investment only?

** A beneficiary is using it.

[jtax]

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@leeleses wrote:

4. Need more info about the non-rental property. Is it actually rental property but just not ready for rental? Or is a beneficiary using it? Or is it held for investment only?

** A beneficiary is using it.

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I would seek profession advice and read the trust text carefully to understand the beneficiaries rights and obligations (e.g. do they have to pay any of the expenses?). 

Here is a presentation make a law firm discussing  some of the issues.  You might find some info in there similar to your case that could inform your questions of your attorney/EA/CPA.

https://www.hklaw.com/files/tklaw/wp-content/uploads/2019/02/25125817/Buying-and-Owning-Homes-for-Tr...

[Anonymous_ · Accepted solution]

Again, it's a newly created Irrevocable Trust.

So, who completes the 1041, the grantor or the executor?

** A beneficiary is using it.

Trusts do not have executors; trusts have trustees, estates have executors.

Odda are that if you created the trust, are the settlor, trustee, and one of the beneficiaries, then the trust is a grantor trust and disregarded for federal income tax purposes. As a result, you would have reporting and filing options if that is the case.

See https://www.irs.gov/instructions/i1041#en_US_2023_publink1000286018

You should consider seeking guidance from a local tax professional.

https://taxexperts.naea.org/expertdirectory

[leeleses]

Thank you!  Yes, my aunt is going to go back to her legal team and their tax guy.  We were wondering if we could learn to do the tax returns, but it doesn't seem worth it now!