Closing out a living Trust with a 1099-s

[Phatparents]

My mother passed away in 2018.  The Living Trust specified that the house was to be sold and split between the three (adult) children.  (And I assume that since we inherited it at the stepped up basis, there will be no tax implications.)  We did NOT put the house in our collective names before selling...the Living Trust was the seller of the house...

The house was sold in 2019 and the "Living Trust"  has received a 1099-S for the selling price of $345,000. 

I know I need to fill out a 1041 for the "Living Trust" of my mother. But I don't understand how this all works....

Does the Living Trust, on schedule D, claim the house sold for $345,000 and had a cost basis of the same?  Do Schedule K's get made and sent to myself and my siblings for $115,000 each?  Or $0, since the trust had no profit. Or do Schedule K's even get generated and sent?

Or does the Living Trust show a gain of $345,000 and each sibling gets a schedule K for $115,00 and each claim it as inherited income? 

I just can't wrap my head around how all this is supposed to work...I am so confused with what seems like it should be simple to understand....can someone please explain how all this works...

[Anonymous_]

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@Phatparents wrote:

The house was sold in 2019 and the "Living Trust"  has received a 1099-S for the selling price of $345,000. 

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There are threshold questions here that need to be answered:

Did anyone apply for an EIN for the trust? If so, does the 1099-S have that EIN on it? If not, what tax ID number appears on the 1099-S?

The way this usually works is the grantor (your mother) has a living trust (aka revocable living trust) drafted during his/her lifetime and specifies the property the trust holds. Upon death, the trust becomes irrevocable and a new tax ID number (EIN) is obtained from the IRS. The trust is now typically considered to be a separate entity and will file a Form 1041 if the threshold income requirements are met.

In this instance, the basis of your mother's house gets stepped up to its fair market value as of the date of her death. If the sales price was the same as the basis (as you indicated it was), then there would be no gain (profit) on the sale. However, the IRS is only aware that a tax reporting statement (a 1099-S) was received that contained the gross proceeds; the IRS is not aware of the trust's basis in the property. Therefore, a return needs to be filed that shows the sales proceeds and basis of the property. If the figures are the same, there is no gain and the K-1s would essentially be blank (and, actually, it would not be necessary to even issue them).

[Phatparents]

Thank you.

Yes, I got an EIN number when we prepared to sell the house and the 1099-S has that number on it.

So to make sure I am understanding this....the responsibility of telling the IRS about this transaction lies with the "Living Trust" in the name of my mother.  The "gross proceeds" are written down to $0, no K-1s are issued, and that is the end of the paperwork.

But on the personal 1040 taxes of my brother, sister and myself...we don't report the distributions we each received on our 1040s?   Is that correct? I thought that is what the K-1 was for?   The only reporting of the money is done on the 1041?  Doesn't the IRS need to know where the $345,000 from the "Living Trust" was distributed?

[Anonymous_ · Accepted solution]

@Phatparents

It is critical to understand that there is no living trust at this point; that trust was extinguished with the passing of the grantor. The trust is now an irrevocable trust, a separate entity, which needs its own EIN and reports on its own return (Form 1041).

Therefore, the 1041 would show the gross proceeds from the sale and the basis of the house, which most likely, would result in no gain. If that is the case, then there is really no need to issue K-1s since a K-1 only reports items of income, gain, deductions, and credits, not distributions of principal (corpus) of the trust.

[Phatparents]

@Anonymous_ 

(1) Regarding the EIN...upon death, I applied for an EIN in the name  of "The (mother's name) Living Trust".  There was no EIN prior to her death.   That was the EIN given to the lawyer handling the sale of the house.  I now have a 1099-s with that EIN on it, the transferor's name listed as "The (mother's name) Living Trust" and  the gross proceeds noted as  $345,000 -  the price of the house. 

I assume all the above was handled correctly? 

(2) Upon completion of the sale, the lawyer handling the transaction cut checks to my siblings and myself in equal amounts.  Since I am not going to be generating K-1's when I complete the 1041, are those distributions reported anywhere?  on our individual 1040's?

My siblings want to file there 1040's and it sounds like they don't have to wait for me since I will not be giving them anything?   Is that correct?

[Anonymous_]

Yes, it appears that you did handle it correctly, the distributions do not have to be reported since there is no income or gain to be reported, and they do not have to wait for you to file. 

It appears as if you simply need to file your 1041 to report the sale proceeds (and basis to show there is no gain).