Our Mother died and the Irrevocable Trust sold our family home that it has owned for 14 years. Proceeds were distributed to benefactors who pays the taxes on the income?

[joseph1405]

The trust must terminate after her death there will be a capital gain based on on basis price of $283,000.00 and the home was sold to 3 brothers for $480,000 the 6 children received about 64,000 rolled in equity for the 3 brothers to buy the existing home and distribute to 3 sister in cash proceeds.   There were passive losses accumulated over the 14 years that amount to $120,000 which will offset our capital gain divided by 6 through the K-1 but how will the 64K be treated per sibling? Is it paid by the trust through the 1041 or is it ordinary income to each individual child, please advise.

Thanks

Joe [Personal Information Removed] Executor of my mother's Estate and Trustee to the Trust that Sold the house.

[Personal Information Removed]

[joseph1405]

PK very helpful I have an Attorney/CPA I have been working with for 10 years and I am concerned I am not getting the right tax advice, please may I ask you to comment further. As I said my mother died on 1/9/13 and my father on 4/6/04 he became a paraplegic in 1999 and decided to form and place his stocks less than 50K fmv at the time in a Barrett Family Income trust (not a living trust Irrevocable under article 13 of the trust), additionally he created a Barrett Family Trust (also irrevocable under article 13) and sold our family home to the trust for $73,600 in Feb 2000. My father did not have a will, my mother was assigned the Voluntary Administrator of his estate after his death. The little assets he had were contents of the home and a few stocks in his and mother's name as Joint Tenants. Finally, my mother did have a will and I was assigned the Executor of her estate as Voluntary Administrator in the state of Mass an informal probate when assets totals are less than 25K plus a car which she met. I am also the Trustee of both trusts along with my brother as co-trustees.

We decided as a family to sell the house from the Barrett Family Trust to myself and my 2 brothers for an agreed price of $480K the basis for the capital gain as defined by my CPA was about $283K (not a stepped up value but calculated based on 73.6K plus home modifications of 160K, hardship loan of 25K and loan from my brother for about 25K).  The sale was completed and liens were paid off including the 50K mentioned above plus outstanding mortgage of 30K in mid April of 2014, each of the 6 siblings including myself received about 64K in cash to my sisters and in equity to myself and 2 brothers who own a live there as their primary residence.

I have been told by my CPA that the cap gain of about 200K will be offset by about 120K in passive losses or 80K/6 time 20% or about $2,600 each sibling carried on their 1040 via the K-1 from the Barrett Family Trust.  My question is how will the 64K distributions be treated in cash to the 3 sisters and in equity to the 3 brothers? Ordinary Income? line 17 or line 21 of the 1040?
Or Does the Barrett Family Trust pay the tax through it's own 1041? My concern is correctly setting the basis for the home plus will the 64k distribution that will knock all of us as siblings to a higher tax brackets.

Please advise you may phone if you like on my cell at 508.954.3220.  I have another CPA friend who is also doing some analysis and I would like to distribute all liquefied assets held in my mother's Estate (18K) and those held in the Barrett Family Income Trust (10K) to all siblings before year end, less taxes owed and fees to my attorney/CPA.

Thanks
Joe Barrett

[pk · Accepted solution]

Assuming that  your mother had a trust into which she had put the family home fourteen years ago. She died recently, therefore there is step-up in the value of the  home   and therefore there may be no capital gains to contend with. The  distribution to the inheritors is tax free for federal purposes.

Assuming that the home was owned by the trust after your mother's death a long time ago ( approx 14 years  when a living trust became irrevocable ) -- yes then there would be capital gain based on a basis established at the time of  death of the decedent.

To be sure , please tell more about the scanrio that you find yourself in --- FMV, at the time of death of the decedent,  was there a will , are  you the successor trust and was this a trust set up by your parents and your mother was the successor trustee after the death of your father, what was the FMV of the property when your father died , etc

[dixie7175]

Our situation is similar in that my husband's father and step-mother had a Irrevocable Trust.  The family condo was purchased by them for $450,000 and then his father died in 1985.  His step-mother lived in the condo until she died and it recently sold for $1.6 M.  Ater the cost  of the condo sale, the net is approximately $1. 5M.  Accordingly to the trust, his stepsisters receive 50% and the other 50% is divided between my husband and his 2 siblings.  Is there a step-up  for my husband and his siblings or not, i.e. will each only have $75,000 tax free and then they will have to pay capital gains on the remainder of their distribution of the net proceeds?  Thank you

[pk]

dixie7175,   my assumptions would be that when the  father died, therewas a step-up and then when the mother passed away there was another step-up -- thus the heirs should have very small gain to contend with ( if any). The gain that will affect the inheritos is that between  the time the mother  died  and the sale of the prop -- if there was any ( there should have been a valuation done on the death of the decedent or soon thereafter as determined by the trustee or executor ). So no I don't expect any capital gains. What I don't know -- because of the way the property was held is  unknown -- is if there is any taxes to be paid by the estate of your mother-in-law because  of increase in value of the  share of your father-in-law -- after his death.

[ScruffyCurmudgeon]

PLEASE always post your question as a new question and not as a comment to a 2 month old one as your question  almost always will be missed.

Please see answer below as a separate response to you.

[view2]

Scruffy link:
<a href="https://ttlc.intuit.com/questions/2587895-irrevocable-trust-between-my-husband-s-father-and-his-step..." rel="nofollow" target="_blank">https://ttlc.intuit.com/questions/2587895-irrevocable-trust-between-my-husband-s-father-and-his-step...>

[ScruffyCurmudgeon]

DIXIE7175

All of the assets of the Trust, upon the death of the Grantor are "stepped up" to the Fair Market Value at time of death of the Grantor.  You did not disclose what was the value disclosed by the Estate on the Form 706 Estate Return, if filed and necessary, but it would have been the Fair Market Value, and not the original cost of $450,000. 

You mention that the selling price was  $1.6M less $100,000 in costs, and a net proceeds of $1.5M.  

As an example, if the FMV for the property at time of death was $1.4M, then the Estate in total would have $100,000 in capital gains. You cited a distribution formula of 50% to step-siblings, and then 16.67% each to your husband and his direct siblings. Thus, the distribution to your husband would be a gross of $250,000 of which in this example [$100,000 total gain] only $16,667 would be reported as capital gain.

All that said, whoever is handling the closing of the Estate, and presumably this is the Personal Representative [old term= Executor], will report all this on any state-level Estate Tax form, if necessary, and on a Federal Form 706, if necessary, and issue to all beneficiaries a statement of bequests distributed.  If the Estate files a Form 1041, and it sounds like it should, the beneficiary report will be a Schedule K-1 and will explicitly cite the amount of distributed capital gain.

[eeafrica]

Using this same scenario, I would like to add.  My father died in July 2013.  Before he died he had an attorney create an Irrevocable Trust in which only his house was placed (Done in June 2013).  The FMV at the time of his death was $596,400.  In January 2015, the Trust (I am the sole Trustee) sold the house for $580,500.  My attorney said, I will receive a 1099-S from the Closing attorney for $580,500 and I should have no tax due.  I am to file a 1041.  My question is: What tax Schedule do I attach to the 1041 to show the FMV at death and the sell of the house.  Also another question: I had expenses on the house: state taxes, utilities, maintenance and HOA fees between July 2013 and January 2015. Can I deduct those expenses and pass these Capital losses on to the two beneficiaries to be used on their personal tax filings?

[view2]

Additional consideration to pk answer  is the passive activity losses. IRC § 469(j)(12):  When an estate or trust distributes a passive activity, losses are not deductible by the estate or trust.  They are added to the beneficiary’s basis.

However to release passive activity losses.

Passive losses are generally deductible only to the extent of passive income. However, current and suspended losses are fully deductible if there is a “qualifying disposition.” Under IRC § 469(g), a “qualifying disposition” requires three criteria:

1. Disposition of an entire interest (or substantially all[1])

2. In a fully taxable event (where all gain/loss is realized and recognized).

3. To an unrelated party.

Generally The passive activity rules apply to:Individuals,Estates,and Trusts.

IV.IRC §267 RELATIONSHIPS

IRC §267(b) has 13 different relationships that make up related parties. These are:[only listed applicable]

1. Members of a family, including:

  Husband and wife;

  Brothers and sisters — including half-siblings;

  Ancestors — parents, grandparents, etc.; and

  Lineal descendants — children (including adopted children),1 grandchildren, etc.;

4. A grantor and a fiduciary of any trust;

5. A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;

6. A fiduciary of a trust and a beneficiary of the trust;

7. A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;

 You might want to seek the advice of a tax professional proficient in trusts and passive activity loss rules.