How to claim farm trustee expenses while I am only paid $1.00 per year for professional farm management?

[Iowaboy]

I am a trustee and also a beneficiary of an irrevocable farm trust that grosses $200,000 per year and distributes profits of over $50,000 annually to 6 sibling beneficiaries of which I am one of the 6 beneficiaries. I am 'paid' $1.00 per year and bear all costs of active professional farm management with 6 different crop share (50% / 50%)  in crop share (50/50) leases involving grain marketing, land management, tenant relations, USDA contracts etc plus I also do the Farm Trusts federal and state tax returns. Since its a family trust, all of my professional farm management expenses (postage, computer, software, phone, printer, legal, crop inspection trips, milage, repairs) are absorbed by me and not reimbursed by the Trust or family members.  I would like to claim all these expenses on my taxes as they are legitimate costs to me to run the farms.  How would I best do that?  The actual farm trust files with Schedule F (Profit or Loss from Farming) and 1041 and I cannot deduct my actual expenses that route.  As an individual 1040 filer, I don't think i can file under schedule C since I don't have a proftable business. The best option seems to file my all my expenses under Schedule F (Profit or Loss From Farming) as I have expenses from farming, do all the management, just no income other than my $1.00 per year trustee payment.  And the USDA considers me a 'farmer' and 'farm landowner'.  Ideas?

[M-MTax]

Question 1: Why is the trust not absorbing the expenses of operating the farm?

Question 2: If you were not managing the farm, who would?

[Iowaboy]

Reply to Question 1:  The irrevocable trust was created by a will dated 1983 and back then, then expenses were not significant, and it was 'family'.  It was considered that family members will sacrifice time and effort to maintain the land / farming legacy.  Farming has changed in 42 years requiring active daily management. Usually, average 2 hours a day.  Just to be clear, the actual crop share inputs and things like property taxes are paid by the Trust.   Its the administrative / office / education costs / inspection trips / computers / chain saws/ that I am absorbing. I will continue to absorb these costs as due to family dynamics, they will not be paid.  The Will and Trust documents are clear, there is no mention of repayment of such expenses. Several Trust  beneficiaries are very much OK with that and will not support reimbursement.  What I am seeking the best way to at least claim these documented overhead costs of being a Trustee on my taxes. 

I wear several hats in the Trust; I am a Trustee, I am one of 6 beneficiaries of annual equal Trust disbursements, I am farmer (USDA), and a landowner of Trust cropland USDA and county / state records. 

Question 2:  If I was not a Trustee, the Trust documents state that the surviving beneficiaries are to elect a new replacement. However, the most likely replacement Trustee has already said they would have to enlist a Professional Fam management company which normally charges 8% of gross receipts.  

Bottom line, you are not going to fix the Trust as its all wrapped around family dynamics and fractions. My only goal is how to best file tax wise to offset my management expenses and its cloudy / messy due to the many hats I wear.  For example if I file as farmer on schedule F, my income is only $1.00, my actual expenses will always be much more than my $1.00 income and the IRS will say I will never make a profit and I agree. But I do not think I can add my annual beneficiary income (on a Schedule K) as farm income.  The Trust functions as a true 'pass through' entity.

[M-MTax]

You are the trustee, however, and have management responsibilities and, although the trust may not provide for reimbursement of expenses, ordinary and necessary expenses incurred as a result of farming operations should be paid by the trust (it is a necessity without which the farming operations would not produce income and I'm not sure the beneficiaries, who are not involved in the operations have the authority to disallow the trust from paying those expenses). 

Again, as trustee, I would recommend that you consult an attorney in your area. This expense should also be paid from the trust corpus and, frankly, I'm uncertain why the beneficiaries, knowing the trust would have to pay an 8% management fee, would take issue with ordinary and necessary expenses of operating the farm being paid directly from income derived from farming operations.

[Iowaboy]

This is not helpful. 

You are suggesting that we try to fix a 'family trust' issue with a toxic environment.  I was chosen as Trustee years ago to act as a neutral unbiased family member, Switzerland so to speak, and I have accomplished that.  I have already consulted 2 attorneys, one who referred the estate that birthed the irrevocable Trust, and neither one recommends reopening this issue unless we want to spend alot of money, frustration, and pain for something that cannot be fixed.  The attorneys 'know' the family dynamics are so negative that parties would rather burn it down then concede a small win to anyone.  I agree, the management expenses are small compared to the other. 

So I am going with my attorney's recommendation that I file Schedule F (Farmers return) show my Trustee income and then show the actual expenses on Schedule F as I have a receipt for everything.  If questioned, we can quickly show that these farm management expenses generate substantial income for the pass-through trust which is reported on Schedule K for 6 beneficiaries.  My expenses are not a 'hobby farm'.  Do this until the Trust reaches its scheduled termination in a decade.

[M-MTax]

I understand your position, but the problem is you don't own the farm, the trust does and the expenses should be deducted at the trust level.

If your attorney is of the opinion that it is proper for both the trust AND you to file a Schedule F, then why did you even bother posting this scenario on this board?

I'm not going to argue with the manner in which your attorney suggested handling this issue (although I personally wouldn't advise a client in the same manner), but I can't imagine how this won't raise issues with the trust reporting virtually all of the income on its 1041 (from Schedule F) and you reporting only $1 worth of income with a number of expenses thus showing a loss on the Schedule F you would be filing with your 1040.

Good luck.