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socrateaser, Lawyer
Category: Tax
Satisfied Customers: 36206
Experience:  Retired (mostly)
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I am preparing form 1041 Irrevocable trust holding 2 family

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I am preparing form 1041 Irrevocable trust holding 2 family real property and mother is grantor and children are beneficiaries. Mother retains right to live in house rent free until death or other catastrophe. However , she agrees to pay her share of insurance and utilities, but retains rights to rental income. The Trust currently collects rental revenue and offsets with operating expenses including depreciation expense. Question 2012 results in 1000 loss caused by 3000 depreciation expense - does mother(grantor) have to pay for reimbursement of insurance and utilities because of NOL totaling 1000.
Submitted: 2 years ago.
Category: Tax
Expert:  socrateaser replied 2 years ago.

It seems to me that you have a grantor trust, because the grantor's right to remain in the property until death, and her right to income from the rent, effectively makes her a beneficiary of the trust. That is, at least a portion of the trust is "self-settled," for the grantor's benefit, and so it may be preferable for the grantor to report all of the income and taxes on her form 1040, rather than use a form 1041 to report income and expenses.

In order to do this, you would follow the instructions found at this link.

Note: I cannot tell you how many hours of searching was required to find an example of this on the internet, so that I wouldn't have to reinvent the wheel for customers here. But, that's your good fortune.

Hope this helps.
Customer: replied 2 years ago.

Thank you for info. I read the Trust document and I do not believe Trust is an "Income only trust" because the Trustee(Son) determines if income is to be distributed to Grantor(Mother) and principal owned by Trust. Real estate property can be distributed to beneficiaries upon Mother's death or ceases residency at property. Question is if the Trust has a reported loss of 1000 but positive cash flow to cover maintenance costs for tenant and Mother, is Mother receiving a taxable benefit from the Trust because her share of maintenance costs is responsible for reporting 1000 loss instead of rental profit.

Expert:  socrateaser replied 2 years ago.
A trust is a grantor trust if the grantor retains the right to direct income or assets to the benefit of the grantor. Assuming that the grantor does not retain this right, which would include the right to amend the trust in a manner that would permit the grantor to direct benefits to herself, then the grantor cannot obtain a tax benefit from the trust -- because if this were possible, then the grantor is receiving an income benefit of the trust, to the extent that it throws off tax benefits to grantor -- making the trust a grantor trust.

Hope this helps.
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 36206
Experience: Retired (mostly)
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