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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4237
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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If I (mother/trustee) set up a Delaware Business Trust with

Resolved Question:

If I (mother/trustee) set up a Delaware Business Trust with two (father and 18 yr old daughter) beneficiaries to run a piece of rental property, do we have to send out K-1's for the beneficiaries? Or can the income/loss flow through to the father's (my husband's) Form 1040 directly without having to create a K-1? We have lot of passive losses built up into the rental property from renovations now completed on our Sch E in past years.  My alternative is a single member LLC. I'd like to use the DBT because of the 1031 exchange availability.

Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi,

NPVAdvisor :

A couple of things: Similar to a 1099 form received that highlights contractor income, you do not have to file the K-1 with your personal income tax return. Instead, you use the data on the form to fill out portions of your personal tax return.

NPVAdvisor :

Second, because of Internal Revenue Bulletin 2004-33, DBTs CAN do 1031 exchanges ...

NPVAdvisor :

BUt provided the entity selling thepropertyis the same as the entity purchasing the replacement property, Corporations or Trusts that are 100% owned by the same entity are considered “Disregarded Entities”, and the same entity for 1031 purposes.

NPVAdvisor :

THe DBT IS an excellent vehicle FOR all kinds of reasons .. but the K-1 shouldn't really caus problems, and again, the income ends up on the 1040 anyway

Customer:

So a K-1 must be created and mailed each year?

Customer:

by the trust for bookkeeping purposes?

NPVAdvisor :

yes, or the information from it

NPVAdvisor :

Tha k-1 is the pass-through vehicle, if you will

NPVAdvisor :

Giving the beneficiary the information needed to put on their 1040

Customer:

Ok. Is a K-1 filed with IRS like a 1099/1096? Sounds like maybe not since we just need to get the pertinent information to the 1040.

NPVAdvisor :

If you use, say TUrbotax, or one of the other packages, the k-1 will be generated automatically, by just answering the questions, if you use the inter method

NPVAdvisor :

NO

NPVAdvisor :

THat is the first thing I told you a K-! is NOT filed

NPVAdvisor :

It's kind of like a 1099

Customer:

inter method?

NPVAdvisor :

its a reporting device to give the taxper so that they can do their taxes and include the information FROM IT on their own 1040

NPVAdvisor :

so sorry for the typos (INTERVIEW) method

Customer:

A 1096 is filed with IRS to report income.

NPVAdvisor :

When using turbosax, once you till it that you want to do a 1041 for a trust, it will ask you the questions needed to do the form and will generate the k-1s automatically

NPVAdvisor :

sorry again ... "Turbo Tax" ( or any of the software tax prep packages)

Customer:

Ok, thanks so much. Very helpful info. I don't use Turbotax, have a preparer, so I would have to produce th

Customer:

e K-1 myself to give to him to file the 1040 is my concern.

NPVAdvisor :

Who must file Form 1096


Any person or entity who files, by paper, forms W-2G, 1098, 1098-E, 1098-T, 1099-A, 1099-C, 1099-CAP, 1099-DIV, 1099-G, 1099-H, 1099-INT, 1099-LTC, 1099-MISC, 1099-OID, 1099-PATR, 1099-Q, 1099-R, 1099-S, 1099-SA, 3921, 3922, 5498, 5498-ESA, and/or 5498-SA, must prepare and submit Form 1096 as well.

Customer:

Do I have to send a copy of the K-1 to IRS similar to process for 1099'

Customer:

sending the 1096 summary to IRS.

Customer:

I see that K-1 is not on that list, so don't have to file summary sheet for the K-1 with IRS, right?

NPVAdvisor :

That's right

Customer:

Ok, got it. Thanks for your patience! I send blessings for your being available to answer these questions so quickly!

NPVAdvisor :

No problem here's an excellent overview of the FEDERAL tax aspect of a DBT:

NPVAdvisor :

The states of Delaware and Alaska have passed legislation for business trusts specific to those states. Unlike the term "Massachusetts business trust," which designates business trusts in general, regardless of location, the terms "Delaware business trust" and "Alaska business trust" refer only to business trusts in those respective states that meet certain state-mandated guidelines. Such business trusts receive special tax treatment when it comes to state taxation, but the federal government does not recognize them as being different from other types of business trusts.

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4237
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks Chelsea,

Here's a piece (Wickipedia isn't an AUTHORITATIVE source) but this is a good overview.

http://en.wikipedia.org/wiki/Delaware_statutory_trust



If you'd like to work with ME again just say "For Lane only," at the beginning of your question.

Thanks again,
Lane
Customer: replied 1 year ago.

For Lane Only. What is the difference between a Delaware Business Trust and a Business Trust set up under the form in Kentucky?

Expert:  Lane replied 1 year ago.

Hi Chelsea,

I'd have to do a little homework to do a true comparison...

But if I remember correctly that your land is in KY and you'll be operating in KY, then the KY trust may make the most sense.

Some states take a very dim view (better said, a view that they think protects their citizens from "foreign" - out of state - entities).

So when you incorporate or set up the trust in a state other than the state where you want to do business you have to jump through two different sets of "hoops."

And you MAY lose some of the "benefit of the doubt" that comes with being an actual domestic (registered in the state where you're doing business) entity - regardless of whether it's a business trust, LLC or a Corporation.

... just to get you a quick answer, my intuition says that you'd be better off registering as a KY business trust for the following reasons:

(1) you have to "register" in KY either way, either as a domestic entity or as a foreign entity - so registering as a KY business trust saves administrative overhead, time, keeping up with two sets of registrations, etc.

(2) Again, you'll be (for lack of a better word choice) "treated better." You'll be a KY company doing business in KY

(3) Protection against law suits, creditors, etc is almost always better for domestic "home state" entities. Not protecting you against a creditor or lawsuit is typically one of the first things that goes, if you don't keep up with all the requirements of the registration as a "foreign" entity (as in, if you formed the trust in Delaware)



On the other side of the coin ... Delaware has the largest body of business/incorporation (business entity in general) law out there. If it's been done anywhere it's probably been done in Delaware.

If you were interested in going public, raising capital from shareholders (other trust beneficiaries in your case) Delaware might be the way to go.

And the price for that ... is typically cost. For example, in Delaware (for Corporations) they tax you on shares AUTHORIZED, NOT outstanding ... in other words they tax you on the shares as if you actually had those shares issued and money in the bank.


My GUT says, that for your purposes, a KY trust does everything you need and may even have some protecting advantages and definitely has some cost and simplicity of operation advantages.



Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4237
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thank you Chelsea.

Good luck with everything.

If you'd like my help again, just say "For Lane," at the beginning of your question.

Thanks again,
Lane

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Lane
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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986