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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22616
Experience:  Taxes, Immigration, Labor Relations
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I have tax questions on the sale of my deceased father-in-laws

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I have tax questions on the sale of my deceased father-in-law's house and the tax forms I'll need to complete for his estate/trust. Dad had 4 sons and the trust states everything be split 4 ways. The bulk of his estate was in a Living Trust of which one of his sons is trustee. My husband is the personal representative. My husband and I are purchasing the house from the trust. The date of death appraisal on the house was $208,000. Each of the 3 brothers are transferring $16,667 of their part of the proceeds to us because we took care of Dad while he was alive and are now taking care of the estate matters and disposal of personal property. Here's the breakdown:
$208,000 value of house
-$ 52,000 my husbands 1/4 share
-$ 50,000 3 brothers splitting
=
$106,000 our sales price
1. Does this arrangement cause any tax consequences for the other brothers? Will what the brothers are giving us be considered a gift? I understand the annual exemption for gifts $14,000 for this year.
2. Dad died in March. Do we have to file Form 1041 within 6 months of date of death?

I will have lots of questions and plan on buying the unlimited questions plan.
Kelly
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
Several issues...
Generally the Living Trust is revocable and as such is ignored while the person is alive - but the trust becomes irrevocable after the settler dies - and that is a separate legal entity.
Such trust may be combined with the estate as ONE entity and in this case - only one tax return is filed. But you may treat the trust and the estate as separate entities and file two separate tax returns.
The sale transaction of the house is reported on schedule D - www.irs.gov/pub/irs-pdf/f1041sd.pdf‎
which us attached to the income tax return of the trust - form 1041 - http://www.irs.gov/pub/irs-pdf/f1041.pdf
Inherited property is always reported as long term - schedule D part II.
The basis of the property is equal to the fair market value at the time father-in-law passed away.
The trustee may have arrangement for not equal distribution out of the trust based on your circumstances and if agreed between all beneficiaries - there is no any tax liability because of that.

LEV :

If beneficiaries will transfer the money AFTER they receive distribution - that would be gifts - and gift tax law will be in effect. The gift below $14,000 per person per year will not have any gift tax circumstances. If the gift is above that amount - the donor will be required to file a gift tax return, but there will not be any gift tax liability as long as the lifetime limit (currently $5,250,000) is not reached.

LEV :

The form 1041 is an income tax return - for the due date - see instructions page 7 right column at the bottom - http://www.irs.gov/pub/irs-pdf/i1041.pdf


For calendar year estates and trusts, file Form 1041 and Schedule(s) K-1 on or before April 15, 2013. For fiscal year estates and trusts, file Form 1041 by the 15th day of the 4th month following the close of the tax year. For example, an estate that has a tax year that ends on June 30, 2013, must file Form 1041 by October 15, 2013. If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day.
You may file a form 7004 if an extension is needed.
Please let me know if you need any help.

Customer:

I would prefer to file one tax return & combine the estate & trust now if possible to be able to pay any taxes due and make the final distributions to the brothers. How would that be accomplished if the 2013 forms are not out yet? Use a 2012 form and file as a short year?

LEV :

First of all - because the property is inherited - you have a so-called stepped up basis - equal to the fair market value of the inherited asset at the time the decedent passed away. Assuming the property is sold at its fair market value - there is no gain - and should not be any tax liability.
Forms for 2013 are not available yet - and are expected in January.
Based on your information - the estate tax return for 2013 tax year will be due by Apr 15, 2014. No need to file it now.

Customer:

We live in Maryland and will owe State inheritance tax because the estate is over one million. I would prefer to just get the taxes paid now if possible. (I am only able to see your answer one line at a time and it is difficult, any way to change that?)

LEV :

I will switch into Q&A mode - so you will be able to see the full page.
Please refresh this page in one minute.

Expert:  Lev replied 1 year ago.
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Expert:  Lev replied 1 year ago.
You generally do not need to file federal estate tax return (form 706) if the total value of the estate is less than $5,250,000.
However as you mentioned - you do need to file an estate tax return on the state level.
The form 1041 is NOT related to estate taxes - that is INCOME tax return.

If you file the income tax return for the estate - you need to obtain a separate tax ID for the estate.
If you choose to combine the estate and the trust - you need to use form 8855 - http://www.irs.gov/pub/irs-pdf/f8855.pdf
If you choose to combine the estate and the trust - on the estate tax return - form 1041 - see box "G" - "Check here if the estate or filing trust made a section 645 election" - it should be checked - http://www.irs.gov/pub/irs-pdf/f1041.pdf
Customer: replied 1 year ago.

I have tax id #'s for both the estate & the trust. Can I still combine them? If so do I use the trust id# XXXXX the 8855 and the estate # XXXXX the 1041?


 


What is the Federal Estate Tax Return Proforma 706? On this list given us by the attorney who set up the living trust it says that must be filed within 9 months of date of death if the decedents estate excees one million dollars.

Expert:  Lev replied 1 year ago.
I have tax id #'s for both the estate & the trust. Can I still combine them? If so do I use the trust id# XXXXX the 8855 and the estate # XXXXX the 1041?
If you choose to combine the estate and the trust - you do not need two tax IDs - you may use either of them.
You need to use the same tax ID on form 8855.
Attach explanation and mentioned both tax IDs.

What is the Federal Estate Tax Return Proforma 706? On this list given us by the attorney who set up the living trust it says that must be filed within 9 months of date of death if the decedents estate exceed one million dollars.
That is related to ESTATE taxes - not income taxes.
Federal estate tax return is required if the total value of the estate is above $5,250,000.
You might need to use that form for state estate tax purposes - but not for federal purposes.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22616
Experience: Taxes, Immigration, Labor Relations
Lev and 4 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

For tax purposes should the $$ paid to the brothers for the house come from our joint account or the estate account?

Expert:  Lev replied 1 year ago.
As you plan to combine the trust and the estate into one entity - that would not matter.
For income tax purposes - inheritance is not taxable income for beneficiaries.
Only income actually received by the trust will be passed to beneficiaries as taxable income. For instance if the trust earns interest on the bank account after the decedent passed away - that is taxable income.

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