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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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distribution of my Grandpas estate

Resolved Question:

I am finishing the distribution of my Grandpa's estate to me and my 5 sisters. His total estate was 2 life insurance policies, totaling about $100,000, which were already distributed 5 years ago when he died.

And the only other thing in his estate was his home, which we are selling right now. It is selling for $249,000. The house is under title in the name of his trust (it was put there by my grandpa before he died), of which I am the executor. I live in Utah.

I understand that the trust will have a "Capital Loss" from the sale of this house, because it was a revocable trust before my grandpa died 5 years ago. I am planning on using Property Tax record values to determine the basis, which means we'll have a "capital loss" of $87,700.

When I get this check for $249,000 minus fees, I plan on trying to set up a bank account in the name of the trust (which will probably be how the check will be payable to) to deposit the check, and then cut 6 equal checks for the 6 beneficiaries to distribute the $249,000.

Do I need to plan on filing any tax forms at all? Which ones? Do I report the loss or is it passed-through to the beneficiaries?

Will I need to issue Schedule K-1's to my 5 sisters (beneficiaries)?

Will they benefit somehow from the capital loss on their personal tax returns?

My understanding is that there are no tax implications to the trust or to each of the beneficiaries on their personal returns, on distributing this money, 1st because it is a small estate, 2nd because it was in a trust, and 3rd because there is a capital loss upon the sale of the house.... Is this correct?

Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

Stephen G :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.

Stephen G :

Well, let's see, most of what you say is true, although some of the terms you use need clarification. Let me run through what you need to do & then answer any questions you have.

Stephen G :

First of all, you must be the successor Trustee of your grandfather's trust, not the executor.

Customer:

Yes, that sounds more accurate.

Stephen G :

Since your grandfather had a revocable living trust, that trust became irrevocable at his date of death and the trust would receive a "step-up" in tax basis on the house to its fair market value at his date of death.

Customer:

got it

Stephen G :

Technically, you should have an appraisal as of that date, but if the property tax valuation is representative of the real estate's fair market value, that would be an acceptable valuation method. Often, the assessors can tell you what percentage of the fair market value they feel the whole town is valued at for real estate tax purposes.

Stephen G :

When the property is sold you will need to file a Form 1041 for that tax year. You would mark that form as the Trust's first & final return.

Stephen G :

In the final year of a trust, any unused capital loss may be passed through to the beneficiaries, so that's what would be on the beneficiaries K-1s.

Stephen G :

In may be prudent to have a CPA prepare that one return so that you get everything 100% accurate with all the required information and minimize any inquiries from the IRS.

Stephen G :

There will be no tax due on anything as long as there are no other income generating assets in the trust. I presume that you haven't been renting the property.

Customer:

correct

Stephen G :

The way you propose to handle the funds appears correct assuming you and your sisters are all equal beneficiaries of the trust and there are no other contingencies on the distributions.

Stephen G :

You will need to obtain a Federal ID number for the trust in order to open the bank account and to use when you file the fiduciary income tax return on Form 1041.

Stephen G :

You can do that now, there's no need to wait until the property is sold. Also, you should be able to do it online at IRS.gov.

Stephen G :

Was your grandfather a resident of Utah also?

Customer:

Yes he was

Stephen G :

I can look it up, but does Utah have an income tax?

Customer:

yes it does

Stephen G :

So you'll need to file the comparable Utah fiduciary return also.

Stephen G :

Questions?

Customer:

So, no taxes to the trust, but when I hand these $35,000 checks to my 5 sisters (and myself), will it cause any tax to them personally?

Stephen G :

No.

Customer:

Not even on a state tax level (utah, az, kansas

Customer:

?

Will they need to somehow report the receipt of the check on their taxes?

Customer:


Will they benefit somehow from the capital loss on their personal tax returns?

Stephen G :

The K-1s will reflect the loss and the only state where you have to file for the trust is UTAH & there's a capital loss, so there's no tax anywhere. In order to make sure everything is done correctly, again....I recommend you have a CPA prepare the required returns.

Stephen G :

The capital loss can be used against capital gains or up to $3,000. a year against ordinary income. Each state may be different, but those are individual questions and generally will key off the federal personal returns.

Customer:

So, my sisters can expect to be able to deduct $3,000 off their personal income for tax purposes, using the K-1 as documentation?

Customer:

one-time

Stephen G :

As the Trustee it is your responsibility to make sure the beneficiaries have all the information from the trust that they need for their personal returns. Generally, for non Utah residents that means a K-1. For Utah, it means a K-1 plus whatever Utah requires for state purposes.

Customer:

Is the $3,000/year mean they can deduct that much in subsequent years until the value of the loss is used up?

Stephen G :

Yes, you & your sisters will have whatever loss is on the K-1 to use on their personal returns and the annual limitation against "ordinary income" is $3,000. with the balance carried forward. Make sure they understand that it is a "loss" not a $3,000. credit against their tax.

Stephen G :

The $3,000. is the ordinary income limitation; there's no limitation against capital gains.

Customer:

So, besides reporting the loss, and claiming $3,000 back (or more for cap gains), they don't need to report the received check to the IRS?

Customer:

That's all of my questions

Stephen G :

What do you mean "claiming the $3,000 back"? The check itself has no reporting requirements.

Customer:

ok that answers that question....just 1 more, I promise - should I distribute the checks, then go to the CPA, or reverse that order?

Stephen G :

They aren't getting $3,000 back.

Customer:

Right, just deducting $3,000 off of ordinary income

Customer:

Yeah, so now I think I might get it, if can reduce my taxable income by $3,000, it will probably only save me like $400

Customer:

in any case, the words I'm using aren't right- I think I understand what you're saying.

Stephen G :

I'd go to the CPA now & discuss the transaction with him/her; you'll need to confirm what he's comfortable with as far as determining the FMV and you'll need to discuss any other potential basis adjustments with him, confirm that you'll be bringing in the closing statement, etc. Best to do it up front. You'll want to save enough $ to pay the CPA, plus confirm what needs to be done with a fiduciary return for Utah. Make sure you ask if the CPA is familiar with and prepares fiduciary returns.

Stephen G :

Correct re the $400.

Stephen G :

I'll leave my contact information in case you need to reach me again here.

Stephen G :

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Again, please remember to rate my response. Bonuses, where you think they are warranted, and excellent ratings, are always most appreciated. Thanks again for using JustAnswer.com.You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;

Customer:

Great job- thanks

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4126
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and other Tax Specialists are ready to help you
Expert:  Stephen G. replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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Customer: replied 1 year ago.

I plan on going to the CPA soon, but I'm going ahead and requesting the EIN on the irs website. It is asking me if I was to elect to file as an estate under Sec. 645? Should I say yes?


 


("A trust filing as an estate under Section 645 election allows a Qualified Revocable Trust to be treated and taxed (for income tax purposes) as part of its related estate during the election period. Once the election is made, it cannot be revoked.")

Expert:  Stephen G. replied 1 year ago.
The answer is NO.

You have no "Estate" within the meaning of an estate for income tax purposes. No probate estate.
Expert:  Stephen G. replied 1 year ago.
Also - the trust is Irrevocable

Use the date of death as to when the trust came into existence, ie. that was the date the trust became irrevocable & a "real" trust.

You must use the calendar year for the trust

No other ID numbers ever obtained

Sign the request ie. Your title is "Trustee" or "Successor Trustee"

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Stephen G.
Stephen G.
Tax Professional
4126 Satisfied Customers
Extensive Experience with Tax, Financial & Estate Issues