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MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
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Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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MASSACHUSETTS: My dad and his 3 brothers created a Investment

Resolved Question:

MASSACHUSETTS: My dad and his 3 brothers created a Investment Property Trust in 1970. Within the Trust there are 4 properties that contain commercial rental buildings. Three of the four brothers and 2 of their wives have passed away. The trust has successfully passed on to the children/wife of the deceased beneficiaries and provides a monthly income to us as the new beneficiaries.
My Uncle Sam (86),is the Trustee and the last Original Beneficiary. He has managed the properties through the years. He now wants to dissolve the Trust and form a LLC, as the original Trust will terminate upon his death.
We received the proposed LLC paperwork last week, after reading through the papers the other beneficiaries and I agree that Uncle Sam is not being fair to us. We do not want to sign the proposed LLC paperwork as it currently reads.

We see 2 options:
1. Try and negotiate a better LLC agreement with Uncle Sam.
2. Wait until Uncle Sam passes, trust will terminate, property passes to us beneficiaries as tenants in common. We then draft new LLC paperwork and pray we can all then agree on a fairer arrangement. We do not want to sell any of the properties.

------My Question pertains to above Option 2.---------
When Uncle Sam passes, the Original Trust terminates. We believe that the property will pass to us, the beneficiaries, as tenants in common. We do not know or understand what the tax ramifications, if any, that will occur when the deeds of the property pass to us, out of the current original trust, upon Uncle Sam’s death.
There are 5 current beneficiaries.
Beneficiaries 1 (Uncle Sam) owns 25%,
Beneficiaries 2 owns 25%,
Beneficiaries 3 owns 25%,
Beneficiaries 4 owns 12.5%,
Beneficiaries 5 owns 12.5%
Section 754 IRS code was used to Step up Basis of the portions of properties that passed upon Original Beneficiaries deaths to their children/wife. They passed away in different years.
Accountants Compilation Report shows Capital End for 2012
Beneficiary 1 $108,849 (Original Beneficiary 31 #1 Uncle Sam)
Beneficiaries 2 , $392,826 (Wife of Original Beneficiary #2 inherited in 1992)
Beneficiaries 3, $996,524 (Only Child of Original Beneficiary #3, inherited in 2010)
Beneficiaries 4 , $689,056 (Child of Original Beneficiary #4 inherited in 2012)
Beneficiaries 5 , $689,056 (Child of Original Beneficiary #4 inherited in 2012)

Properties were appraised Aug 2012 at $5,690,000.

Can you help us understand the tax liabilities/ramifications when the deeds of the trust properties pass to us as tenants in common, when Uncle Sam passes? And would there be any tax cost of putting the properties back into a LLC. (other than the cost of setting up a new LLC)
Thanks for any assistance you can provide.
Submitted: 11 months ago.
Category: Tax
Expert:  MequonCPA replied 11 months ago.
Hi and welcome to JustAnswer:

Generally speaking, upon liquidation of a trust there is no tax liability. The trust distributes the assets to the beneficiaries and they get a carryover basis.

The trust can elect to distribute assets at fair market value. In this case, the trust will report a gain as if the assets were sold. If liquidating the trust, each beneficiary will taxed d on the imputed gain. (This option is not recommended as there will be limited cash to pay the tax).

If the properties are distributed by the trust and then contributed to a new LLC, the LLC would use the contributed basis by each member. Again, no tax consequence on the contribution.
Customer: replied 11 months ago.

My lawyer felt that taxes would be a problem - but is i read your answer you feel that no tax will be due. Am i understanding your answer correctly ?


 


You say "Generally Speaking" What conditions would cause a tax liability?


 


Can you define what you mean by "Carry Over Bias"? As written in my question the appraiser value is far greater $(5,690,000) as opposed to our Capital Cost in accordance with 754 - stepped up basis and depreciation of real property.


 


In you answer paragraph 2 -Who elects to distribute assets at fair market value? (the trust is over when Uncle Sam dies)


 


Would an LLC have to be formed and pre-established before Uncle Sam passes so we could contribute the properties to the LLC.


 


And also in Paragraph 3 what is considered to be the "Contributed basis?" How is this different from carryover basis that you mention in paragraph 1?


 


 


The following is a paragraph from original trust :


Does this imply that the taxes are paid by trust?


 





18. INCOME AND OTHER TAXES: The Trustees shall have the right to pay out of the Trust Fund any and all.income taxes levied or assessed upon the creators of this Trust or upon the Trustees by realization of any Incorne by the Trust; and further, may pay out of the Trust Property and all inheritance taxes or estate taxes that may be imposed upon the estate of the creators of this Trust or upon any interest passing to any Beneficiary of such estate, but only to the extent that such tax liability results from value attributable to this Trust.







Sorry I am still not clear on my question. Also are you a Massachusetts CPA ? Do states differ in settling trust terminations?


 


 

Expert:  MequonCPA replied 11 months ago.

I have provided my responses following each of your items

 

My lawyer felt that taxes would be a problem - but is i read your answer you feel that no tax will be due. Am i understanding your answer correctly ?


I believe no taxes will be due. I would have to know why the attorney felt taxes would be due to respond directly to his/her concerns.


 

You say "Generally Speaking" What conditions would cause a tax liability?


The election by the trustee to distribute assets at fair market value

 


Can you define what you mean by "Carry Over Bias"? As written in my question the appraiser value is far greater $(5,690,000) as opposed to our Capital Cost in accordance with 754 - stepped up basis and depreciation of real property.

 

The carryover basis is the stepped up basis each beneficiary received upon the death of the prior beneficiary. This basis is adjusted for depreciation, income, deductions and distributions.


 

In you answer paragraph 2 -Who elects to distribute assets at fair market value? (the trust is over when Uncle Sam dies)

 

The fiduciary (trustee) of the trust. Below is an excerpt from the instructions for Schedule D of Form 1041:


Section 643(e)(3) Election
For in-kind noncash property distributions, a fiduciary may elect to have the estate or trust recognize gain or loss in the same manner as if the distributed property had been sold to the beneficiary at its fair market value (FMV). The distribution deduction is the
property's FMV. This election applies to all distributions made by the estate or
trust during the tax year. Once the election is made, it may only be revoked
with IRS consent.


Note. Section 267 does not allow a trust or a decedent's estate to claim a deduction for any loss on property to which a section 643(e)(3) election applies. In addition, when a trust or a decedent's estate distributes depreciable property, section 1239 applies to deny capital gains treatment for any gain on property to which a section 643(e)(3) election applies.


 

Would an LLC have to be formed and pre-established before Uncle Sam passes so we could contribute the properties to the LLC.

 

No, you could each hold the properties as tenants in common and then contribute them at a future date. However, it may be easier and cleaner to make the transfer upon liquidation.


 


And also in Paragraph 3 what is considered to be the "Contributed basis?" How is this different from carryover basis that you mention in paragraph 1?

 

Contributed basis would be the same as carryover basis.


 

The following is a paragraph from original trust :


Does this imply that the taxes are paid by trust?




18. INCOME AND OTHER TAXES: The Trustees shall have the right to pay out of the Trust Fund any and all.income taxes levied or assessed upon the creators of this Trust or upon the Trustees by realization of any Incorne by the Trust; and further, may pay out of the Trust Property and all inheritance taxes or estate taxes that may be imposed upon the estate of the creators of this Trust or upon any interest passing to any Beneficiary of such estate, but only to the extent that such tax liability results from value attributable to this Trust.

That provision will not apply upon liquidation.



Sorry I am still not clear on my question. Also are you a Massachusetts CPA ? Do states differ in settling trust terminations?


No, I am not a Massachusetts CPA. The MA Form 2 follows federal taxation.

MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2323
Experience: CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
MequonCPA and 4 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

Thank You Kind Sir, you have done a excellent job explaining my questions. I appreciate your patience with my general lack of tax knowledge. I will rate you with the happiest face !!!!!

Expert:  MequonCPA replied 11 months ago.
Hi Eileen -

Glad I could help. Thank you for the positive rating.

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