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In 2012, my wifes parents gifted a piece of real property

In 2012, my wife’s parents...
In 2012, my wife’s parents gifted a piece of real property to an irrevocable trust (no taxes were paid in the transfer) in which my wife is the beneficiary. The property is valued at $6M and the tax basis is around $400K. My wife and I are the trustees of the trust. Her parents continue to remain in the house and pay utilities and maintenance…so far. We just completed the taxes for 2013 and the preparer who is also an attorney told us her parents need to pay rent or vacate the house. The preparer spoke to the attorney who prepared the trust and she said her parents will not be paying rent. He then told us we had to get the parents out of the house. They have other houses as well.
Best case is nothing bad happens and everyone is happy. So I want to know worst case of what can happen if there is an audit from the IRS and the situation is the same….. Property was gifted to trust, grantors remain in possession of the property. Is this OK?
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Answered in 1 minute by:
6/15/2013
Thomas McJD
Thomas McJD, Attorney
Category: Estate Law
Satisfied Customers: 6,516
Experience: Wills, Trusts, Probate & other Estate Matters
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TMcJD :

Hi, I will be happy to assist you, and it is my goal to make you a very satisfied customer! This may take a few minutes, so thanks for your patience.

TMcJD :

Do you know if this was a qualified personal residence irrevocable trust (often referred to as a QPRT)?

Customer:

No....not a qprt

TMcJD :

Does the trust include terms that allow them to continue residing in the home or receiving a benefit from the home for a specified period of time (1 year, 2 years, for life, etc.)?

Customer:

The title of the document is just "irrevocalble trust"

TMcJD :

That would not determine whether it is a QPRT trust - the terms would determine that. Did you see my second question?

Customer:

Yes, I saw but there is no such provision

TMcJD :

Okay. Who is/are the beneficiaries of the trust?

Customer:

My wife is the beneficiary

Customer:

The reason I'm asking is that I'm getting conflicting stories from the attorney's involved....

Customer:

The tax preparer says they need to pay rent or vacate....

Customer:

The trust preparer says they will not pay rent and will vacate soon.

TMcJD :

Okay. Thanks for all the information. If you've been paying taxes by filing a Form 1041 and state equivalent tax return for the trust, then the IRS won't care whether someone not a beneficiary is living in the home. That's an issue between the trustee, beneficiary, and the persons (her parents) living there without legal right (because they are not beneficiaries). If you and your wife are trustees, and your wife is the sole beneficiary, then her parents do not have any right to live there and can be removed from the property by filing an eviction proceeding in court. You asked whether it's appropriate for them to remain in possession of the home. It is not. They have no legal right to remain there. They must pay rent or be removed. In fact, if they continue to live there without rent, then the IRS might consider the trust to be invalid for purposes of preventing inclusion of the value of the home in calculating their gross estate for estate tax purposes. That would be the worst case scenario of they refuse to pay rent and do not leave the property.

Customer:

But her parents have no expectation of vacating soon. I suspect they have no idea what they signed and the impact thereof.

Customer:

What does this mean...in laymans terms.

Customer:

if they continue to live there without rent, then the IRS might consider the trust to be invalid for purposes of preventing inclusion of the value of the home in calculating their gross estate for estate tax purposes

TMcJD :

Yes, you are probably correct. There attorney probably did not fully explain the implications. They should have either done the trust they did with knowledge they needed to pay rent or move. Alternatively they should have done a QPRT

TMcJD :

It means they might end up paying a whole lot in estate taxes versus not paying estate taxes.

Customer:

When would they have to pay those taxes?

TMcJD :

At death.

Customer:

OK...so we don't have any real immediate risk.

TMcJD :

No, not based on what I understand from your explanation of the facts.

Customer:

Thank you.

TMcJD :

You're welcome. Have a great day!

Thomas McJD
Thomas McJD, Attorney
Category: Estate Law
Satisfied Customers: 6,516
Experience: Wills, Trusts, Probate & other Estate Matters
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