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In 1996 the owner of a farm in my area formed an irrevocable…

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In 1996 the owner...

In 1996 the owner of a farm in my area formed an irrevocable trust placing the land in it. the trust never filed 1041 on the trust. in 2010 one of the beneficiaries, applied for a EIN number for the trust. With the EIN number, the IRS stated the trust was to file 1041s for the years prior.

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

Sorry I pressed enter too soon. They did not comply with the IRs. in 2015 the grantor died. the trust has now been distributed, and the accountant that did the 1041 has recvd a different EIN number and filed the 1041 under that number. they figured the capital gain as 650 an acre in 1996, instead of the step up fair market value of 6500 . my question is this the correct figure to on the capital gain. if they had filed the 1041s my client would have recd the step up fair market value.

Submitted: 4 months ago.Category: Finance
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Answered in 39 minutes by:
3/8/2018
Financial Professional: Stephen G., Sr Financial Expert replied 4 months ago
Stephen G.
Stephen G., Sr Financial Expert
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Financial Professional: Stephen G., Sr Financial Expert replied 4 months ago

Are you sure the Trust was Irrevocable or did it become Irrevocable at the death of the Grantor?

In terms of the tax basis of the land, if the Grantor actually created an Irrevocable Trust in 1996, the tax basis of the land would have carried over from the Grantor to the Irrevocable Trust. There would have been no "step up" to the Fair Market Value in the basis of the farm land.

Questions:

1. Who was the Trustee(s) of the Trust when the Irrevocable Trust was created?

2. Who was the beneficiary(ies) of the Trust while the Grantor was alive?

3. Do you know if the Grantor filed a Gift Tax Return on Form 709 when he created the Trust in 1996?

Filing or Not Filing the 1041s and/or the 709 would not affect the tax basis of the property.

Depending upon the Grantor's reason(s) for establishing the Trust, a normal situation would have been that the Grantor would have created a Revocable Living Trust to hold title to the land (to avoid Probate) & facilitate settlement of his estate; the Living Trust would have become Irrevocable at the Grantor's Date of Death & the Trust would receive a Step-up in tax basis to the Fair Market Value at the Grantor's Date of Death, which stepped up basis would transfer to the beneficiaries.

Let me know if you have any question and/or if you can answer my questions.

Thanks very much,

Steve G.

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Customer reply replied 4 months ago
What is the penalty or fines for not having filed 1041s for the 20+ years the trust was in effect?
Financial Professional: Stephen G., Sr Financial Expert replied 4 months ago

The penalty & interest assessments are based upon the amount of income tax owed. The penalties could equal an additional 50% of the tax owed for failure to file returns and failure to pay the tax due, plus interest at varying rates over that 20 year period. That could easily amount to an additional 50% to 100% of the tax owed.

However, in a "normal" situation, the income would be passed through to the current income beneficiary and that beneficiary would pay the income tax.

If the Trust just held title to the land and didn't actually operate the farm, it's possible that there was no taxable income in the Trust and therefore no requirement to file an income tax return.

Steve G.

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