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Irrevocable Trust and Sec 121 gain exclusion


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#1 Randall

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Posted 24 January 2013 - 08:14 PM

Can an irrevocable trust be a grantor trust?

 

If personal residence is transferred to an irrevocable trust and the trust sells the house, can the Sec 121 gain exclusion be used by the trust?  Or will gain be taxable at trust tax rates?

 

 



#2 Terry D

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Posted 25 January 2013 - 10:54 AM

This is an interesting topic. Jainen would probably be your best source here. Maybe KC as well. My first take is the exclusion states you must live in the residence for two of the last five years. I don't think the trust can exclude the gain but am not here. Again, it will be iteresting to see what others have to say.

#3 Lion EA

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Posted 25 January 2013 - 12:43 PM

Wouldn't a grantor trust be revocable?  I agree that if an irrevocable trust owns a house, then the trust does not have a principle residence to exclude, has investment or rental property or....  I don't do many trusts and haven't had a house in one yet.



#4 jainen

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Posted 25 January 2013 - 12:57 PM

>>Can an irrevocable trust be a grantor trust?<<

 

Obviously all trusts have a grantor.  It's only called a grantor trust if the grantor retains control over the trustee, including the right to amend or terminate the trust. 



#5 Randall

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Posted 25 January 2013 - 05:50 PM

>>Can an irrevocable trust be a grantor trust?<<

 

Obviously all trusts have a grantor.  It's only called a grantor trust if the grantor retains control over the trustee, including the right to amend or terminate the trust. 

Yes, but if the grantor has the right to terminate, would it be an irrevocable trust?  I've read some things that certain retention of control would allow the grantor to report the sale of house and use the Sec 121 exclusion of gain.  Not sure how that would be reported if house was titled in the trust and the trust sold the house, who would report the sale, trust or individual?  Trying to understand this 'idea' that has recently been proposed to me.



#6 jainen

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Posted 25 January 2013 - 06:02 PM

>>certain retention of control would allow the grantor to report the sale of house and use the Sec 121 exclusion<<

 

Well, yes, but that may be more complicated than you want to get into.  First of all, you are going to have to READ the trust document and see exactly what the relationship between grantor and trust actually is.  Here's how Quickfinder describes one common scenario, as interpreted by Letter Ruling 200104005.

 

"A married couple originally set up a revocable trust that included their primary residence.  Upon the death of one spouse, the residence was transferred into an irrevocable trust that provided the surviving spouse a withdrawal power up to the greater of $5000 or 5% of the trust principal each year (five-or-five power).  When the trust sold the house, the taxpayer (surviving spouse) could only exclude gain to the extent that he was deemed to own a portion of the residence through the annual five-or-five power."



#7 Randall

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Posted 25 January 2013 - 09:01 PM

I think I came across that ruling too.  I agree this is more complicated than the general overview of the idea.  That's why I'm trying to get to the heart of it.  Some elder law specialist is proposing this and I was wondering how they would get the Sec 121 exclusion.  Personally, I wouldn't want to fight the IRS if it were disallowed.  I suppose some people have bought and sold several homes along the way and the would be gain on their most recent residence would not be very much.  But for someone who bought their home 50 years ago, it could come back to haunt them.  That's why I'm leaning heavily against such a thing.






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