Jump to content
ATX Community

Trust distributions


Max W

Recommended Posts

2017 Trust only had one asset, a rental house.   House was distributed to 3 beneficiaries in Mar 2017, when trust and it's bank acct should have closed.  However, the monthly rental payments continued to be deposited into the trust bank account until early this year.

So, this is the way I see it.  The income and expenses are applied to the trust up to Mar 2017;  then the balance should be allocated to each bene's Sch E, 1040.

The trust should issue a 1099MISC, box 1, to the 3 bene's.

Any other ideas.

Link to comment
Share on other sites

Did the trust continue to pay the expenses?  In that case, the trust should file as usual, but probably no depreciation because it no longer owned the house.  Take a look at the trust document, but remember that just because a trust is technically defunct doesn't mean it's defunct for income tax purposes.

Link to comment
Share on other sites

Yes, Sara, the trust continued to pay the expenses and collect the rents.     The depreciation I cut off in March when the rental was distributed.  This would mean that the benes would lose out on the depreciation for the year since the transferred property is outside the trust and not directly collecting income.   Or, am I overthinking this?

 

 

Link to comment
Share on other sites

2 hours ago, Abby Normal said:

You're overthinking this. It was not the trusts income or expenses. This was merely a banking error. I would not file a trust return. Just treat this bank account as if it belonged to the new partnership that succeeded the trust.

While this may technically be wrong, it's how I would do it.

Just document everything in your records so that you don't forget the details (I'd forget in 18 months) if the IRS ever wants clarification.

  • Like 1
Link to comment
Share on other sites

2 hours ago, Abby Normal said:

You're overthinking this. It was not the trusts income or expenses. This was merely a banking error. I would not file a trust return. Just treat this bank account as if it belonged to the new partnership that succeeded the trust.

I don't know the answer to this issue, but saying that, "It was just a banking error" seems to me to minimize what could be a  problem.

  • Like 1
Link to comment
Share on other sites

2 hours ago, DANRVAN said:

 I agree with Abby Normal. After the house was transferred to beni's the income and expenses are theirs, including depreciation.

The trust bank account in effect served as a conduit to collect rent and pay expenses for the joint owners.

 

I do too, up to the point where Abby suggested to not file a return for the trust, because we don't have enough information to say this for sure. If the trust had gross income exceeding $600 because the house wasn't transferred until sometime in March of 2017, then technically a 1041 return would be required. If that's the case, file the final 1041 for the trust too.

Link to comment
Share on other sites

Here is my suggestion....Take a look at how much the rental income was from the management company and then send your client a bill for that amount for cleaning up this monumental mess they created.   They will fire you, and you will not have to worry about it, or they will pay you and you will be a happy worker.   Win - Win baby!!!!

Tom
Modesto, CA

  • Haha 2
Link to comment
Share on other sites

If the trust got the 1099, received all the income and paid all the expenses, just file a regular 1041.  In the first post it sounded like its only asset was the house, which it already distributed, but then it turns out it continued to collect income and pay bills.  Sounds to me like it didn't end for income tax purposes in 2017, so why go through all the antics to get the 1099 reissued, the beneficiaries' returns amended, etc?    It should end when it distributes its remaining cash and stops collecting rents.

  • Like 2
Link to comment
Share on other sites

3 hours ago, SaraEA said:

If the trust got the 1099, received all the income and paid all the expenses, just file a regular 1041.  In the first post it sounded like its only asset was the house, which it already distributed, but then it turns out it continued to collect income and pay bills.  Sounds to me like it didn't end for income tax purposes in 2017, so why go through all the antics to get the 1099 reissued, the beneficiaries' returns amended, etc?    It should end when it distributes its remaining cash and stops collecting rents.

Yes. I would like to keep it as simple as possible.   To summarize, the sole asset of the trust was the rental property, which was occupied and producing income.  The property was distributed in March, but the trust was not closed at that time, as it should have been.   The trust bank account continued to receive the monthly rental payments and to pay the rental expenses, mort. int, prop. tax, insurance and some repairs.  The property was managed by a property mgmt co. that issued a 1099MISC Rental Income for the entire year.   

There are two things that concern me. 1. Can the trust continue to pay the expenses of the rental (after Mar to the EOY) if the rental is no longer in the trust? 

 2.   If the answer is Yes, then would the beneficiaries lose out on the last 9 months of depreciation, since the rental shows no income?

 

 

 

 

 

 

  • Like 1
Link to comment
Share on other sites

Max, expenses related to rental during the period of ownership within the trust will be deductible. Once the house is transferred to the beneficiaries, the rental income and expenses after that date should not be included on the trust return.  The trust can NOT deduct expenses for a property it no longer had title to, similar to as if this was an individual that had transferred ownership.

This is what I would report on the trust return, others may have other opinions on how they'd report it:

  • The rental management company issued the 1099-misc for 100% of the rental income to the trust because that was the recipient of the funds.  Report 100% of the rental income on the trust return, then...
  • Issue Forms 1099-misc to each of the beneficiaries for their respective shares of the rental income assigned to each of them.  Report this assignment of income as an offsetting expense on the 1041 so that the net rental income or loss will properly reflect only the activity during the period of ownership by the trust before the house was transferred out.
  • Report rental expenses paid, including depreciation, from Jan 2017 through March ?, 2017, up until the house's distribution out of the trust.
  • For the rental expenses paid out of the trust after the house was distributed out, I would aggregate those and call those a distribution of assets out to beneficiaries since they were paid out for their benefit on an asset owned as individuals.
  • One problem will be if the trust had any suspended passive activity losses being carried in the trust. Those don't get passed out to the beneficiary until the final year of the trust.  If there was a very nominal amount remaining in the trust cash account simply for winding up of the final return, it may be possible to call this a final return, especially since there should be no other income in the trust since you said the house was its only asset, meaning that the trust will not have any future income to report, and no future 1041s would be required.  If there are suspended PALs to pass through in this final year, those losses do not attach to the specific asset, but rather they attach to the activity.  In this case since there is only the one house and not multiple rentals, the activity is the one and only house.

On the individual returns of the beneficiaries:

  • They will each receive a 1099-misc for their respective share of assigned rental income for the period after the house's distribution out of the trust in March 2017 that they will report as rental income.
  • Report the rental expenses that the trust paid after March 2017 that the trust reported as a distribution.
  • I don't see why they can't depreciate the house. They received the house in distribution, it is a rental property in their hands as individuals, and they should be allowed the depreciation deduction on it.  Whether step up or carryover basis is used is dependent on the type of trust and whether or not it was a rental property before it went into the trust.

 

I hope this helps somewhat.

 

 

Link to comment
Share on other sites

On 8/16/2018 at 1:31 AM, jklcpa said:

.

  • For the rental expenses paid out of the trust after the house was distributed out, I would aggregate those and call those a distribution of assets out to beneficiaries since they were paid out for their benefit on an asset owned as individuals.

 

Mostly agree with you Judy but the expenses paid after transfer would not be treated as distribution if paid from rent that was received after transfer.  In this situation, the trust collected rent and paid expenses on behalf of beni's.  So anything paid out of rent earned by beneficiary's would not really be a distribution from the trust assets.

Also I question whether 1099 from trust is appropriate.  I would advise trustee to furnish beni's with a statement showing their share of rent and expenses including mortgage interest that flowed through the trust bank account.   

Also provide beni's with information on their share of basis on date of transfer per treas. reg 1.1014-4  (Uniformity of basis).

  • Thanks 1
Link to comment
Share on other sites

On 8/15/2018 at 6:31 PM, SaraEA said:

If the trust got the 1099, received all the income and paid all the expenses, just file a regular 1041.  In the first post it sounded like its only asset was the house, which it already distributed, but then it turns out it continued to collect income and pay bills.  Sounds to me like it didn't end for income tax purposes in 2017, so why go through all the antics to get the 1099 reissued, the beneficiaries' returns amended, etc?    It should end when it distributes its remaining cash and stops collecting rents.

Even though the trust was not closed out, the property was transferred out of the trust so the income and expenses go to the beni's per the assignment of income doctrine.

  • Like 1
Link to comment
Share on other sites

On 8/17/2018 at 8:26 AM, DANRVAN said:

 

**Also I question whether 1099 from trust is appropriate.**  I would advise trustee to furnish beni's with a statement showing their share of rent and expenses including mortgage interest that flowed through the trust bank account.   

Also provide beni's with information on their share of basis on date of transfer per treas. reg 1.1014-4  (Uniformity of basis).

Bear in mind that the management company issued a 1099 to the trust, so the income after March has to be offset.  What other way could it be done without issuing 1099's to the beni's?

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Restore formatting

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...