Discussion:Grantor Trust - Incapacity of Grantor

If no change in basis now, is there still a step up in basis at death?

Any help on this issue would be greatly appreciated.

Thank you

John

John

If I am understanding your answers correctly, the only thing that changes with the incapacity of the grantor is a requirement for a 1041 return. No tax is paid with the 1041 and basically the same amount of income and expense will end up on the grantor's personal 1040 as before the incapacity. Could I ask you to validate?

Again, I really do appreciate your straight talk.

John

Note how things are NOT supposed to turn out: it looks they they have done a guardianship of both person and property. This means assets were not properly titled to the trust and/or they did not continue to title them. Classic mistake. Guardianship of property should not have been necessary. This could have worked well, and may still work ok. But, the idea that these "Living Trusts" ...oh anyway.

Remind the successor trustee of his/her/it's duty to read the trust and administer it properly; if he needs help, competent legal help is a (should be a) proper expense of administration.

Do you FEEL the boom coming in fiduciary liability cases? Hopefully legal malpractice cases too. I actually feel sorry for the accountants if they don't know the lay of the land, boobytraps etc.

Very interesting case in GA. where a law firm was sued for malpractice, and case allowed to go to trial in a situation where a law firm handled sale of business for seller, and forgot to renew an ancillary document/secured transaction (re-up a financing statement) some years later. There was no written contractual duty for firm to do it; ct. reasoned that it went with the job of being a lawyer. What does this mean for the lawyer that drafts a "living trust" and fails to remind, remind, remind client to keep titling appropriate assets in the trust? So many ways...

Then you have your outright frauds, of course...

I'd like to resurrect this thread, as I have a similar situation (revocable living trust where the grantor has been declared incompetent -- children are now co-trustees). Dennis stated in a previous post "If grantor is no longer a trustee the trust will file a 1041 with a grantor statement transferring income and expense to the incapacitated individual's 1040." I've looked through §§671-678 along with the associated regs, and like CalifCPA I can't see where a 1041 is actually required -- even an informational one. Reg 1.671-4(b) talks about the alternative reporting methods available to the trustee besides the filing of a 1041 and grantor statement. I don't want to contact all of the savings institutions to give them a new EIN if I don't have to. Or perhaps it is desirable to do this even if not required.

Please let me have your thoughts.

Thanks much for the help.

Once it becomes irrevocable, an EIN is required. Therefore the top portion of the 1041 gets filled in. All income and expenses go to the grantor via a statement attached to the 1041. The K-1 is not used. No numbers go on the 1041.

The grantor receives a statement from the trustee with the info that has to go on the 1040.

In short, there is no reason to file a Form 1041 just because the grantor is no longer the trustee. However, a statement of income is required. The statement of income need not be filed with IRS. See Reg 1.671-4.

Riley2's post is consistent with my own understanding. Maybe Dennis' reference to the filing of a 1041 assumes the trust discussed earlier in this thread became irrevocable -- I can see where JohnP's very first post could imply that.

I'll plan to prepare the required grantor statement under 1.671-4(b)(2)(ii) for the trustee's records, although I think the trustees will also receive the usual forms 1099-INT from the payors and probably won't need it.

Thanks again, Barbara and Riley2. Hope you've gotten a little rest since April 15!