Discussion:Simple Trust, or Grantor Trust and Principal Residence

I went here for guidance as it was close to what I was looking for, but still falls short:

Discussion: Primary Residence Held In an Irrevocable Trust

Here goes:

Client has irrevocable trust. The "settlors" or "grantors" (from what I've read these legal terms seem to be interchangeable) established the trust in 1994 and transferred their assets, including the principal residence and stocks, to it at that time. Client moved in 2007 and sells residence in July 2007 and wants Section 121.

1041's from prior accountant indicate the trust is a "simple trust." Now I read the trust document and here's where things get to be fun.

In reading the above post, Riley2 asserts all trusts can avail themselves to Section 121 as long as they are described in Sections 671-679. Riley2 is always on target no reason to doubt him.

Based on other posts I've seen (this one comes to mind Discussion:Irrevocable Living Trust /) the term irrevocable is meaningless. The trust grantors (i.e., the client) are the recipients of the income of the trust. They enjoyed the income from the dividends from the stocks, bonds, etc. Doesn't that sound like a grantor trust under Section 677? If so, client gets Section 121 or I would hope so.

So, in reviewing prior 1041's, prior accountant checks the "simple" box and not the "grantor" box. Does that or does that not make a difference? If it does, it seems it needs to be corrected.

Now comes another curve ball: one of the beneficiaries/grantors passed away in September of 2007. We have one beneficiary left. Lawyer says that the trust is now an "incomplete gift" due to the death of one the grantors. I've only seen this term used when a gift is given (i.e. check/transfer of money) and before the check is cashed, the person dies.

Any guidance is most appreciated.

Thanks,

Tom

A tax return for a grantor trust is done differently than one for a simple trust.

For a grantor trust, only the name address and ID and type of trust are completed on the 1041. Then a separate statement is attached to it to advise the grantors of the various parts of the trust that are income taxable to them. The 1041 is basically a cover sheet for the IRS.

Most Sec. 677 trusts are also gifts described in Sec. 2036(a), meaning that the value of the trust is thrown back into the gross estate for death tax purposes.

Thanks for the look. I think Riley's answer in the original first post is applicable. I think the prior accountant didn't read the trust document correctly. It reads grantor trust to me, but I am no lawyer and I am not about to play one on TV.

Now, if Riley2 is out there, I would love for you to chime in.

Barb, thanks for the look as well. You pretty much summarized what's happening and that leads me to believe I am right. But, I am trying to talk with the attorney, but he's hard to get a hold of and he's not making money on this anymore, hence, no return calls.

Thanks,

Tom

Our posts crossed.

I gather from what you say Section 121 is still available because it qualifies as a "grantor" trust under 676. It seems Dennis is correct that "irrevocable" is meaningless as long as the trust complies with the Sections 671 and 673-677 when it comes to being a "grantor" trust.

Have I got that right?

Tom

I spent most of the morning looking for that darn clause set it down because my brain began to hurt over this issue. I will look later but is the timeline of the sale and death significant? Sale was July 2007 and death was September 2007.

And I gather from what I've read, a grantor trust can be irrevocable. Irrevocable simply means no modification to the trust can be made. It does not preclude Section 121, correct?

Tom

Thanks.

Tom

Client calls and the prior accountant seems to have corrected his mistake and checked the "GRANTOR" box. Subsequent information indicates this is a grantor trust.

The trust stays in effect until the mother passes away. The attorney confirmed this in a meeting in September 2007. During that same meeting, a paralegal tells the client the transfer is an "incomplete gift." But this still makes no sense.

The house transfer was executed in 1994 to the trust. The sale was completed in 2007 prior to the passing of one of the trust grantors. How does this render the transfer of the property to the trust an "incomplete gift"? It doesn't sound logical.

Tom

It always helps me to put the numbers down clarify the situation, so here is the fact pattern with numbers:

Husband and Wife build a house in 1955 for $20,000. The adjusted basis of the home is around $50,000 at the time of the transfer. They transfer it to the grantor trust in 1994. The home is then sold in April of 2007 for $190,000. The proceeds are placed in the trust and the grantors move to be closer to their children. Husband (Grantor A) dies in September of 2007, and the trust continues on with the wife being the remaining beneficiary of the trust.

I will speak to the attorney who drafted this today for clarification. In the meantime, thanks for the guidance.

Oh and welcome back Riley. We missed you!

Tom

He says that the trust is still a "grantor" trust as both husband and wife "granted" their assets to the trust including the house. He said the incomplete gift comes in because the grantor "still has the power to change the beneficiary" (how can that happen in an irrevocable trust is anyone's guess.) Anyway, he says the trust continues as it has, no need to change the filings after the death and he says the client should still get the exclusion.

Does anyone disagree with this?

Tom

Here's the definition I found that's most useful:

Q: What are irrevocable/revocable trusts?

A: An irrevocable trust is a trust, which, by its terms, cannot be modified, amended, or revoked. For tax purposes an irrevocable trust can be treated as a simple, complex, or grantor trust, depending on the powers listed in the trust instrument. A revocable trust may be revoked and is considered a grantor trust (IRC § 676). State law and the trust instrument establish whether a trust is revocable or irrevocable. If the trust instrument is silent on revocability, then most states consider the trust revocable.

Here's where I found it:

http://www.irs.gov/businesses/small/article/0,,id=106551,00.html

I hope this helps.

Dennis and Riley are both the board gurus on these issues. I hope they can give us some more useful guidance.

Tom

This is a learning experience for me as well because everything I was reading here, in the trust document and in the code was telling me what was previously being done appeared incorrect. But once I had more pieces to the puzzle, it became clear, that things were straightened out, but some of the advice the client was getting was mixed up, wrong or at best incoherent on their part.

What was frustrating today was the lawyer didn't remember his own document! He wanted me to read it to him and asked me to look for things for him. He then realized I had an old trust document that he has since updated. I didn't get a warm, fuzzy feeling from that conversation.

Tom

Thanks for the information. You've been very helpful as well as Riley.

It is most appreciated.

Tom

"Estate and Trust Tax Return Helper"

by: P. N. Strand

a good place to start.

It's a grantor trust because the grantor is the bene and receives the income.

It's a grantor trust because the grantor is the bene and receives the income.

It will only be a simple trust if all of the assets transferred belonged to the husband at his death. (Actually 96%)♫

If trust is obligated to pay real estate taxes for trust property, presume that any taxes paid by individual outside the trust becomes a gift to the trust, and must be accounted for.

If trust is not obligated to pay real estate taxes for trust property, presume that any taxes paid by individuals other than by the owner would be gift to the owner, and must be accounted for as property in the estate tax and income tax returns in any year where it occurs whether that payment is by the trust, or by persons who pay over which the trust has control.

If property is placed in trust for beneficiary, anything that doesn't benefit the beneficiary becomes a breach of trust by whomever it is committed.

If personal residence was exempted by first to die, the question of which trust, if any, it was to be placed, in the B Trust or the A Marital Trust, of left solely in the survivor of a Joint Tenancy by Entirety - which by most tax laws of states, the 1/2 attributable to each spouse should be accountable on the estate tax return subject to 121 deduction, presumably. It may also be possible that a couple for whom such an all inclusive trust exists - exclusive of personal property, lies within the A/B Trust (unless the survivor contributed to purchase), and that all property must be valued with respect to the A/B Trust design set up at the death of the first spouse; the property does not flow free from the obligations of a married couple and their respective rights upon the marital property - unless they married after 1978 when marital property became severable, and women were allowed to mortgage their own half of the marital property. Since the Marital Trust is set up to take advantage of the former A/B Trust set up, it cannot ignore that obligation and operate as if it were un-associated.