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.