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  1. #1
    GAIA is offline Junior Member
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    What are the tax implications of a property placed in a irrevocable trust?

    We placed my parent's property (personal home) into a irrevocable trust. The instructions was to sell the property upon the death of one of the parents with the proceeds going into trust account at a bank of our choosing. We are to distribute money from the proceeds to my surviving parent for living expenses, etc. As far as I know, the trust was not given a tax id (still checking with lawyer who drew up the trust for us).

    So now that the bank trust account has the funds, can I as the trustee distrbute the money without any tax liabilities? Who owns, if any, the tax responsibilities here?

    The property is in California and proceeds from the sale was less than $500,000.
  2. #2
    tranquility is offline Senior Member
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    We'd have to see the trust. You will have to see a tax professional as this could get complex really fast. There was a present gift at the time the house was added to the trust if it were truly irrevocable. You have lost the right to a section 121 exemption on the sale of a personal residence if the parent's did not have the right to change the corpus beneficiary and only had the right to receive income from the trust. I assume the purpose of the trust was to qualify for medicare sooner and without using up the parent's assets. Right?

    There should be a tax id number for the trust. The trust may be responsible for a big tax bite. The amounts acutally distributed can be a deduction against income. See a tax professional at least this year who can review everything.
  3. #3
    GAIA is offline Junior Member
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    At this point, one of my parents have died. So the house has been sold and we are ready to distrubute the proceeds of the sale into a trust accout at the bank.

    The only purpose of the trust was to protect the property from one of my parent's children from another marriage. They did not want the other children from coming after my parent for the money.

    The trust is known as the "FirstName Lastname and Firstname and Lastname Irrevocable Trust."

    I would be wiling to send a copy of the trust if it would help clarify it a bit more.
  4. #4
    FlyingRon is online now Senior Member
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    Tranquility is right. An irrevocable trust was a terrible idea tax wise. The capital gain (from your parents presumably low basis) is ENTIRELY taxable. There is no $500,000 exclusion nor is there any basis step up. The issues are complex. You're going to need a lawyer or accountant well versed in this (rather than whoever suggested this to you to begin with).
  5. #5
    tranquility is offline Senior Member
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    Except for medicare planning, I don't really see a good reason for this set-up. I'd have to know a lot more regarding the setting up of the trust, but it appears you and your parents may have been ill-served by the attorney who set things up.
  6. #6
    GAIA is offline Junior Member
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    Well I spoke to the lawyer. I didn't get into details of why we did this type of trust but he never set up a tax ID and that he normally does not set up a tax id. Does this change things for us?

    At this point, we have used my father's social security number for the 1099 that will report the sale of the house.
  7. #7
    tranquility is offline Senior Member
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    Get to a tax professional. If the house was titled to an irrevocable trust, you should not use your father's tax ID. In fact, if you had the intent, it would be fraud. Also, because it was a CA sale, tax should have been withheld on the sale with the Form 593. Since the actual sale will be reported on a fiducary return, getting things worked out may be hard. This is why. You will not get credit for the withholding on the fiduciary return. The trust will need to come up with the money. You will get the withholding back on father's final return. However, that money is not in the trust and will have to go through the normal channels (probate, or whatever) to flow to the beneficiaries. If there is not a will or a pourover will to a trust, the money may go to *all* the beneficiaries. Including the ones who you don't want to have the money.

    On and on. You have a problem and it's time to fix it. Get a number for the trust. See if you can properly report the transaction. (It's very simple to get a number. ) If nothing else, see if you can use "applied for" in the documents. Otherwise you will be setting yourself up for a fight with the children from a prior marriage.

    See a professional with knowledge of such things. Things may not have been screwed up beyond fixing yet, but you are very close to giving yourself years of grief.
    Last edited by tranquility; 09-12-2007 at 06:17 PM.

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