Revocable Living Trust & Estate

[GTS1101]

I need some guidance on how to handle a revocable living trust at death. This is the first time I have taken on a trust return but I thought it would be very good experience as I have one more part of the EA exam to go and I want to expand my practice once I become an EA. My client's dad died on 7/27/08 & her mom died 11/16/08. They had a Revocable Living trust which I understand is a grantor type trust. The only asset in the trust is their home at a value of about 300,000. The trust has two beneficiaries my client and her brother at 50% each. The brother is currently living in the home as he was taking care of the parents before they passed away. Beginning in 1/09 they began renting out two of the rooms in the house. I am assuming that in 2008 the trust does not need to file a return because no income was generated from the house? Would I be assuming correctly. They were getting social security and retirement and had some CD's and a vehicle but no other assets. Their assets are well under 2,000,000 so I am also assuming that an 706 estate return does not need to be filed. They would like to keep the house and rent it out in the future. The trust allows them to keep the home in the trust for up to 21 years after date of death. If they make a profit from renting the property out would it be wiser to quit claim deed the house out of the trust into their names and claim on their own tax return the income from the rental and the expenses or would it be wiser to keep in the trust & do a trust tax return each year. It looks like trust tax rates are higher but since I have no experience with trusts I wasn't sure. If they quit claim deed to themselves they would have to refi in order to write off the interest because the loan is in the parents name. Is that assumption correct? For any of you that have experience in this area thank you for taking the time to read my long area and to give me some guidance.

Happy New Year!
GTS1101

[Burke]

1. To begin with, a Revocable Living Trust is a disregarded entity and its only purpose is to avoid probate. Ownership passed outside the probate estate and is now owned by the heirs. It does/did not file a separate income tax return. All income and expenses are/were/will be reported on the grantor(s)/owners' tax return(s). The assets held within the trust do not avoid Estate Tax. However, that does not seem to be a problem here.

2. I have never seen one that "allows the property to be retained in the trust for 21 years"...are you sure this is a Revocable Living Trust? If you are sure it is, you would treat the property as you would any real estate in the parent(s) name at death. It now belongs to the beneficiaries named in the trust document and should be retitled properly. They can each treat it as one-half owned rental property and file respective Sche E's starting from the date it was put into use as rental property.

3. I assume the one brother is not going to continue to live there, making it his primary residence?

4. Whether or not to put this into an irrevocable trust and file a trust return every year with K-1's to the bene's, would depend on a whole lot of other information about the 2 owners' respective situations. In most normal circumstances, probably not advisable. Trusts cannot deduct passive losses, for one thing. However, if that is done, you will have to apply for an EIN. I would think your clients would have to refi anyway, since the parents are now dead, no longer own the property, and obviously can no longer be responsible for the mortgage. The bank is going to mandate that.

5. One last thing -- I have seen many of these Revocable Living Trust documents set up, but the assets were never retitled to put them inside it. So the trust is "unfunded," and of no import at death. Ck both the trust document and the deed.