Basis of inherited rental w/trust issues

[joanmcq]

Ok..client was trustee and executrix of mother's estate & trust. DOD was in 2004. Rental was valued at $435,000 at DOD. Client paid pretty much all of trust's expenses including repairs, taxes, etc rental as well as two other properties without being reimbursed. Trust deducted allowable expenses like RE tax, accounting fees, utilities, repairs, etc. The two other properties were sold and other bene (client's nutso sister) sued client, I think for dawdling on the distributions. Client ended up getting the remaining rental & had to pay sister's attorney fees (which were paid from trust assets) and 200K. Never got reimbursed for most other expenses, including her own attorney fees.

On another board it was suggested that her attorney fees could be added to basis. What else is the basis? Does she get 1/2 of DOD value + 200k, or DOD value? The settlement doesn't specify if 200k is for 1/2 value of property at settlement date or if the unreimbursed expenses are in there as well. Can we salvage any of the other expenses, like repairs, taxes, utilities for basis? House wasn't rented until April 2008.

[joanmcq]

bump, can anytone comment on this please?

just the question is how to I compute basis?

[JG EA]

I don't know if I can think of anything helpful. But was this a decedent's trust? Is it closed? Was the property distrubuted? If the trust is not closed has it changed its character? Client "got" the remaining rental how? Distributed from trust or did an attorney deal with this after the trust was closed? Basis for attorney fees would depend on many factors. If in a trust and he was doing things with the trust it would probably be a write off.

[joanmcq]

The decedent had a living trust that became irrevocable upon death. The trust had stocks, mutual funds, cash, plus two houses and some bare land. The land and one house were sold and the proceeds split, but the last house didn't sell, and the nutso sister of my client (the other bene) sued to get her half. The settlement resulted in my client getting the house (now rented) but has to pay her sister 200K. Sister also got her attorney fees (16K) paid out of the little remaining cash in the trust, and my client still had a lot of unreimbursed expenses for the trust and estate she never got paid back, including RE tax, utilities, repairs on all the properties, accounting & legal fees etc. My take is that her share of some of these expenses + the 200K + her half of the DOD value is going to be her basis in the house. All property is deemed distributed as of the settlement in Nov, 2007. Then my client has had to pay her sister interest on the 200K which she still hasn't paid. I'd like to treat that as mortgage interest (accruing since Nov 2007 & paid in Oct. 2008).

[JG EA]

The decedent had a living trust that became irrevocable upon death.

So, you mean things were put into the names of others, not turned into a irrevocable trust?

The trust had stocks, mutual funds, cash, plus two houses and some bare land. The land and one house were sold and the proceeds split, but the last house didn't sell, and the nutso sister of my client (the other bene) sued to get her half. The settlement resulted in my client getting the house (now rented) but has to pay her sister 200K. Sister also got her attorney fees (16K) paid out of the little remaining cash in the trust, and my client still had a lot of unreimbursed expenses for the trust and estate she never got paid back, including RE tax, utilities, repairs on all the properties, accounting & legal fees etc.

These were never counted anywhere?

My take is that her share of some of these expenses + the 200K + her half of the DOD value is going to be her basis in the house.

I think it sounds rights assuming you are talking about she now owns the property, however remember that depreciation is the lower of basis or FMV when in service

All property is deemed distributed as of the settlement in Nov, 2007

.You mean settlement of legal issues not settlement of a trust?

Then my client has had to pay her sister interest on the 200K which she still hasn't paid. I'd like to treat that as mortgage interest (accruing since Nov 2007 & paid in Oct. 2008).

Cash basis interest paid in the year could be counted as many things, investment interest, carrying charges. non deductible interest depending on the use of the property.

Things to take note: A living trust is revokable. You mentioned an irrevokable trust which would change everything. Outline on your workpapers: What was what when it happened. These questions depend upon what we are talking about. It isn't clear to me, but I've tried to insert a few thoughts to help you organize what you have.

[joanmcq]

Decedent had living trust which became irrevokable upon death. As do all living trusts. All of the assets listed were titled to the trust. The properties that were sold and the distributions of the resulting cash, as well as distributions in kind of the stock & mutual funds were reported by the trust on the 2005 & 2006 trust returns and documented in the accounting. None of them are issues. Some of the expenses were reported by the trust, such as taxes paid and accounting fees.

" think it sounds rights assuming you are talking about she now owns the property, however remember that depreciation is the lower of basis or FMV when in service"

This is why I am trying to figure out basis, so I've got an idea which is lower. Remember property values here in CA peaked in late 2005/early 2006 and started dropping all through 2007. I've also got to do the final trust return. At the suit settlement, the final distriubutions took place, although my client has still not titled the house in her name, so I think the settlement date of the trust and suit are the same.

[Burke]

I started to post an answer a while back but could not figure out exactly what was going on. It appears that (for whatever reason) your client paid certain expenses related to this remaining trust property out of her own pocket instead of trust assets. Why she did this I am not clear on, since there were liquid assets in the form of stocks and mutual funds which should have been sold to provide cash to take care of these, but no matter now. I would add these expenses to her basis in the property, using 1/2 DOD FMV and $200K. I can't see how the interest is mortgage interest. It is simply interest on the settlement amt. Other bene's basis would be 1/2 DOD FMV reported to offset "sales" proceeds of $200K on Sche D, long-term cap gain/loss. She would also report interest income. Send her a Form 1099INT in the year paid.

[joanmcq]

Yeah, I've already sent the 1099-Int. The reason the expenses were paid out of her pocket...who knows. She said there wasn't a checking account for the trust, but I told her she had to set one up. Is one of the most disorganized people I know.

[Burke]

I see it all the time. Parents make children executors/trustees who have no idea what they are doing. It is not something most individuals have had any experience with before, but they should procure professional help when it comes along. The whole point of an irrevocable trust is to avoid probate, and provide for a simple distribution of assets at death. The problem is that not every liquid asset like checking/savings/CD accounts should be titled in the IT, or there is no money to pay estate expenses. And if simple distribution was the intent, then maybe the sister is not so nutso, as it appears the client did not do this and the other bene had to eventually hire an attorney to force the distribution. So, in some cases, the whole process of the irr trust (which costs money to begin with to draw up the appropriate documents by a lawyer -- I had one for which the client paid $4,000) is sometimes circumvented and this is the result. So how much in probate costs did anyone save? And was it worth it? And as far as the attorney fees are concerned, IMO, it appears these would be a trust expense, which would be used to offset any income and the excess passed thru to the benes upon termination. Whenever I learn of a family death, I try to immediately contact my client to determine what their responsibilities are, because what happens is, you are dragged in after they have totally messed things up, and it is a nightmare to untangle.