Home placed in irrevocable trust

[Jesse]

I have not viewed the trust document yet, so according to my client her lawyer set up an irrevocable trust and placed the clients home into this trust. That is the one and only asset in the trust. She had the IRS letter stating the FEIN for XXXX Trust - IRRV and from information provided form 1041 will need to be filed.

Form 1041 should not have to filed because there is not income - correct?

If the house was placed in an Irrevocable trust can the taxpayer take credit for property taxes paid? Or does this expense now belong to the trust?

This is after the fact so there is no going back - are there any other issues that come to mind that I might be overlooking?

[Burke]

I suppose there was some valid reason for doing this? Because placing the home in an irrevocable trust means that it is now a trust asset, no longer an asset of the individual. Which means she just lost the Sect 121 treatment if it is sold. Did she retain a life estate when the deed was changed? Are you sure it was an irrevocable trust and not a living (revokable) trust which is a disregarded entity? Better get a copy of the trust document to determine how to proceed. If no income is earned, no 1041. How is it going to pay the real estate taxes, etc?

[Koss]

Type of Trust

It may be a grantor trust. If it is, then it is a disregarded entity. If it is a disregarded entity, then the taxpayer may still claim the property tax deduction. A grantor trust does not need to file any type of tax return, and generally does not need an EIN, either.

Just because your client got an EIN for the trust doesn't mean that a return must be filed. It also doesn't tell you whether it's a grantor trust. The attorney may have made a mistake by applying for an EIN.

The question is whether the taxpayer has retained control of the assets in the trust. The fact that the trust is irrevocable, in and of itself, does not address this question. If the taxpayer is also the trustee, then it is probably a grantor trust.

If it isn't a grantor trust...

Well, then, the taxpayer may not be able to claim the property tax deduction. If it's a genuine trust, then she may have completely transferred ownership of the home, and this would mean that she is no longer the party responsible for paying the property taxes. But if the transfer took place late in the year, then maybe she can still deduct some or all of the tax that she paid during 2008, prior to the transfer.

If it's not a grantor trust, it may not be required to file a return. As you pointed out, there is no income, so it may not be subject to a filing requirement.

You'll definitely need to see the trust instrument in order to get to the bottom of this.

BMK

[Jesse]

Burke - I think the only reason it was done was because the lawyer told her too. Looking to avoid probate, but why this irrevocable trust instrument I have no idea.

I'll know more when I actually see the actual documents.

Burton - off topic, I was surprised you are only 40, the way you come across on this board you are always so very thorough & very helpful, I just envisioned you to be much older.

I thank you both, and once again I really appreciate all my "people" for the great help!

[johnsapea]

Grantor Trust

I would suggest that you identify if this is a straight Irrevocable Trust and not a "Irrevocable Grantor Trust". An "irrevocable trust" can be treated as a grantor trust if any of the the grantor trust definitions contained in internal Code §§ 671,673,674,675,676, or 677 are met. This type of trust is used to protect the home for Medicaid purposes and sale of the home would still qualify for the §121 exemption.

John

[natiro]

Residence in trust

It's possible this may be a personal residence trust although I agree with all the previous posts that say you should read the trust document to make that determination. If it is, here is a link to an article that I believe gives a fairly good explanation of these types of trusts which might help you.

http://en.wikipedia.org/wiki/Qualified_personal_residence_trust

If the reason for this trust was solely to avoid probate, then a revoable trust would have accomplished that.