The situation is a married couple, wife owned the house and died. Upon her death the marital home went into a Irrevocable Trust. The trust document says husband gets to live in the house, rent free and the trust will pay all house expenses. An associate of mine says this makes all house expenses (not just interest and taxes) investment expenses, deductible by the trust on Forrm 1041. To me this does not make sense. The house is being used as a principal residence by the benificiary. I don't see where this house is being held for investment purposes. Any comments?
-
-
A trust cannot turn personal expenses into business or investment expenses anymore than a corporation turn personal expenses into business or investment expenses. Using the corporation checkbook to purchase groceries for a shareholder does not turn personal expenses into business expenses, unless the corporation puts those expenses on the shareholder's W-2 as taxable wages. Likewise, using the trust checkbook to pay for personal expenses of a beneficiary does not turn those expenses into investment expenses.
The trust can certainly pay for personal living expenses of a beneficiary. It cannot, however, deduct those expenses on Form 1041, unless it passes them through to the beneficiary as taxable income on the K-1. Personal expenses paid on behalf of a beneficiary would be treated as discretionary distributions to the beneficiary.
TTB, page SB10-15 under the line 10 instructions for Schedule B, Form 1041 says:
When TTB talks about deducting discretionary distributions, it is referring to the Income Distribution Deduction, which is calculated on Schedule B of Form 1041. The Income Distribution Deduction simply transfers otherwise taxable income on the 1041 over to the beneficiaries on their K-1, similar to the pass through of income for a partnership and S corporation.Line 10. Other amounts distributed. Include all other amounts
paid, credited, or required to be distributed to beneficiaries:
• Mandatory and discretionary distributions of principal.
• Discretionary distributions of income.
• Distributions in-kind.
• Estimated tax allocated to beneficiaries on Form 1041-T.
Estates. Line 10 generally includes all distributions made during
the year except specific gifts.
Trusts. Simple trusts should have no amount on this line.
65-day rule. Discretionary distributions are generally deductible
only if made during the tax year. To allow the fiduciary time
to complete its accountings and make discretionary distributions,
an estate or complex trust may elect to include distributions made
during the first 65 days of the following year as distributions for
the current year [IRC §663(b)]. Simple trusts do not need to make
this election. Required distributions are considered distributed
whether or not they are actually distributed. Make the election by
checking the box next to Question 6 on the bottom of page 2. For
the election to be valid, Form 1041 must be filed by the due date
(including extensions).
Thus, if the trust makes discretionary distributions in the form of paying the personal expenses for a beneficiary, either the Trust will pay tax on that amount by treating it as a non-deductible personal expense, or the beneficiary will pay tax on it by having the trust treat it as a deductible distribution of income to the beneficiary.
Comment