1041 Required?

[Corduroy Frog]

Elderly parents, in a thinly disguised attempt to reduce their cash available for plundering by nursing homes, spend $300,000 on land.

They sign the land over to their two sons with a Deed of Trust in exchange for a promissory note for $300,000. The two sons run a contracting operation and will develop the land, and pay appx $50,000 annually on the note. The $50,000 will be paid to the trust.

Is this instrument ignored for Federal Tax Purposes, or is a 1041 required for this "trust?"
(The state is Tennessee but this question applies only for Federal purposes)

[Koss]

Deed of Trust

A deed of trust is an instrument that is used to post the real estate as collateral for the promissory note. The function of a deed of trust is almost identical to that of a mortgage.

They are not exactly the same. But they serve the same purpose. Some states use mortgages, while other states use deeds of trust.

The role of the "trustee" is to hold title to the real estate until the note is paid off. Once the note is paid off, the trustee transfers title to the borrower. If the borrower defaults on the note, the trustee transfers title to the lender.

So perhaps it could be said that using a deed of trust instead of a mortgage instrument makes the foreclosure process a little easier. But I'm sure there are still some fairly extensive legal proceedings involved before title to the property can be transferred to the lender in the event of a default.

My short answer to your original question is:

A deed of trust is merely a legal structure that is used to secure real estate as collateral. It does not establish a "trust" for federal tax purposes. No separate EIN, no Form 1041. The "trust" should have no income and no expenses, unless the borrower defaults.

BMK