Trust Accounting Income for vehicle

[Gretel]

I am going in circles on expenses for a vehicle owned by a now irrevocable trust used 100% personally. I believe personal property taxes can be deducted on the 1041 but I am trying to figure out if the accounting income would be reduced by all expenses for the vehicle. That does not seem right. Same goes for personal residence. Would f.e. utilities be part of the accounting income?

In my simple mind assets either belong to a trust or they don't. If they belong to the trust all associated expenses should be deducted from the accounting income but somehow that does not feel right. I do not have problems what I can deducted on the 1041 but I need to get the income required to be distributed right. What am I missing? I have a big folder from a Gear-up seminar that does not address this issue.

[Burke]

Be careful with these types of arrangements. IRS targets abusive trusts where personal assets are put into trusts so that expenses can be deducted that would not otherwise be. It is better for the vehicle to be owned by the bene and distributions made that will cover the expenses. It is then reflected in DNI. Is there a reason it is in the trust? You said it was used 100% personally. Also a personal residence? Are there remainder beneficiaries?

[Gretel]

Be careful with these types of arrangements. IRS targets abusive trusts where personal assets are put into trusts so that expenses can be deducted that would not otherwise be. It is better for the vehicle to be owned by the bene and distributions made that will cover the expenses. It is then reflected in DNI. Is there a reason it is in the trust? You said it was used 100% personally. Also a personal residence? Are there remainder beneficiaries?

Thanks, Burke. Yes, it's about the remainder benes (children) and I guess, to avoid probate. Main asset of trust is farm land, which is leased now, no active farm business any longer. This also means that the income barely covers all the expenses if all property taxes are included. This is true for the taxable income. If the expenses for house (remodel), other than taxes are part of the trust then we would have negative accounting income with no way to recover. After learning about probate I think it makes sense to have these assets in the trust, maybe the vehicle can be taken as a distribution by surviving spouse. But then again the vehicle could make the difference to have to go through probate. Would it be wrong to just pay the house taxes through the trust and all other expenses are paid personally? Would probably not work for remodel since that will be part of house already in the trust anyway.

[Burke]

Did the surviving spouse own the house, farm and/or vehicle jointly with her husband (whom I assume is now deceased)? Was it a testamentary trust, or a grantor trust to begin with? I am gathering from the post that the trust has insufficient income to pay all the expenses, so where is the money coming from? And what is f.e. utilities? An income item?

[Gretel]

Did the surviving spouse own the house, farm and/or vehicle jointly with her husband (whom I assume is now deceased)? Was it a testamentary trust, or a grantor trust to begin with? I am gathering from the post that the trust has insufficient income to pay all the expenses, so where is the money coming from? And what is f.e. utilities? An income item?

Most assets were owned jointly (farm & residence on farm land), another piece of land was just hers but also part of the joint revocable living trust. The truck, which she traded for a car was titled to the trust but his farm vehicle. Wife paid from her personal funds, she hasn't caught up yet what it means to be the trustee. I am trying to find a way to get her out of the 1041 (she still would need to keep track of the trust assets). Since she is the bene as long as she lives, maybe the trust can grant her the right to lease the land (only income left that requires filing of form 1041) and report income on her 1040. She will need to talk to a lawyer but do you think that could work?

[Burke]

Well, I don't have the trust document, so I cannot tell definitively what it can and cannot do, or whether it can be changed at this point. I think you have a handle on what can be deducted on the 1041. Normally a trust can pay for expenses of its assets, but not necessarily deduct all of them as expenses on the tax return. Taxes & interest yes, other personal expenses would be classified as distributions. I need to get back to you on the RLT thing since she was also one of the grantors.

[Gretel]

Burke, I am so glad you hang in there with me. Your last sentence brought up something I hadn't considered yet. The place surviving spouse owed 100% before putting in RLT. I believe the basis for this piece is the FMV at the time RLT was created. Since she didn't die when trust became irrevocable there is no step-up in basis. I am pretty sure time of death or that this trust is now irrevocable has no bearing on basis. Correct me if I am wrong.

[Burke]

Well, if she owned it 100% before putting in grantor trust (RLT), then its basis is her original basis (cost, inheritance, etc,) not its FMV when it went in the trust. And you would be right, no step-up when he died. It would get stepped up when she dies. I have seen plenty of these RLT's for husband and wife individually. That's probably what should have happened. Her assets in one and his assets in one. Joint assets are sometimes put into Family Limited Partnerships which are also disregarded entities. So I am thinking this is still a grantor trust, why are you saying it became irrevocable? Does the trust document say so, or provide for the assets to pass to the other spouse? If jointly owned assets are in the trust, only 1/2 got stepped-up when he died.