grantor trusts

[JenMO]

both husband and wife have died. trustees sold income producing property, which if grantors were alive, SE liable. On K-1 to beneficiaries, this income comes over as other income, is it SE in the hands of the beneficiaries, too? Would like to close trust in 2016, but trust still holds a deed of trust. If deed of trust can be signed over clear, and other income received, (interest mostly) distributed to heirs, can we close? There is a private note still out, can that note be paid to heirs individually without the trust being a part?

[taxea]

Have you read the trust? It should guide you. Also if the beneficiaries inherited the note then they can call it in at any time demanding full payment which can then be distributed among them.

[Burke]

both husband and wife have died. trustees sold income producing property, which if grantors were alive, SE liable. On K-1 to beneficiaries, this income comes over as other income, is it SE in the hands of the beneficiaries, too? Would like to close trust in 2016, but trust still holds a deed of trust. If deed of trust can be signed over clear, and other income received, (interest mostly) distributed to heirs, can we close? There is a private note still out, can that note be paid to heirs individually without the trust being a part?

It is not clear from your post what "income" you are talking about. The sale would not be subject to SE tax. Rental income would not be subject to SE tax. What kind of income-producing property is it, and what income are you referring to? See the terms of the trust for distribution at the death of the grantors. Also, you do not state what type of trust it is. If all is to be distributed to the beneficiaries, then the deed of trust is changed to those parties, the note becomes payable to the heirs, and all income is paid out -- trust closed.

[Roland Slugg]

The term "income producing property" is normally understood to refer to improved or unimproved real estate or to an investment such as stocks or bonds. As such it is not subject to self-employment tax. Was your client's "income producing property" something like a motel or a parking lot? If so, it would have been subject to S-E tax, but I would consider that to be a "business" and not "income producing property."

In any case, trusts are not subject to S-E tax, so the trust's benes aren't, either, at least regarding the income passed through to them from the trust.

Regarding the D/T and the other promissory note: Unless the trust document prohibits it, a trust can distribute any asset/property to its beneficiary(ies). Thus, it should be a simple matter for the trust in your case to distribute those assets to its benes.

[JenMO]

couple had a farm and there were still calves to be sold. that is what I was considering income producing. there was cows also sold, but since they are deprec assets or cap gain, I used FMV amounts as basis for them. I don't believe I can use any type of FMV on calves can I?

[JenMO]

Sorry been gone a few days. if there is some SE liability, where does that show up on the K-1? Am I right in thinking that the calves that were born on the farm and then sold would not get any stepped up basis? I put a farm schedule in the trust return and filled out normally as any farm.

[Burke]

The calves born on the farm were also capital assets. So if this was a revocable living trust, everything got stepped-up basis when the grantors died. When were the calves sold?

[JenMO]

calves were sold shortly after the last grantor's death. Husband died in 2013, 10 months later, wife dies. Not sure when calves were born, probably after husband died.
How do you sell with stepped up basis? on 4797? I assumed a Sch F would be in the 1041 return and calves would be listed as "sale of livestock raised (line 2) Beneficiaries received quite a bit of money, farm sold at FMV so no income tax on that amount, but when I put in DNI as exactly what we are showing as income, there is no income tax, but the software is generating AMT. Is that correct?

[TAXNJ]

Review

calves were sold shortly after the last grantor's death. Husband died in 2013, 10 months later, wife dies. Not sure when calves were born, probably after husband died.
How do you sell with stepped up basis? on 4797? I assumed a Sch F would be in the 1041 return and calves would be listed as "sale of livestock raised (line 2) Beneficiaries received quite a bit of money, farm sold at FMV so no income tax on that amount, but when I put in DNI as exactly what we are showing as income, there is no income tax, but the software is generating AMT. Is that correct?

Suggest do a software diagnostic review of the return and more IMPORTANT understand the forms in the return to see if the software generated the correct result or input error is causing the problem.

[JenMO]

I did go over, and some figures were not flowing correctly. No AMT

[TAXNJ]

Congrats

I did go over, and some figures were not flowing correctly. No AMT

Sometimes the smallest input error creates big problems and the software is not to blame in most cases.

[Burke]

.
How do you sell with stepped up basis? on 4797? I assumed a Sch F would be in the 1041 return and calves would be listed as "sale of livestock raised (line 2) Beneficiaries received quite a bit of money, farm sold at FMV so no income tax on that amount, but when I put in DNI as exactly what we are showing as income, there is no income tax, but the software is generating AMT. Is that correct?

4797 is what I would do in this case. There probably is no gain or loss, but if there is, it will flow through to the bene's, and not subject to SE tax. I think your AMT question was answered.