Trust sending 1098 Mortgage?

[GVTaxLady]

I've avoided trusts as much as possible, I know my limitations but this involves me personally so I can't avoid it. When my father-in-law died he left substantial farm land in a trust. The trust had to borrow money to pay the estate tax. Now all 3 beneficiaries have to give the trust $500 a month to pay the interest only loan. The trust issued a 1098 mortgage showing $6000 in mortgage interest to each beneficiaries.

First, this does not seem to be correct to me. Should this come on a K-1? and it's not a mortgage per se (certainly not a home mortgage as it is on farm land).

Second, if it is correctly issued as a 1098 Mortgage Interest Statement, is this Investment Interest expense?

None of this adds up to me. I've searched Pubs etc. and nothing seems to address this situation. Any place I can find more information?

Thanks for your assistance.

M

[Burke]

1. It appears that the Trust has borrowed funds using the farm land owned by the Trust as collateral? This interest is not qualified mortgage interest as a principal home does not appear to be involved. So no 1098 should have been issued to the beneficiaries.

2. Loan interest can be deducted when borrowed in order to pay Estate taxes. See IRC section 2035(a). The interest is deductible by the Estate. But since it appears the benes are paying $500 per month to the Trust to pay that interest, it must have no income of its own with which to pay it? Are there no other Estate assets from which the interest can be paid? What is the intention of the Executor/Trustee in regard to selling the property?

3. Who filed the Estate Tax return? Was an attorney involved?

[GVTaxLady]

1. It appears that the Trust has borrowed funds using the farm land owned by the Trust as collateral? This interest is not qualified mortgage interest as a principal home does not appear to be involved. So no 1098 should have been issued to the beneficiaries.

2. Loan interest can be deducted when borrowed in order to pay Estate taxes. See IRC section 2035(a). The interest is deductible by the Estate. But since it appears the benes are paying $500 per month to the Trust to pay that interest, it must have no income of its own with which to pay it? Are there no other Estate assets from which the interest can be paid? What is the intention of the Executor/Trustee in regard to selling the property?

3. Who filed the Estate Tax return? Was an attorney involved?

Yes, that is correct the farm has no funds or income (it is strictly farm land and the rent has been suspended when property went into escrow--but the rent didn't cover the loan payments in any case) and has borrowed the money to pay the estate tax. The benes have to kick in money to pay the interest only loan. The Executor has the property on the market (and hopefully it will close next month). No attorney that I'm aware of just a tax preparer that I do not know.

I'll go read IRC section 2035(a) to see if it sheds light on how these expenses, paid by beneficiaries should flow through the trust. (I still think on a K-1?)

[Burke]

I think the best course of action in this case is to use a 645 Election to treat Estate and Trust as one entity. See Form 8655. Must be done within the election period, not after everything is closed out and property sold. This will allow Executor to elect a fiscal year for the estate, hopefully ending in 2016. (Trusts have to use a calendar year when filing on their own.) Then, when sale is completed, and monies disbursed to the heirs, the estate will have a deduction on the 1041 for the interest paid to offset any possible gain. If there is no gain, then the capital loss and/or any Excess Expenses on Final Termination will flow through to the bene's on the K-1. (If there are no distributions during the estate/trust tax year, then income and expenses (i.e. interest paid) stay within the trust/estate).