Personal residence in irrevocable trust

[sdtaxman]

I have a client considering the transfer of her personal residence into an irrevocable trust, maintaining the right to income and her daughter being the trustee and beneficiary of the trust. The local attorney is advising the plan and I know only enough to be dangerous on trusts and have read but cannot put my arms around the following questions.

1. If the trust owns the house, it would be responsible for the taxes, insurance and upkeep of the house. If no other assets exist in the trust to pay for them wouldn't that force her to pay rent to the trust for living in the house?

2. Then I guess this forces the filing of a 1041 income tax return with the income being taxed back on her personal return. I think that means she created taxable income and has increased her tax liability, is that correct?

3. What would be the rule about fair market rent or can you just charge rent to cover the expenses so no net taxable income?

I know these plans are being used but I don't understand the income tax implications so any help is greatly appreciated. Thanks for the help.

[Gene V]

Revocable Trust

I have a client thinking of doing the same thing. However, she is planning on putting her house and assets into a Revocable Trust (Also referred to as a living trust). This type of trust does not need a separate EIN as long as the owner is still alive. No 1041 to file. The income earned on this type of trust is reported on the donor's 1040 tax return. The Revocable Trust becomes an Irrevocable Trust when the donor dies.

[Gretel]

I have a client considering the transfer of her personal residence into an irrevocable trust, maintaining the right to income and her daughter being the trustee and beneficiary of the trust. The local attorney is advising the plan and I know only enough to be dangerous on trusts and have read but cannot put my arms around the following questions.

1. If the trust owns the house, it would be responsible for the taxes, insurance and upkeep of the house. If no other assets exist in the trust to pay for them wouldn't that force her to pay rent to the trust for living in the house?

2. Then I guess this forces the filing of a 1041 income tax return with the income being taxed back on her personal return. I think that means she created taxable income and has increased her tax liability, is that correct?

3. What would be the rule about fair market rent or can you just charge rent to cover the expenses so no net taxable income?

I know these plans are being used but I don't understand the income tax implications so any help is greatly appreciated. Thanks for the help.

I am no expert but do know that income from an irrevocable trust is not reported on the 1040. However, if an irrevocable trust is deemed to be a grantor trust (then reporting goes on 1040 along with some basic reporting on 1041) is a different story.

[New York Enrolled Agent]

I have a client considering the transfer of her personal residence into an irrevocable trust, maintaining the right to income and her daughter being the trustee and beneficiary of the trust. .

You are asking questions that are difficult to answer because we haven't seen the documents and we do not know all the facts.

Your comment suggests that there MIGHT be a life estate involved. If mom is, in fact, a LIFE TENANT then mom treats the house as her own and deducts the real estate taxes and any possible mortgage interest on her tax return.

You need to read the document - Gretel says it might be "a different story" depending on the facts. She's correct.

BTW, as an aside to Gretel - haven't seen you at NTPI for awhile.

[Gretel]

Ot - nyea

BTW, as an aside to Gretel - haven't seen you at NTPI for awhile.

I know (sigh), I just don't like Las Vegas and especially the Cosmopolitan...

[DonB]

Tax benefits lost?

I'm not a trust expert, but here are some thoughts: In the irrevocable trust there would not be a section 121 exclusion if the home were sold, and no step up in basis upon the clients death. Am I right??

[Burke]

I have a client considering the transfer of her personal residence into an irrevocable trust, maintaining the right to income and her daughter being the trustee and beneficiary of the trust. The local attorney is advising the plan and I know only enough to be dangerous on trusts and have read but cannot put my arms around the following questions.

From a tax standpoint, I don't agree with this scenario. Either an RLT or a Life Estate would probably accomplish what she wants. Which we really don't know, or why the attorney is advising this.
She is essentially turning her personal residence into rental property, jeopardizing the 121 exclusion and causing taxable income to herself and unnecessary tax returns. Explore the reasons with the attorney so there is a better understanding of what they want to accomplish. There may be other assets (that actually generate income) which are going into this trust, but a personal residence usually would not do so.