Trust issue

[New York Enrolled Agent]

The attorney is correct that there is a step up in basis. Only the step up in basis is based on 2005 FMV, not 2021 FMV. Thus, the reason for the 50K - 60K gain that must be split 50/50 on the 2 K-1s.

I presume you're talking about the original post. There is no reference as you describe. This is the only reference to the attorney. This is correct????

However, client has insisted that he was told by an attorney
during another issue that the Trust proceeds are NOT taxable because this is an inheritance.

[TAXNJ]

An estate attorney once told me it is very rare to set up an irrevocable trust before death. It is usually some type of revocable trust, because people have a habit of changing their minds before they die.

With that in mind, I am going to offer a straight forward guess that is more than likely to be true.

Grandmother forms a trust in 2000 and puts her house in it as the only asset? Why? Most likely to avoid probate, NOT to avoid estate tax, because estate tax would not be a factor if the house was her only asset. Thus, it is more likely than not that this was a grantor trust.

Grandmother dies in 2005.

Grantor trust turns into irrevocable trust upon death. House basis is stepped up to fair market value on the date of death.

Grandson starts renting the house in 2005, using fair market value as of 2005 for depreciation purposes.

Grandson sells rental property in 2021. Gain is 50K - 60K, meaning the difference between selling price in 2021 and FMV in 2005 minus depreciation recapture equals 50K - 60K.

The attorney is correct that there is a step up in basis. Only the step up in basis is based on 2005 FMV, not 2021 FMV. Thus, the reason for the 50K - 60K gain that must be split 50/50 on the 2 K-1s.

All good replies but seems the Original Poster lost interest in the post.

[ATSMAN]

As we all know 1041 returns can be very challenging until you yourself read the trust document. Most lay people think that rich people form Trusts to hide income and taxation so they want to be in with that.