Living Trust

[Jesse]

Just received a phone call and no time to reasearch so sorry to offend those of you that think a question w/out research is not proper.

Client had a "living trust" created by a lawyer and the lawyer told him this is 100% tax deductible. It is not a Life Estate, it is not a will, it is a living trust created at the cost of $3,000.00. I am illiterate in knowing exactly what this means any thoughts?

[jimmcg]

Living Trust

Generally the income from a living (or grantor) trust is taxable to the donor during the duration of the trust. See where the trust income is coming from and determine for yourself whether it is taxable or not. Absent the facts the first thing you need to do is read the trust agreement to determing the facts and see if this is truly a living trust agreement.

[jainen]

the lawyer told him

>>the lawyer told him this is 100% tax deductible<<

The lawyer should have said his fee is tax-EXCLUDABLE. You 100% exclude it from the tax return.

[Jesse]

I will ask to see the documents - I think he was taken for a ride - what the client has is his home and an IRA that is not even totallying $10,000.

Again sorry for the ignorance a couple of questions:

Will the living trust now have to file a return seperate from the taxpayer?

The $3,000 fee is deductible from the income of the trust, but not as a miscellaneous expense of the taxpayer?

[OldJack]

Will the living trust now have to file a return seperate from the taxpayer?

For income tax purposes you can think of a "living trust" (usually called a revocable trust) as a disregarded entity. No trust tax return unless the grantor is dead and then it is not a living trust. Anything to do with taxes in the trust goes on the personal tax return of grantor. The lawyers fee is probably outrageous in amount and a portion may actually be deductible as tax advice on 1040 Sch-A, misc, subject to 2% limitation.

edit: well... if someone disagrees with my deducting on Sch-A as "tax advice", maybe I should have called it "tax preparation costs and related expenses" or "investment advice/fees" as it relates to the assets in the trust.

[Gretel]

Jesse,

It sounds this is a revocable trust until death, meaning no separate tax return will be filed, everything is just reported on 1040 as it was before AND - as was pointed out - NO DEDUCTION for lawyer fees since fees have nothing to do with protecting taxable income.

The only thing this trust really does is to keep assets out of probate but if value of assets are not high the lawyer fees are probably higher then probate would be.

[Jesse]

Thanks a million for the quick responses!!!

[thomtax]

Living Trust Cost

We prepared a living trust for my parents. My mother absolutely did not want lawyers getting the money instead of her children. I was fortunate in that I had the software and my best friend is a lawyer, so he looked it over after I prepared it.

However, one of the reasons for the large cost is that if you have a living trust, the lawyer does not get another chance to make any money. With a will, many people will go back to the attorney to have him handle probate, thereby allowing him to make more money after the death.

It's a "Pay me now or pay me later" situation.

LT

[S T]

More on Deduction

Here is a link that pretty much covers all! http://www.april15.com/article_deduct.html so hopefully it will help you to determine whether the fee is deductible and I will let you draw your own conclusions based on your t/p circumstances.

Sandy