Can beneficiaries contribute $ back to a Trust?

[LCP]

More precisely, what is the effect if beneficiaries have to put some of their distributions back into the trust in order to cover negative cash flow of a rental or fix it up to sell?

In my case, all liquid assets were distributed in 2005. In 2006 the beneficiaries had to put $ back into the trust to fix up the real estate which will sell in 2007.

Seems like it would increase the basis and affect their gain in 2007 but I'm wary of any quirks that would disallow expenditures that weren't coming out of trust accounts

[Koss]

Trust contributions

Answer depends mainly on the type of trust, and the terms of the trust instrument.

You'll need more information, or maybe you already have it. It is dangerous, and in some cases impossible, to prepare a tax return for a trust without first reading the governing instrument.

Is it a living trust or testamentary trust?

Is it revocable or irrevocable?

Who was the original grantor?

Who is the trustee?

Does the language of the trust instrument allow any type of contribution at all?

When a beneficiary of a trust contributes assets to the trust, the beneficiary becomes a grantor to the trust. And this may negate any spendthrift protection.

Burton M. Koss

[OldJack]

In my case, all liquid assets were distributed in 2005. In 2006 the beneficiaries had to put $ back into the trust to fix up the real estate which will sell in 2007.

A trust that runs a business can borrow money and as such it would appear that what you refer to is nothing more than a loan from the beneficiaries to the trust business the same as if the trust had borrowed money from the bank. Loans must be documented in the usual way with interest as appropriate.

[LCP]

My taxpayer's mother's assets were in trust that became irrevocable when she passed away. All the stock was sold and the bank accounts and brokerage accounts were distributed in 2005 leaving only her home. They've had to spend money to fix up the home in 2006. They expect to sell the home in 2007.

[OldJack]

They've had to spend money to fix up the home in 2006. They expect to sell the home in 2007.

So the trust has a debt/loan to whoever loaned it money. When the trust improves the property the cost (money from the loan) adds to the stepped-up basis to determine gain on sale. The home could have been distributed and the question could be why was it not. Since it is left in the trust to sell, the trust will have to file an income tax return 1041 when it is sold. What exactly is your question?