Burton - Estate question

[Gretel]

Burton,

Your earlier response to a trust question makes me think I did something wrong on an estate return.

Estate was in litigation to defend farm. Lawyer fees eventually were higher than money left in account and beneficiaries paid out of own pocket. These lawyer fees, as far as not lost already, were past through on final return. Some were paid from estate account, some from personal funds. Is this wrong?

[Koss]

Trust expenses

I'm not sure about that one.

You referred to a final return. That implies that the trust has been dissolved.

Treating the expenses that were paid out of their pocket as trust expenses may or may not be correct. Personal legal expenses are generally not deductible. Construing those funds as a contribution to the trust, and then treating it as a pass-through expense...

well, I'm not sure about this. Here's why:

Even if all the legal expenses were paid by the trust, there is an underlying substantive question as to whether and to what extent they are deductible, or whether or to what extent they can be passed through to beneficiaries on a K-1.

I'm not saying they are not deductible. I'm admitting that I'm not quite sure what you meant by "defend farm."

I'm also saying that there is a general principle that a trust cannot and should not be used to convert nondeductible personal expenses into deductible business expenses.

If the trust is really operating a business, such as rental property, then clearly certain expenses such as insurance and repairs are deductible in the same way they would be on a personal Schedule E.

But many trusts have been set up as a abusive tax avoidance vehicles, in which personal expenses such as food and nonbusiness vehicle expenses are used by the trust as deductions to reduce investment income. This sort of thing is totally bogus.

Legal fees fall into a gray area, where you have to look at regs and case law, and look carefully and what the legal fees are for.

And I'm admitting that this one is a little over my head.

Burton

[Gretel]

Thank you so much for your response, Burton. It's not a trust it's an estate. Main part of inheritance was a farm, which was run as a farm for decades. In recent years farm land was leased with active participation of deceased. Lessor and lessee signed a lease to buy option (Lessor = deceased also willed farm to heirs) and lessee took heirs too court and won.

Form 4835 was filed was 1041 (estate) and since farm income is taxable income I concluded legal fees for defending this farm are deductible. I sure pray I will not get audited at this one.