Grantor Trust that includes personal residence

[Cathy H]

Early 2022, client set up an irrevocable trust - main purpose of which was to protect assets in the event she has to go into long-term care. Yes, she is aware of the 5 year lookback period. For whatever reason, she decided to place her personal residence in the trust. She is paying a monthly rent amount into the trust so the trust has the funds to pay insurance, taxes, repairs, etc. on her house.

Per information provided by the attorney, it appears the trust is or can be treated as a grantor trust - therefore, everything should be reported on the taxpayer's Form 1040 instead of Form 1041.

Client does not have any access to the bank accounts nor deposits nor pays any of the expenses. Her son (as trustee) transfers money to her as needed.

2 questions if anyone has any help they can provide regarding the personal residence.

1. The house - when sold whenever or transferred to the heirs if/when trust was terminated - would no longer qualify for the exclusion of gain from sale of residence up to $250,000. (there should not be any gain near this amount any way.) The basis would be the lower of cost or fair market value when placed in the trust, correct?

2. Since this appears it is to be treated as a grantor trust, how does the activity surrounding the personal residence get reported on client's tax return? Income / expenses reported on Schedule E ..... and if there is a loss, would it be allowed? If a loss would not be allowed (if there is one) when filed as grantor trust on client's Form 1040, can a Form 1041 be filed and be allowed to report a potential loss on the personal residence and then passed through to client's 1040 via K-1?

FYI - besides the personal residence, the rest of the trust is farmland.

Thanks
Cathy Herber

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[Stuart O. Bronstein]

Cathy H <chew...@gmail.com> wrote:

> Early 2022, client set up an irrevocable trust - main purpose of
> which was to protect assets in the event she has to go into
> long-term care. Yes, she is aware of the 5 year lookback period.
> For whatever reason, she decided to place her personal residence
> in the trust. She is paying a monthly rent amount into the trust
> so the trust has the funds to pay insurance, taxes, repairs, etc.
> on her house.
>
> Per information provided by the attorney, it appears the trust is
> or can be treated as a grantor trust - therefore, everything
> should be reported on the taxpayer's Form 1040 instead of Form
> 1041.
>
> Client does not have any access to the bank accounts nor deposits
> nor pays any of the expenses. Her son (as trustee) transfers
> money to her as needed.
>
> 2 questions if anyone has any help they can provide regarding the
> personal residence.
>
> 1. The house - when sold whenever or transferred to the heirs
> if/when trust was terminated - would no longer qualify for the
> exclusion of gain from sale of residence up to $250,000. (there
> should not be any gain near this amount any way.) The basis would
> be the lower of cost or fair market value when placed in the
> trust, correct?

Yes, to qualify for that exclusion the person has to both own and
live in the property for two of the prior five years. She no longer
owns the property. If it's sold within three years of when she
transferred it to the trust, she can probably qualify for the
exclusion. Otherwise not.

> 2. Since this appears it is to be treated as a grantor trust, how
> does the activity surrounding the personal residence get reported
> on client's tax return? Income / expenses reported on Schedule E
> ..... and if there is a loss, would it be allowed? If a loss
> would not be allowed (if there is one) when filed as grantor trust
> on client's Form 1040, can a Form 1041 be filed and be allowed to
> report a potential loss on the personal residence and then passed
> through to client's 1040 via K-1?

As a grantor trust, all assets and income in the trust are taxed just
as if she still owned the property. If there's a sale at a loss and
she would be able to take the loss as the owner, she can take it as
the grantor of a grantor trust. The only time a 1041 should be filed
is after she dies.

> FYI - besides the personal residence, the rest of the trust is
> farmland.
>
> Thanks
> Cathy Herber
>



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Stu
http://DownToEarthLawyer.com


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[Alan]

I just want to raise a caution flag. In order for an irrevocable trust to be considered a grantor trust the grantor has to have some power to control or direct the trust's income or assets. The original post has this statement:

> Client does not have any access to the bank accounts nor deposits
> nor pays any of the expenses. Her son (as trustee) transfers
> money to her as needed.

All the facts relating to retained powers are not present in the original post. Therefore, I would like to know how the attorney concluded that this trust could be considered a grantor trust.

[Cathy H]

While I'm not a lawyer, a good point is raised. I will make inquiry. For whatever reason, the attorneys have made it abundantly clear that my client is not to touch the assets - even suggesting that disbursements from the trust to go an account controlled by the trustee and then he will make distributions from that account to my client. So, it may smell more like an entity that needs a 1041 return. If it turns out to be a grantor trust, it appears the rental income / expenses from her personal residence would be ok to be on her 1040 - Schedule E - even if a loss is incurred - do I understand that correctly?
Thanks
Cathy

[Alan]

> CathyActive participation
> --
If it is a grantor trust then the rental income and expenses would go on the personnel 1040. Reporting of losses on rental property is limited for non-professionals. First off, the investment has to be at risk. Secondly, Rental income is considered passive income. As such, a rental loss could only be taken to offset any passive income one has. There is an exception to this passive loss rule if one actively participates in managing the rental property. Then you can report a loss up to $25,000. Active participation means that you take an active role in managing the property.

[Stuart O. Bronstein]

That's an excellent point. OP said it was a grantor trust and I took
it on faith.

There are a number of things that can make an irrevocable trust a
grantor trust, and that can include the grantor not having many
actual rights - and even a non-adverse party (like the grantor's
lawyer) having that right rather than the grantor, can also make it a
grantor trust for this purpose. In fact as I recall (I can't find
the provision at the moment) that just allowing the trustee to pay
for life insurance premiums from trust income will make it a grantor
trust as well, even if no insurance is ever purchased. So it's not
hard if someone wants to do it.

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Stu
http://DownToEarthLawyer.com


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