Trust Tax Planning

[whiskers]

I am successor trustee of a irrevocable trust. The. trust was created in 2006. In this trust is land that is owned by the trust. There is a gas station on this land that we have a ground lease to the tenant of the gas station and he pays the trust rent every month. The trust only owns the land not the gas station.

Land was valued at $665,000 in 2006. We want to sell the land and close out the trust. Are we able to add the sales commission and any or all of the closing costs to the cost basis?
Land is worth $2,000,000 now. When we sell how is the gain taxed? Looking at the 1041 would it be Business Income? Capital Gains? Or ordinary income for the trust? I thought it would be capital gains but talking to one accountant he said since the land generates an income the gain of the sale would be ordinary income.
There are two beneficiaries that receive the rent from the trust every month. Am I able to distribute the gain using a K-1 to each beneficiary? I am assuming it is better for the gain to be taxed to the beneficiaries.
Also in the trust it states the land can not be sold until one of the beneficiaries is dead. That person wants to sell the land now before she dies. Is there a work around to selling the land before she dies?

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[Taxed and Spent]

On 7/31/2021 9:06 AM, whiskers wrote:
> I am successor trustee of a irrevocable trust. The. trust was created in 2006. In this trust is land that is owned by the trust. There is a gas station on this land that we have a ground lease to the tenant of the gas station and he pays the trust rent every month. The trust only owns the land not the gas station.
>
> Land was valued at $665,000 in 2006. We want to sell the land and close out the trust. Are we able to add the sales commission and any or all of the closing costs to the cost basis?
> Land is worth $2,000,000 now. When we sell how is the gain taxed? Looking at the 1041 would it be Business Income? Capital Gains? Or ordinary income for the trust? I thought it would be capital gains but talking to one accountant he said since the land generates an income the gain of the sale would be ordinary income.
> There are two beneficiaries that receive the rent from the trust every month. Am I able to distribute the gain using a K-1 to each beneficiary? I am assuming it is better for the gain to be taxed to the beneficiaries.
> Also in the trust it states the land can not be sold until one of the beneficiaries is dead. That person wants to sell the land now before she dies. Is there a work around to selling the land before she dies?
>

What does the trust say about distribution of trust assets after that
one of the beneficiaries has died?

[whiskers]

On Sunday, August 1, 2021 at 9:47:06 AM UTC-6, Taxed and Spent wrote:
> On 7/31/2021 9:06 AM, whiskers wrote:
> > I am successor trustee of a irrevocable trust. The. trust was created in 2006. In this trust is land that is owned by the trust. There is a gas station on this land that we have a ground lease to the tenant of the gas station and he pays the trust rent every month. The trust only owns the land not the gas station.
> >
> > Land was valued at $665,000 in 2006. We want to sell the land and close out the trust. Are we able to add the sales commission and any or all of the closing costs to the cost basis?
> > Land is worth $2,000,000 now. When we sell how is the gain taxed? Looking at the 1041 would it be Business Income? Capital Gains? Or ordinary income for the trust? I thought it would be capital gains but talking to one accountant he said since the land generates an income the gain of the sale would be ordinary income.
> > There are two beneficiaries that receive the rent from the trust every month. Am I able to distribute the gain using a K-1 to each beneficiary? I am assuming it is better for the gain to be taxed to the beneficiaries.
> > Also in the trust it states the land can not be sold until one of the beneficiaries is dead. That person wants to sell the land now before she dies. Is there a work around to selling the land before she dies?
> >
> What does the trust say about distribution of trust assets after that
> one of the beneficiaries has died?

The trust states after the one beneficiary dies the land is to be sold and the proceeds go to me. Then the trust is to terminated.

[Taxed and Spent]

On 8/2/2021 12:54 PM, whiskers wrote:
> On Sunday, August 1, 2021 at 9:47:06 AM UTC-6, Taxed and Spent wrote:
>> On 7/31/2021 9:06 AM, whiskers wrote:
>>> I am successor trustee of a irrevocable trust. The. trust was created in 2006. In this trust is land that is owned by the trust. There is a gas station on this land that we have a ground lease to the tenant of the gas station and he pays the trust rent every month. The trust only owns the land not the gas station.
>>>
>>> Land was valued at $665,000 in 2006. We want to sell the land and close out the trust. Are we able to add the sales commission and any or all of the closing costs to the cost basis?
>>> Land is worth $2,000,000 now. When we sell how is the gain taxed? Looking at the 1041 would it be Business Income? Capital Gains? Or ordinary income for the trust? I thought it would be capital gains but talking to one accountant he said since the land generates an income the gain of the sale would be ordinary income.
>>> There are two beneficiaries that receive the rent from the trust every month. Am I able to distribute the gain using a K-1 to each beneficiary? I am assuming it is better for the gain to be taxed to the beneficiaries.
>>> Also in the trust it states the land can not be sold until one of the beneficiaries is dead. That person wants to sell the land now before she dies. Is there a work around to selling the land before she dies?
>>>
>> What does the trust say about distribution of trust assets after that
>> one of the beneficiaries has died?
> The trust states after the one beneficiary dies the land is to be sold and the proceeds go to me. Then the trust is to terminated.
>

This is a bit confusing.

Are you "the second beneficiary" who receives half of the rent each
month? If not, who is that second beneficiary? What do you intend to
happen to her lost income after the property is sold?

Is your new intent that the "first beneficiary" is to receive half of
the sales proceeds? She is not entitled to them. Is she willing to
forgo income from the date of the property sale until her death? If
not, what is your thinking here?

What is the main reason you want to sell the property and wind up the
trust now?

It seems that in order to change the trust in some fashion you will have
to petition the Probate Court and give good reasons, and acceptance of
the proposed change by all interested parties, i.e. present and future
beneficiaries. And the closer the change is to the initial intent of the
trust, the better. Others who frequent here are likely to have more
experience in these matters, I am mostly just trying to get the details
out in the open.

[whiskers]

My sister gets 56% of the monthly income and I get 44%. When my sister dies I am suppose to sell the land and keep the proceeds and close the trust. My sister says she will have enough money with the sale of the land so she will not miss her lost income.

My intent is she will get 56% of the proceeds of the sale and I will get 44% even though I know she is not entitled to it I will do it anyway. She is okay with forgoing the income from the date of sale until her death.

My sister wants to buy a house. She is renting right now and does not like it.

My thinking was that if no one contests the trust there would be no problem in selling the land now since it is my sister who wants to do it.

[Stuart O. Bronstein]

whiskers <whisk...@hotmail.com> wrote:

> My sister gets 56% of the monthly income and I get 44%. When my
> sister dies I am suppose to sell the land and keep the proceeds
> and close the trust. My sister says she will have enough money
> with the sale of the land so she will not miss her lost income.
>
> My intent is she will get 56% of the proceeds of the sale and I
> will get 44% even though I know she is not entitled to it I will
> do it anyway. She is okay with forgoing the income from the date
> of sale until her death.
>
> My sister wants to buy a house. She is renting right now and does
> not like it.
>
> My thinking was that if no one contests the trust there would be
> no problem in selling the land now since it is my sister who wants
> to do it.

If that is what you both agree to, the law will probably allow that.
It's called Partition. Technically your sister's share would be less
than 56% because it would be calculated based on the actuarial value
of her current income stream. But if that split is OK with you, the
law is unlikely to prevent it.


--
Stu
http://DownToEarthLawyer.com

[whiskers]

On Wednesday, August 4, 2021 at 12:36:37 PM UTC-6, Stuart O. Bronstein wrote:
> whiskers <whisk...@hotmail.com> wrote:
>
> > My sister gets 56% of the monthly income and I get 44%. When my
> > sister dies I am suppose to sell the land and keep the proceeds
> > and close the trust. My sister says she will have enough money
> > with the sale of the land so she will not miss her lost income.
> >
> > My intent is she will get 56% of the proceeds of the sale and I
> > will get 44% even though I know she is not entitled to it I will
> > do it anyway. She is okay with forgoing the income from the date
> > of sale until her death.
> >
> > My sister wants to buy a house. She is renting right now and does
> > not like it.
> >
> > My thinking was that if no one contests the trust there would be
> > no problem in selling the land now since it is my sister who wants
> > to do it.
> If that is what you both agree to, the law will probably allow that.
> It's called Partition. Technically your sister's share would be less
> than 56% because it would be calculated based on the actuarial value
> of her current income stream. But if that split is OK with you, the
> law is unlikely to prevent it.
>
>
> --
> Stu
> http://DownToEarthLawyer.com

Thank you for everyone's replies so far. What about the question of capital gains or ordinary income? Can I take the gain as capital gains and deduct the cost basis on the trust tax return. Then distribute the gain 56% to my sister and 44% to me on the two k-1's? That way both of us will pay the tax on our own 1040 and state returns. One accountant told me the profit must be ordinary income and not capital gain because the land generates monthly income. We would both like to pay the 20% capital gain rate and not the 37% rate ordinary income rate.

I would issue the k-1's with the gain for each of us and not what the sale of the land gives us correct? Assuming 2 million sale price using round numbers after closing costs and commission my sister gets $1,200,000 and I get $880,000. I do not put those numbers on the k-1, I can put the gain instead of the actual money we receive from the sale?

[Stuart O. Bronstein]

whiskers <whisk...@hotmail.com> wrote

> Thank you for everyone's replies so far. What about the question
> of capital gains or ordinary income? Can I take the gain as
> capital gains and deduct the cost basis on the trust tax return.
> Then distribute the gain 56% to my sister and 44% to me on the two
> k-1's? That way both of us will pay the tax on our own 1040 and
> state returns. One accountant told me the profit must be ordinary
> income and not capital gain because the land generates monthly
> income. We would both like to pay the 20% capital gain rate and
> not the 37% rate ordinary income rate.

I think the accountant is wrong. The property was an investment, not
inventory. People have apartment buildings that generate income, but
when they are sold the profit is capital gain.

Now you will have to recapture depreciation, and that will be taxed as
ordinary income.

--
Stu
http://DownToEarthLawyer.com

[John Levine]

According to Stuart O. Bronstein <spam...@lexregia.com>:

>I think the accountant is wrong. The property was an investment, not
>inventory. People have apartment buildings that generate income, but
>when they are sold the profit is capital gain.
>
>Now you will have to recapture depreciation, and that will be taxed as
>ordinary income.

In 2019 I had a somewhat similar situation, a trust that owned a rental property terminated
on the death of the primary beneficiary so we sold the property and distributed the assets
and closed out the trust. The depreciation showed up as "Unrecaptured Section 1250 Gain"
and taxed as a capital gain. Has that changed? I gather it depends on your depreciation
schedule, and we'd owned the property for a long time.



--
Regards,
John Levine, jo...@taugh.com, Primary Perpetrator of "The Internet for Dummies",
Please consider the environment before reading this e-mail. https://jl.ly

[whiskers]

On Wednesday, August 4, 2021 at 6:26:57 PM UTC-6, Stuart O. Bronstein wrote:
> whiskers <whisk...@hotmail.com> wrote
> > Thank you for everyone's replies so far. What about the question
> > of capital gains or ordinary income? Can I take the gain as
> > capital gains and deduct the cost basis on the trust tax return.
> > Then distribute the gain 56% to my sister and 44% to me on the two
> > k-1's? That way both of us will pay the tax on our own 1040 and
> > state returns. One accountant told me the profit must be ordinary
> > income and not capital gain because the land generates monthly
> > income. We would both like to pay the 20% capital gain rate and
> > not the 37% rate ordinary income rate.
> I think the accountant is wrong. The property was an investment, not
> inventory. People have apartment buildings that generate income, but
> when they are sold the profit is capital gain.
>
> Now you will have to recapture depreciation, and that will be taxed as
> ordinary income.
>
> --
> Stu
> http://DownToEarthLawyer.com

I never took depreciation. We only own the land not the gas station that sits on it. I like your answer better. Good to know the gain will be capital gains. Thank You.