Compex trust distribution of property

[strongsilence]

Trustee wants to distribute a residential rental from a trust to a beneficiary.  This beneficiary is am adult man who is competent but irresponsible, apathetic, often unaccountable and doesn't have a source of earnings.  She wants to deed it to him. There is no mortgage.  The FMV is 650K. The carryover basis is 430K. In her mind there exists the possibility in the near future that the beneficiary would sell it but have no money to pay taxes.  And he Is the trustee doing the best thing?  Would you advocate the 643(e) election by the trust to tax it in order to step up the basis?  This action could mean no tax on a future sale as gain would likely be less than the 250K exclusion.  Is she best advised to seek the consultation of an attorney?

[sjrcpa]

Yea, giving a $650K property to such a person is a great idea. Sarcasm intended.

What is the relationship of Trustee to Beneficiary?

Do you know why Trustee wants to do this?

Legal advice wouldn't hurt.

And is Trustee ends up doing this, the election for the Trust to treat as if sold and pay the tax sounds prudent.

"tax on a future sale as gain would likely be less than the 250K exclusion." What exclusion? The beneficiary would live there for 2 years and then sell? The beneficiary is the current tenant?

[qbteachmt]

"the beneficiary would sell it but have no money to pay taxes."

Yes, from the sale.

"This action could mean no tax on a future sale as gain would likely be less than the 250K exclusion"

Is this already the primary residence? The person can't immediately sell and benefit from the exclusion. But if there really is the likelihood of nearly immediate sale, there would be very little gain.

Why doesn't the trust just sell the property and distribute the proceeds? Aren't they setting up this person for more failure?

[Karen_pdx]

I would suggest that the trustee  seek the advice of an attorney experienced in trust administration. Does the proposed distribution fall within the terms of the trust? Are there remainder beneficiaries who could/would object to such a distribution? It sounds like the trustee should seek legal advice regarding any potential issues with respect to fiduciary liability. 

[sjrcpa]

Is this the only asset in the trust?

And if Trustee distributes it, trust terminates and she doesn't have to deal with this ahole beneficiary anymore?

This might be the why she wants to do it.

[Karen_pdx]

That could be, but if the trustee no longer wants to act as a trustee, resignation is an option - the trust document may contain provisions for the remaining beneficiary(ies) to appoint a new trustee, or if not, let the beneficiary go to the courts for the appointment of a new trustee. Seems preferable to resign than to do something that could result in fiduciary liability.

[sjrcpa]

True, but I suspect there is a family/personal dynamic at play. OP did not answer the question about the relationship between Trustee and Beneficiary.

[strongsilence]

Thursday Aug 14.

Thank you everyone. I see good ideas and lots of good questions and I'll know more on Monday and report back here.

The adult beneficiary is the brother of the trustee.

The other assets are two other properties. The trustee wishes to give him a permanent home for his unstable life. (He isn't an ahole, just a wayward drifter with little purpose and enough privilege to let others care for him.)

[sjrcpa]

But if she thinks he's going to sell it soon, why give it to him? Then she'll give him one of the properties?

It could be rented to him. 

He could live in it rent free.

[qbteachmt]

These: "It could be rented to him."  "He could live in it rent free."

If the projections are as laid out here, let's answer the question asked: "Is the trustee doing the best thing?"

Nope.

[strongsilence]

The trustee has a better feel for the brother/beneficiary than I do and doesn't think he will be impetuous and sell the house.  But she appreciated that I thought of this scenario. 

Thanks for everyone's input.