Grantor tax return

[Natasha]

Hi All,

I need help with trust tax returns. Never worked with trusts before.

Living trust was created back in April 2020, grantor died in June 2020. Residential property was sold in 2021. Nothing else beside the residential property was in the trust. Should I file original grantor trust return in 2020, than another return for 2020 as a simple trust after grantor's death and final simple trust in 2021 reporting sale of the property?

[BobKamman]

Is there a probate estate that will require filing a 1041?

[sjrcpa]

Personal residence or rental real estate?

[Natasha]

Hi yes, personal residence and 1041 has to be filed.

[Natasha]

Yes. Have to file 1041.

[sjrcpa]

"Should I file original grantor trust return in 2020, than another return for 2020 as a simple trust after grantor's death"

What would you put on these returns? The property is not income producing.

Definitely do not file a 1041 for the period of time in 2020 Grantor was alive.

There is an election that can be made to treat the trust as part of the estate. That may simplify the filings and get you a fiscal year end. See Form 8855.

[BobKamman]

A 1041 might be required for the period before death if the grantor was not the trustee  -- which might be the case if the grantor was near death and doing final-days estate planning. But there would not have been any income, right, if the only trust asset was the personal residence?  

Probably too late to choose a fiscal year, if no return has been filed yet.  

[joshuabarksatlcs]

Not enough facts.  It could be very simple but could get complicated, depending on the facts not given.  Just typing out loud of my thoughts without fiscal year consideration:

1.  @sjrcpa is correct.  NO need for Grantor trust from 4/20 thru DOD - that is, provided trustee was the grantor during that period.  If the trustee was NOT the Grantor, technically, a Grantor trust return may be needed  and a grantor tax information letter has to be sent to each "deemed owner". See various sections of Regs. Secs. 1.671-4(b)(2) and 1.671-4(b)(3).

2.  Period from DOD to 12/31/2020 - filing requirement depended on the trust income. 

3.  For 2021, to report the sale, check the escrow info.  Basically "Who was the seller?"

4.  Based on the facts as stated, the Trust may not even have FEIN.  If 1099 was/were issued, to whom and whose SSN?  I am careful in matching the tax reporting to 1099's.  For a sale, it may be necessary to include a "dummy sale" and clarification note if the sale was reported on the 1041 and K-1.  NO fun when client got a bill of x% of the gross sales per the 1099 a year or two later.

5.  If the sale was reported on the heir's (heirs') SSN, could there be a "deemed distribution" from the Trust to the beneficiaries?  (To me, this is a legal question, NOT a tax question.)  If the (competent) answer given to me is yes, the distribution is NOT reported on 1041; Client may still choose to file 1041 anyway, with the sale reported on 1040. 

The exact reporting decisions could basically be "1099-S" driven.

6.  California has a withholding tax Form 593.  If care was not taken and state tax was withheld, it could lead to some "janitorial tax services".

Hope this is not TMI.

[joshuabarksatlcs]

Sent without editing.

For a sale, it may be necessary to include a "dummy sale" and clarification note (on the 1099 issuees'1040 even) if the sale was reported on the 1041 and K-1.  NO fun when client (to whom the 1099 was issued) got a bill of x% of the gross sales per the 1099 a year or two later.

[Natasha]

Client doesn't want to make the election for personal reason. 

[Natasha]

Trust has EIN. No income. Sales has to be reported on the trust return without making election treated as an estate. 

[Natasha]

1. Trustee is not a grantor. Meaning I have to file from 4/20 thru DOD. Trust has EIN.

2. Trust has no income. I believe I have to file due to change in trust from Grantor to Simple.

3. Sale has to be reported on 1041 due to personal reason. 

[sjrcpa]

Now that we have more facts:

for 1 and 2. I'll repeat myself - What are you going to put on the return? There's no income.

for 2. Is there a requirement to file in this situation if there's no income?

3. I agree the 2021 sale has to be reported on a 2021 1041.

[Natasha]

1. To report creation of the living trust with property listed in the attachment.

2. I don't know. I'm not sure if after death of the grantor it's required to report change in trust status.

Does it makes sense or am I overthinking? 

[sjrcpa]

1.There is no requirement to report creation of any kind of trust that I am aware of. (except if it is a reportable gift for gift tax purposes)

2. Where'd you get the idea that you should report this?

I think you are overthinking it.

[IRonMaN]

I'll second the thought about overthinking.

[BobKamman]

See IRS Form 56.  From the Instructions:

Who Should File

Form 56 should be filed by a fiduciary (see Definitions below) to notify the IRS of the creation or termination of a fiduciary relationship under section 6903. For example, if you are acting as fiduciary for an individual, a decedent’s estate, or a trust, you may file Form 56.

A fiduciary is treated by the IRS as if he or she is actually the taxpayer. Upon appointment, the fiduciary automatically has both the right and the responsibility to undertake all actions the taxpayer is required to perform. For example, the fiduciary must file returns and pay any taxes due on behalf of the taxpayer.

A fiduciary is any person in a position of confidence acting on behalf of any other person. A fiduciary assumes the powers, rights, duties, and privileges of the person or entity on whose behalf he or she is acting. Examples of fiduciaries include administrators, conservators, designees, executors, guardians, receivers, trustees of a trust, trustees in bankruptcy, personal representatives, persons in possession of property of a decedent’s estate, or debtors-in-possession of assets in any bankruptcy proceeding by order of the court.

[Natasha]

Thank you! 

[Natasha]

LOL

[Natasha]

Thank you.

[sjrcpa]

@BobKamman Do you ever file these?

I used to, but they are a paper filing and I have no idea what IRS does or doesn't do with them. I haven't filed one in years.

[BobKamman]

@sjrcpa   No, but I never file Forms 3115 either, and so far I have managed to avoid Leavenworth. 

My client who is a professional fiduciary files them for every case (conservatorships, estates and trustee appointments) and I understand that's SOP for those licensed in that profession.  

They tell me it does result in IRS sending notices concerning 1040 and 1041 filings to the fiduciary.  This is often helpful if they get a case where they don't know if returns have been filed, or taxes owed.  

Do a search for Internal Revenue Manual 3.13.5.32 for details on what IRS does with these. Apparently they also ask for a Form 8822 with them. I don’t know if that’s what my client does.

There’s this interesting detail in the Manual:

“When reviewing Form 56, if you notice the taxpayer is appointing a high ranking IRS or Treasury employee or other high ranking governmental official or him/herself as a fiduciary, refer these cases to Frivolous Return Program (FRP). See IRM 3.13.5.7 for additional guidance.”

[sjrcpa]

Thanks. I guess it does make sense to file for professional fiduciaries. I mainly get spouses, kids, grandparents, in-laws, etc. as fiduciaries.

But I do file 3115s. 😉