Revocable trust

[Greta]

Client set up a revocable trust for wife as beneficiary. He died 3 years ago. Revocable trust used wife's SSN and had no income. Now (in 2022) their house will be sold for $600K. Lawyer does not know (!) whose SSN or EIN will be on 1099-S document. Should I get an EIN number for the (now irrevocable) trust just to be on safe side in case I have to file a 1041?

[sjrcpa]

"Lawyer does not know (!) whose SSN or EIN will be on 1099-S document"

If there's no EIN, it can't be used on a 1099-S.

Is the house titled in the name of the trust? Who will be listed as seller(s) on the Settlement Sheet? The lawyer will know that.

[Greta]

Ugh, this lawyer is useless. My understanding from the daughter is that the house is titled in trust. But when he died, the trust became irrevocable, and should this lawyer who prepared the revocable trust applied for an EIN?

[BobKamman]

Who is the (successor) trustee?  The wife?  Then she was responsible for applying for the EIN when she inherited the job.  In my jurisdiction, she would also have been responsible for recording a notice of change in trustee and beneficiary within 30 days of the husband's death.  

Trusts are like used cars.  The guy who sold it to you isn't responsible for changing a flat tire five years from now.  Keep in mind that 20% of lawyers graduated in the bottom fifth of their class.  Many of them end up marketing cookie-cutter estate plans, and handling real estate closings in states that are backwards enough to still be doing them that way.  

[Greta]

My experience with clients who try to handle affairs of the deceased has not been good. This trust was set up (in Virginia) for the benefit of a spouse with dementia. A daughter who lives in California became the successor trustee upon her father's death. (Taxes for her mother were always rushed in around April 14...) So, no, she did not pursue or was aware of her trustee responsibilities.

If this were your client, would you refuse to process the house sale? There should be no tax liability.

[BobKamman]

Separate trusts for spouses are rare in community-property states like California, so the daughter is especially clueless about what happens in a place that still calls itself a commonwealth.  If it turns out that  the house is owned by an irrevocable trust, does it even still qualify for the $250,000 exclusion?  Does that matter?  

Presumably the buyer wants title insurance, so the seller will have to comply with whatever is required for that.  The lawyer, or more likely the paralegals who do most of the work, are what would be known as scriveners, back in the days when commonwealths were common.  

[Greta]

I was thinking that the deed to the house is in the trust, so there should be the step-up cost basis only 3 yrs after the man's death. No?

[BobKamman]

It might still be treated as a grantor trust, even though "irrevocable," if "intentionally defective."  

[sjrcpa]

If it was a jointly owned house, wife trust only gets a step up for the husband's half.

[Norman2001]

The tax Adviser has a related article. 

https://www.thetaxadviser.com/newsletters/2021/mar/revocable-trusts-grantors-death.html

[Greta]

If house was first deeded to the husband alone, and then deeded to the trust, so once he died, would there not be a stepped-up basis?

Also, the widow has enormous nursing medical costs, so the trust could give her a K-1 for big distributions?

[Greta]

My understanding was that the deed on the house was totally in his name before he deeded it to the trust. But, yes, if jointly owned, then only half is stepped up. I was thinking that widow's medical expenses are so high (she is 90 and has dementia) that nursing home and nursing care would wipe out any capital gain.

[sjrcpa · Accepted solution]

Yes full step up if it was his house that was transferred to the trust.

Yes she could absorb a capital gain if she has huge medical bills.

Is this the only thing in the trust, such that the sale of the property and distribution of the proceeds will terminate the trust?

Hint - pay the accountant fees before distributing.

[taxes96786]

Like I said.. you need to read the trust in order to have necessary information to do this accurately. Don't rely on what anyone else tells you...and the attorney, obviously, is an estate attorney, not a tax attorney..he is not responsible for answering the questions you may have.