Treatment of unusual payments as part of a will

[lmlassociatesinc]

I understand that most items associated with administering a will are not typically deductible, but this situation is a bit unique (at least for my usual work) and wanted an outside opinion. My clients father passed away a few years back and left a commercial property to his estate. His father and his fathers girlfriend lived on the property until he passed, and she continues to live in a home on the property while my client runs his business off the commercial land. The will states the property will be passed to my client 100% as long as he pays (from his money, not inherited funds) $2,000 monthly until the day she passes and then he will receive the property in full. He also fully upkeeps the property, pays the taxes etc. Should he not make these payments, she will receive the commercial property immediately and my client will get nothing, including being forced to move his business and she will immediately kick him out due to the usual discord after estates are handled. 

The question would be since he is paying her from his own funds, is there any recourse to deduct this or 1099 for this money as it was not being paid from funds that were in the estate. Rather, my clients funds so he can keep his businesses operating on the land in question. He obviously wants to give her a 1099, which she was originally ok with doing until she found out she would owe a small amount of tax by doing so.

[qbteachmt]

"He obviously wants to give her a 1099, which she was originally ok with doing until she found out she would owe a small amount of tax by doing so."

Wahhh; cry me a river.

The provision of using "only his own money" seems odd. We all have only our money, no matter what the original source of it was. Once you inherit money, it is added to your money and it is yours.

"My clients father passed away a few years back"

"from funds that were in the estate"

Were? Are? It's not clear if you are describing an Estate or a Trust. How long is the Estate staying open and unsettled?

"she will receive the commercial property immediately and my client will get nothing, including being forced to move his business and she will immediately kick him out due to the usual discord after estates are handled."

These people have never heard of Leased Property, then? A commercial property that is not occupied becomes pretty expensive to maintain.

Of course he can take a business expense on his taxes for costs incurred for the location of his business. Of course any rent payment to someone for business occupancy is a business expense and of course it would be reportable. It isn't clear if he should be paying that person and reporting it as such, or paying the Estate?

[lmlassociatesinc]

I was trying to say no money was dispersed form the estate as this property was all that was there. He only has to pay her cause of his fathers stipulation. 

The estate will remain unsettled until the girlfriend passes, at which point my client will receive the property assuming he maintains the 2k monthly payment to her. It remains open

In theory he should be paying the estate i suppose then the estate would send to her and he would then 1099 the estate? Same difference to him

[BobKamman]

Who is/was personal representative/executor of the estate?

Or was there an estate?  Were all these provisions in a trust document, instead?

Was there a deed from the estate to the son?  Does it have these restrictions in it?  

What happened to the rest of the assets in the estate?  Were they distributed to the son?  Or are they still being held in an estate  account, from which the $2K is being paid?  Are 1041's still being filed for the estate?

Why does he think he needs her permission to give her a 1099?  Why does he think he can't deduct the rent, if he doesn't?  (Last time I checked it's a $50 penalty, although maybe that has gone up recently.)

[qbteachmt]

Do you have a Life Estate, or just a verbal expectation for making some income for the girlfriend? Because legal issues should rule; not, "My girlfriend is your problem, now."

[lmlassociatesinc]

The fathers Girlfriend is the executor

A life estate was left with the provision that she be allowed to continue living on the property and my client be allowed to continue running his business while paying all operating costs of the land, plus $2,000 monthly to her. Short version she lives there for free at my clients expense. Upon her death he receives the property from the life estate. 

Restrictions on the property is is cant be sold, or mortgaged until he or she passes. 

There were no other assets other then a tiny bank account and some small collectibles which went to the girlfriend. 

No 1041's have been filed as she is the executor and doesn't believe them necessary. 

He doesnt need permission, just more looking at if he is correct to issue it, as their relationship is toxic at best and we just want to be sure she has no recourse to say a 1099 is not applicable.

[lmlassociatesinc]

Actual life estate by the father. 

[qbteachmt]

"The fathers Girlfriend is the executor"

That doesn't mean she profits personally. Perhaps these payments are supposed to be paid into the Estate.

"Upon her death he receives the property from the life estate."

Yes, that would be typical.

"No 1041's have been filed as she is the executor and doesn't believe them necessary."

She doesn't get to control what is required.

"He doesnt need permission, just more looking at if he is correct to issue it, as their relationship is toxic at best and we just want to be sure she has no recourse to say a 1099 is not applicable."

She doesn't get to control what is required.

[qbteachmt]

"Upon her death he receives the property from the life estate."

Yes, that would be typical.

"No 1041's have been filed as she is the executor and doesn't believe them necessary."

[qbteachmt]

She doesn't get to control what is required.

[qbteachmt]

"He doesnt need permission, just more looking at if he is correct to issue it, as their relationship is toxic at best and we just want to be sure she has no recourse to say a 1099 is not applicable."

[qbteachmt]

She doesn't get to control what is required.

[lmlassociatesinc]

So pay the estate moving forward then her as the executor will file the necessary estate returns as necessary? seems like the way to go. 

[qbteachmt]

Look at topics such as: https://www.investopedia.com/terms/l/life-estate.asp

Because you have the life tenant and the remainderman, and there should be a deed that guides this, and there might be some sort of estate document, and there needs to be some legal footwork done here, apparently.

[qbteachmt]

My State has an extension service that includes a lot of these topics online and as video courses. Example:

https://apps.msuextension.org/montguide/guide.html?sku=MT200510HR

[BobKamman]

@lmlassociatesinc  "Short version she lives there for free at my client's expense."

Even shorter version, the son eventually gets free real estate if he honors his father's last wishes.  

[qbteachmt]

Or, the straight-line version:

They own the property together per the life estate. He, the business tenant, pays to the estate for occupancy and shoulders property maintenance costs. She gets the income from the estate, but cannot touch the principal. He wears two hats. And his right to the property should be protected within the life estate, and she cannot make him lose that, if he were to need to rent a different place for the business, because personally (one of his hats) he is the joint owner.

But people can threaten to do all sorts of things to each other, of course.

[Terry53029]

Sounds like your client should seek the advice of an attorney. I would think the $2000 a month sounds like rent, and a 1099 would be appropriate. If not rent, it would be a gift, and would require a 709. I would certainly have my client seek legal advice, as I'm not sure a will can force a person to spend his own money to receive an inherence  

[qbteachmt]

I agree with Terry. I would seek an attorney, just to figure out how to abandon this girlfriend and still have the right to the property later, to make it clear that the legal issues outweigh any petty issue she thinks rules this roost. But, hey, that's just my response to stupid...

[joshuabarksatlcs]

Kudos to Terry's advice: Get prudent legal advice.

Scenario 1.  All those facts were "my client told me" and you hadn't read the legal document, be aware that people tell people things that aren't exactly true or the whole truth.  Remember the game in high school that you passed down a statement and after 20, 30 participants, the statement would be all twisted?

Scenario 2.  You read the document and still had no clue what exactly to do and needed to ask for opinion here,: You need to talk to the client's lawyer.

Scenario 3.  You talked to the client's lawyer and still don't know which direction to go: Suggest to client to change lawyer.

Quite a few pieces of info are missing here.  The tax treatment has to be based on the legal treatment of the document in its entirety.   I prepare taxes.  I don't interpret the law outside the arena of tax law.

Then, as a practical matter, do you want to tangle yourself up in case the GF and Client get into a legal battle?

[BobKamman]

@qbteachmt " his right to the property should be protected within the life estate, and she cannot make him lose that,"

She's the one with the life estate.  He has what is called a "contingent remainder."  You can look it up.

Maybe this is a tax question.  But my guess is that it's a squabble between two people who would never have met had it not been for a third person, now dead.  Is the son really interested in a tax deduction for rent?  Then let him claim it.  Is he really interested in complying with 1099 rules, but doesn't want to upset the owner of the life estate?  Then tell him he might have to pay a penalty in the unlikely event of an audit, but the deductibility does not depend on the 1099 filing.  Or does he just want to stir up trouble with Dad's significant other?  Then he doesn't need you, or a lawyer.  He needs a psychologist.  

[qbteachmt]

"She's the one with the life estate. He has what is called a "contingent remainder." You can look it up."

Look above your reply; I already noted he is a remainderman in this scenario. There is a will or deed, and a legal analysis needs to be performed. Listening to people who have axes to grind with each other doesn't give any directive for a professional responsibility for tax form preparation other than, she doesn't get to have whatever she wants. She gets to have what is applicable.