Trust Tax Planning

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.

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.

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?

whiskers snipped-for-privacy@hotmail.com wrote

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.

According to Stuart O. Bronstein snipped-for-privacy@lexregia.com:

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.