How to report a Cost Basis Step up when a joint grantor (husband and wife) living trust sold the appreciated real property after the husband dies?

[TaxesTech]

It is a joint grantor living trust set up for a husband and wife.  They transferred their 20 acre farmland in Colorado where their main residence is, to a joint Colorado living trust in 2018. The cost basis transferred into the trust was $100K.  

In 2019, the husband dies, 50% of the real property had a cost basis step up, at an appraised FMV of $1.1M.  The wife remains to be the living grantor and the trustee, and she decided to sell the house without any tax planning, subsequent to the husband's death, and move to Florida in 2021. 

There were no distribution made after the sale.  The trust bank account hold the proceeds, and the Wife terminated CO trust and transferred everything into a successor Florida trust.  In my understanding with the trust lawyer, all transactions were within the trust but the husband's 50% cost basis had a step up before the sale.  

Q1: Do I need to file a Form 1041 for the Colorado trust (which remain a revocable living trust with the late husband's SSN as the EIN) to report the sale of the house, or this sale of house can be reported on the Wife's individual income tax return? In either case, can I still use Form 8971 to report the values to the IRS?  

Q2: Does the asset transferred from Colorado trust to Florida successor trust trigger any reporting requirement?  

Much appreciated!!

[sjrcpa · Accepted solution]

I think the 1/2 of the trust attributable to husband is no longer a Grantor Trust after his death.

I think 1/2 the sale, with the 1/2 step up gets reported on a 1041, and to CO.

The wife's half of the trust is still a Grantor Trust. Her half of the sale gets reported on her 1040 and on a CO nonresident return.

I'll say it again-I hate joint trusts.

[TaxesTech]

Thank you for the quick response...I really appreciate it.  

It makes sense to me from the tax reporting purpose, half of the trust is a living trust and half of the trust is an irrevocable estate trust.  That is a great idea to report taxes - thank you!!

Now the trust never had a EIN...so I guess an EIN needs to be applied now to file the Form 1041, and I can attach a statement noting the EIN was applied late?  

The CO trust was terminated and all assets were transferred to FL successor trust, which bought a residential house for the wife to live in.  No further transactions after that.  I guess this should not be counted as the CO trust distribution and no Form 706 is needed, is that correct? 

P.S., after another call with the client I was told the CO trust is still there.  I've updated the facts in this threads.  Sorry!

[sjrcpa]

Was the CO house the only thing in the trust at time of husband's death?

Wass all of the money from the sale used to buy the new house? Or only some of it?

[TaxesTech]

Thank you for checking!  The CO house was on a piece of 20 acre farmland with Water Rights, which were viewed as personal property, all in the trust as of the date of the husband's death, and both the real property and water rights were sold in 2021 as separate transactions with significant capital gain.  A portion of the money from the sale were used to buy the new house in Florida, and the new house was under the title of the successor FL living trust, to which the wife is the only grantor. 

The FL living trust is now only holding title of the new house, no other assets under the FL trust.  The remainder assets are still held by the CO trust with no trust documents amended.  No distribution to listed beneficiaries, listed as the wife's three children.  The daughter is listed as the substitute trustee in the case that the mother dies or losing capacity, so the CO trust seems to be still in existence with an executor till this day, simply making disbursement to Wife's FL living expenses as defined in the trust documents as "Expenses and Taxes".  "Transmission to other trust and estate" is also covered under the "Expenses and Taxes" definition. 

Now I see literally the wife is the grantor of both the CO trust and the FL trust.  Sorry for messing up the facts - I was literally making the call to client verifying these while typing this update of fact pattern.  

So I think the purchase of the FL house and periodic distribution to the wife's checking account needs to be treated as distributions from the CO's Form 1041? Further reading the allowable deductions from the tax perspective I guess the trust document's definition of "Expenses and Taxes" has nothing to do with the allowable tax deductions.... 

In addition to worrying about the late EIN for the CO trust, I am also considering about the Form 706 filing requirement at the husband's deaths back in 2019.  I'm assuming we should use the $11.4 million exemption as the late husband?  Either way, the entire trust asset fair market value is far less than the threshold (all appraisal work done), I am assuming no Form 706 is needed. 

[sjrcpa]

"Now I see literally the wife is the grantor of both the CO trust and the FL trust. "

So it wasn't a joint grantor trust when it was set up?

[TaxesTech]

The CO Trust was a joint grantor Trust when it was set up back in 2018.  No trust document/certificate updates after one of the two grantors died in 2019. 

The FL trust is a single grantor trust when it was set up in December 2021.

[TaxesTech]

I think the distribution to the wife from the CO trust needs to be treated as related party transactions? 

So the trust can deduct the payments to the grantor on Form 1041 if the grantor include the payment as income in her 1040...Then the FL trust is a related party of the CO trust as well, but we can elect whether or not deduct the FL house purchase and make it the 1040 income for the wife...

Gosh this is hard.  

[sjrcpa]

I think the distribution to the wife from the CO trust needs to be treated as related party transactions?  Huh?

The CO Trust is 50/50 as per my original answer. What happens to the deceased husband's share upon his death? The answer is in the Trust document. It sounds like you are saying some of the money from the sale was distributed to the wife. Probably 50% of that is hers/her grantor trust half and the other half is a distribution from the deceased husband's now irrevocable trust share. The distribution from the husband's share may be income, principal or some of each.

She set up the FL Trust as a Grantor Trust and it owns her new home. "we can elect whether or not deduct the FL house purchase" What would you propose to deduct?

"and make it the 1040 income for the wife." What kind of income is attributable to owning your personal residence?

[BobKamman]

No one should be trying to answer these questions without knowing the terms of the original trust.  "Joint grantor living trust" tells us nothing.  We can make assumptions that it is a typical revocable trust, but that could lead you down the wrong path.  

The Florida trust is likely a red herring.  What year return are you preparing, anyway?  Was the sale in 2021 and "Florida Woman" is just getting around to sorting out this mess?