Who is/are the Successor Trustee(s) for your Mom’s “Family Trust”? The Successor Trustee is the person(s) who will have authority to convey ownership of Trust property.
You mentioned that your Mom was the Trustee during her lifetime. Talk with an Estate Settlement Attorney and your tax accountant to review the Trust document, so you can better understand the purposes your Mom had in mind when she signed the Trust document.
If the Trust was a revocable trust (“Revocable Living Trust”) that she intended simply as a way to avoid probate, your attorney and accountant will tell you that she still owned the real estate at death, so there will be a “step up” in basis for you and the other beneficiaries of the Trust. That means (under current tax law) that you get a free pass on any capital gains on the increased value of the property.
If the Trust was Irrevocable, and the house was transferred as a “present interest” gift that your Mom gave away when she was alive, the attorney and accountant will tell you more about capital gains.
Even irrevocable trusts provide a “step up” in basis if they include clauses that fit the “Grantor Trust Rules.” The IRS considers the property owned in a Grantor Trust to be the property of the Grantor, and (for tax purposes) that would keep ownership with the Grantor right up until the time of death.
So, your liability for capital gains tax depends on the terms of the Trust. Now is the time to find out how the Trust was written, as you decide what to do with the property.
As Successor Trustee, you sell the house on behalf of the beneficiaries, but you need to raise the issue of "step-up" with the attorney who drafted the trust. Has your father passed as well?
Address also the issue of inheritance (market) value of the house on the date of death and on the date of sale. It's been awhile since I've worked on these issues so I don't want to give specific advice other than what I've written - I don't want to inadvertently offer information on the market value issue that might have changed over the years as tax laws are revised.
The reason I raise the step-up value though is b/c for certain assets (such as stocks), step-up to the market value applies for calculation of gains, so the market value would be the date of death, not the date of purchase if your parents had sold the house themselves.
When you (or preferably a trust accountant as trust returns can be very complex) calculate whether or not there are gains or losses from the house sale, you apportion them using the Schedule K-1, one of which will be prepared for each of the beneficiaries.
The beneficiaries factor all of the income or deductions on the K-1 into their own individual 1040 returns.
In other words, the 1041 reflects the income, losses or deductions for the trust, those are divided by the number of beneficiaries and reflected in a Schedule K-1 for each.
This isn't a particularly appropriate analogy, but it could help make sense of the 2 different levels of trust taxation and reporting.
You buy a whole pie for the family (the 1041), cut it in 4 pieces, and give each member 1/4 of the whole pie. Each person gets the benefit of 1/4 of the pie, or 1/4 of the dissatisfaction if it's a bad pie.
The 1041 and K-1 operate in the same way.
But all of this is done after sale of the house and calculation of any gains.
AKDaughter is a tax expert and understands this better than I; perhaps she'll offer her opinion if she sees this post.
Was your mother the only trustee? If the trust was set up properly there should be a successor trustee on the trust as well. the successor trustee could then take action on the trust's assets. You may be heirs...but are any of you trustees? Heirs do not necessarily inherit a trust...as a trust has a trustee and its own rules.
If no successor trustees were named, you have a very big problem. Each state has its own laws governing what happens when a trust has no trustee to steer it. You will need an estate lawyer immediately if this is the case.
I am named as Trustee as well as Excutator of the estate. Yes, after trying to read things about capital gains, taxes ect I will be going back to the lawyer who set up everything. I need guidance as to how to sell the house and all in of its contents. As well as cashing a few small annuities, life insurance policies.
As if you are trustee that is very good. Generally all income taxes (including capital gains taxes) are excluded from items within a trust if the trustee is currently the owner. If you are inheriting the house (were not currently the owner) you only have to pay capital gains if the income is greater than $250k for single, $500k for married heirs.
We just sold, and the tax advisor said the inheritance is the property market value on the day of death. So let's say it's valued at $150K split three ways. You each have a non-taxed inheritance of $50K (basis). So you sell it for $150K -- then deduct the closing costs. You each get a check for $45K after the closing. You each have a $5K short term loss. It will be worth your while to have a pro do your taxes.
My brother and I had to claim capital gains federally and state. Almost 1/3 was taken away just from this. So sad. We had the lawyer set it up so we each took the brunt of half each.
From what I have read there was is no capital gains involved federally unless the gain is more than $250,000. There will be if the value of the house goes up in value between my mother's death and the sale date on the amount above $250,000. We do have to pay 10% of the value of the estate for the "privilege" of receiving an inheritance. We are avoiding probate because the will states that all of my mothers possessions, stock, bonds, annuities are in a family trust. The clerk of the court office is sending paperwork for me to finish filling out and send back to them with a copy and of the death certificate. I am going to a CPA or moms lawyer to make sure that I am doing things right.
You mentioned that your Mom was the Trustee during her lifetime. Talk with an Estate Settlement Attorney and your tax accountant to review the Trust document, so you can better understand the purposes your Mom had in mind when she signed the Trust document.
If the Trust was a revocable trust (“Revocable Living Trust”) that she intended simply as a way to avoid probate, your attorney and accountant will tell you that she still owned the real estate at death, so there will be a “step up” in basis for you and the other beneficiaries of the Trust. That means (under current tax law) that you get a free pass on any capital gains on the increased value of the property.
If the Trust was Irrevocable, and the house was transferred as a “present interest” gift that your Mom gave away when she was alive, the attorney and accountant will tell you more about capital gains.
Even irrevocable trusts provide a “step up” in basis if they include clauses that fit the “Grantor Trust Rules.” The IRS considers the property owned in a Grantor Trust to be the property of the Grantor, and (for tax purposes) that would keep ownership with the Grantor right up until the time of death.
So, your liability for capital gains tax depends on the terms of the Trust. Now is the time to find out how the Trust was written, as you decide what to do with the property.
Address also the issue of inheritance (market) value of the house on the date of death and on the date of sale. It's been awhile since I've worked on these issues so I don't want to give specific advice other than what I've written - I don't want to inadvertently offer information on the market value issue that might have changed over the years as tax laws are revised.
The reason I raise the step-up value though is b/c for certain assets (such as stocks), step-up to the market value applies for calculation of gains, so the market value would be the date of death, not the date of purchase if your parents had sold the house themselves.
https://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Interest,-Dividends,-Other-Types-of-Income/Gifts-&-Inheritances/Gifts-&-Inheritances
I don't recall w/o researching whether step-up applies to market value of a house but I believe it does.
A trust return is prepared using IRS form 1041.
https://www.irs.gov/uac/About-Form-1041
When you (or preferably a trust accountant as trust returns can be very complex) calculate whether or not there are gains or losses from the house sale, you apportion them using the Schedule K-1, one of which will be prepared for each of the beneficiaries.
https://www.irs.gov/uac/About-Schedule-K-1-Form-1041
The beneficiaries factor all of the income or deductions on the K-1 into their own individual 1040 returns.
In other words, the 1041 reflects the income, losses or deductions for the trust, those are divided by the number of beneficiaries and reflected in a Schedule K-1 for each.
This isn't a particularly appropriate analogy, but it could help make sense of the 2 different levels of trust taxation and reporting.
You buy a whole pie for the family (the 1041), cut it in 4 pieces, and give each member 1/4 of the whole pie. Each person gets the benefit of 1/4 of the pie, or 1/4 of the dissatisfaction if it's a bad pie.
The 1041 and K-1 operate in the same way.
But all of this is done after sale of the house and calculation of any gains.
AKDaughter is a tax expert and understands this better than I; perhaps she'll offer her opinion if she sees this post.
If no successor trustees were named, you have a very big problem. Each state has its own laws governing what happens when a trust has no trustee to steer it. You will need an estate lawyer immediately if this is the case.
Angel
Angel
It will be worth your while to have a pro do your taxes.