Inheritance and Property Rights/Sale of Home,1099-S
Although I am a Connecticut resident, this is a general question regarding 1099-S and IRS reporting.
The home (and stock account) is in the name of the Family Trust. When I die, my 4 children will inherit the home, and stock, if any.
When the house is sold, (e.g. $400,000), I am assuming that each of the children will receive a 1099-S for $100,000.
I am also assuming that a Trust K-1 will not be required, since all the 1040 reporting for stock gains/losses over the years were reported using my personal SS number. The home sale should be the equivalent of me personally willing the house to them and they in turn selling it. The title of "Trust" should be irrelevent.
Am I correct in my reasoning.
Thanks for volunteering.
Nicholas -- very interesting question. I'm assuming the trust is revocable thus does not have its own tax ID number like an irrevocable trust would have, as you mention the pass through process with the gains/losses which is typical of revocable trusts.
Before we get to the tax issue, you might want to consider how the trust instructions read upon your passing; is the house to be sold immediately by the trustee? Is there a right of first refusal to purchase the other interests vested in one or more beneficiaries that might want to buy the others out? If so, who pay the expenses, etc? How is sales price in that instance to be calculated?
It might well be a property some or all would like to hold for rental purposes.
Also, what if a fight breaks out amongst the beneficiaries, is there a no-contest type clause for disputes other than the questioning of what the trustee does, accounting, etc?
In my experience the problems arise, not with the blood heirs but with their spouses that tend to egg them on about getting cheated out of something and causing a big stink. That can be short-circuited in a properly drafted trust.
As to your initial question, assuming the trust says sell upon your death and cash everyone out, your question is what is the taxable gain to the beneficiaries?
This I am not qualified to answer. For example, the typical capital gain is calculated on sales price, less costs of sale, less tax basis in the property and less capital improvements that might add to the basis.
What you need to find out from someone qualified to give tax advice (I am not) whether the beneficiaries inherit your basis, or does it "step up" on your death to current value?
Let's say in your area you paid $400k for the house, and in 20 years it hasn't gone up one dime. If they inherit your basis of $400k and then sell it for $400k there is no capital gain, and although $400k went out the door to them, as I understand it (verify this) the distribution to them is tax free.
Now if your basis is $100k, same scenario, $300k gain -- the issue there is if each bene is responsible, pro rata, for the capital gain? Or if it steps up 100%, there would be no gain if sold for the stepped up value.
Also if there was depreciation taken in the mix as with rental property, that's another tax factor upon sale.
There is no "inheritance tax" chargeable to them; however if your estate exceeds the IRS minimum for estate tax purposes (I believe that's presently $1.5 million) then estate tax would be payable on everything.
Important inheritance tax point while I'm at it: if you own life insurance policies, check to see who the owner is, not the beneficiary but the owner.
Life insurance owned by a decedent counts into the mix for taxable estate assets.
With husbands and wives, or life partners, I recommend cross ownership of the policies, your spouse owns the policy insuring you and vice versa; and you can also have contingent owners.
I hope this helps. I would advise getting tax advice on this.
Congratulations on arranging your affairs so as to avoid probate or surrogate court proceedings!