My two brother and I are to split the assets of my dad's estate equally, but, as Trustee, it's up to me to figure it out. I'm doing ok, except for one thing. Dad sold his house in 2015 via Land Contract (rather like owner finance, but the home remains in the Trust's name till the note is paid off in around 3.9 years (balloon payment). How do I treat the monthly house payment made by the buyer till the balloon payment comes due is my question? Anyone know?
I think this is worth discussing with an estate planning or real property attorney for that reason. I would ensure also that the attorney has significant trust management experience. If your counsel is with a law firm, there's often a real property section complimenting the estate planning and other practice areas of the firm.
Since the land contract is a Trust asset, it shouldn't be affected by Probate.
What I would have an attorney specifically consider is whether or not the clause mandating continuation until pay-off time is iron clad, although I suspect that some wise planning went into this issue. Apparently your father wanted the buyer to have enough time to pay off the land contract - he must have wanted this person to have the property. After reading your other post on similar issues, I think your father was a very wise and proactive man.
In the interim, the payments would be allocated according to Trust terms - split between you and your brother. When you file the 1041 Trust tax return at the end of the year, you'll prepare Schedule K-1s for each of you. That will reflect the split allocation for you and for your brother.
What I do NOT know is how to treat this in the 1041 though. It would be a payment in and payment out, so it might offset any tax on the payments as income. It's been years since I did a K-1 and I don't recall specifically but I believe any payments received (such as for sale of a vehicle) were treated as Trust income as well as Trust payments to the heirs. So the net effect was $0. But this is based only on vague memories and should be clarified by a Trust attorney.
In the meantime, you can split the payments when received and disburse 1/2 each to you and your brother.
If you do see an attorney, please let us know what the advice was. This is an interesting situation.
I think AK Daughter would probably have some good advice on this situation as well.
It's going to cost for '16 but you just may be able to file 2017 - 2019 on your own by repeating the pattern set by the CPA. Then have CPA do the 2020 one when ballooned off happens.
About K-1s (form 1065) I get them from S corp (100%) & from LLCs (partnership). Whatever K1 shows (+ or -) goes into your 1040. So if you can get everything dad done & filed feb or march, it will be better so your not rushed on your personal taxes. Good luck, first year is the hardest.
And you're right - the first year REALLY is the hardest.
D - your dads trust, what's its finding source? If its been his SS or retirement that $ has stopped. Was there a hefty bank account POD to you to draw from? Is it that the land contact payment is the sole $ coming into the trust? If you can try to put paper to pencil as to what the costs are looking like to get the next 6 months done... Like atty fees, courthouse filing fees, CPA, your travel expenses, bonding fees. So I'd dad estate / trust can't cover the estimated costs plus 20%, just who is going to front the $? I'd really suggest you & bro each put up 50% of the estimated and you add in the 20% extra and you have some sort of memo of understanding on this and the $ goes into an account January 2, 2017. $ makes family act odd.... It may not be your brother... But his wife or a son in law who starts carping about how your doing things and spending $.
Also please do as Garden mentioned something to remind Akron that the land contract is totally binding and Akron must continue to pay and understands that Dads death does not alter the land contract. My cncern is this....Sometimes family "sells" property via a SCIN - self canceling installment note. Its a way to pass down stuff with minimal $ actually being paid - totally legit (but complex) and done often by the generational wealthy. You just want to make sure that Akron doesn't think the debt is gone as dad is gone.
You are probating Dad's estate, which is separate from the Trust, which has it's own taxpayer ID number, like a separate "person", with a separate tax return.
In the meantime, it's my understanding that, though the principle of an inherited home is not taxable, interest is. The largest portion, of not all, of each payment at this stage is interest, so therefor taxable, right? If the payments are split between the 3 of us, then would we each be responsible for paying taxes on our shares going forward (knowing Dad's trust is responsible for 2016 taxes)?
Yes, until close to the end, dad was very pro active in his finances...the last couple of months it was getting hard for him though, as I'm sure it will for all of us. Bless his heart...but I knew he had trust that I would do my best to see to it all his wishes were carried out and I know that gave him some peace. I just hope I can...
I'm so glad you guys are all here to bounce this stuff off of. Thanks so much!
Life gets so complicated after the fact.
Igloo, I will be visiting Ohio in two weeks to spend a week with my best friend from high school. I will visit the buyers and let them know that dad has passes away and that they need to continue just as they have been, only they will need to add a bit to the monthly payment as what they are paying is not enough to completely covering the property taxes. The tax rate went up last year but dad just let the increase slide. I think, as trustee, I need to make them aware of the adjustment as the taxes will be coming out of the trust.
There is money in a bank account in Texas that was not in the trust. There we ad to get a lawyer and are doing a minument of title for probate.
Since the house is in Ohio, which is the same state as the trust is in, I don't think there will be a state to state problem with the trust. The only thing in the trust now is the home and all that will be coming into the trust will be the payments and anything I put into it as Co-Trustee.
There is enough money in the Texas account to cover the taxes and expenses it's going to cost to get the taxes done. I plan on holding out what I feel will be needed for trust expenses once that bank account is available to me before dispersing the rest, which I will then deposit into the Trust. I'll pad it a bit, knowing that once all the income taxes and such are taken care of I can then disperse it to my brothers and myself.
I will probably first talk to Dad's HnR block people since he sold the house last year so they had to deal with the sale of the house on the taxes somehow.... and go from there... If I don't feel them competent, then I'll talk to our Texas Lawyer who's doing minament of title and get his recommendations...
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