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Revocable Trust Tax Return Issues

Hi! I'm Trustee of my father's revocable Trust. At the time of his death in September 2010, assets amounted to about $1.5 million (mostly real estate). A beneficiary and her "friend" sued the Trust relentlessly, however, both cases have been dismissed as "frivolous and for no purpose other than harassment." Legal fees for defending the Trust were $325,000, and while in litigation, the Trust continued to pay mortgages, all utilities, and property taxes on his 3 properties. Consequently, cash reserves took a huge hit. In 2013, the court approved the distribution of 1 home to a beneficiary (per terms of the Trust). Currently, there is no longer cash reserves to pay off mortgages on the remaining homes, until one of the properties is sold. The "profit" from the sale will be less than $30,000. Federal and Illinois tax returns were filed the year of my father's death for both him (personally) and the Trust. However, I have yet to file returns for the years following in which the Trust funds lost value. Aside from the funds which transferred to the Trust after my father's death, as indicated on the initial Tax returns, income for the Trust was $13,000 in total (from stock that was liquidated the following year). This income was offset by costs related to maintaining properties (mortgage, tax, utilities, etc.). 1) Do I need to file a Tax Return for the Trust if it did not have income? 2) Are the legal fees for 20deductible? 3) If the Trust incurred losses, are there any Tax credits that would provide a refund of any kind? 4) If a filing is required, can the 2 years (2012 and 2013) in which it lost money be filed in a single return? Your feedback is greatly appreciated!!


Robert Barker
Title: Professor of Accounting
Company: Calif. State Univ., Northridge
(Professor of Accounting, Calif. State Univ., Northridge) |

Dear Anonymous, it's always dangerous to recommend tax related actions based on limited (and potentially incomplete) information. My first recommendation is that you seek assistance from a CPA with extensive experience in the taxation of fiduciaries. Having said that, I will suggest some generalized answers to your questions based only on the information you provided. (1) Yes, Your father's revocable trust became irrevocable when he died. An irrevocable trust must file annually regardless of taxable income or loss. (2) Based on your description, the legal fees may very well be deductible. This is an area where an experienced CPA can provide assistance. (3) In general, negative taxable income belongs to the trust until it distributes all its assets and terminates. Upon termination, it is possible that some or all accumulated losses MAY be allocated to beneficiaries. (4) A separate return must be filed for each tax year.


THANK YOU! Your guidance and suggestions are very much appreciated.


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