A Trustee Tax responsibilities

[Badger]

A friend has been trying to turn his deceased father's estate (a massive amount of gem stones, carvings/statues, rare insect collections, lapidary tools, furniture, cars, and house) into cash for distribution. He is the only surviving child but there are 3 nieces that will also get an inheritance. There will be 50% to him and 50% divided among the 3 nieces.
He has been driving about 200 miles RT on weekends to the house for the past year to clean out the house and sell the contents. There is still a massive amount left to convert to cash and then eventually the house to sell when it is cleared.

Are there federal taxes owed when being paid from a trust to the executor for handling the trust? Would this apply for the typical percentage often given to the executor and/or money spent if keeping a record of the time, milage, motel (if having to stay for the days while having to clear out/sell items/etc.?

Cheers!

 

[Souschef]

According to what I just read, trustee's fees are income. However, the trust should reimburse all OOP expenses. Keeping detailed records is important

 

[Texas Proud]

Yes. The trustee fee is regular income to the trustee. Most trustees are not the beneficiary of trust. BTW, I am assuming that it is still an estate so he is an executor... same tax result though.


Like other post, should be reimbursed for expenses. I would also be charging the trustee fee based on time spent... use a reasonable hourly rate.

 

[OldShooter]

... the trust should reimburse all OOP expenses. Keeping detailed records is important

This.

Just the RT mileage at business rate will be over $100 per trip. "58.5 cents per mile for business driving from Jan. 1 to June 30, 62.5 cents per mile for business driving from July 1 to Dec. 31"

 

[Badger]

Yes. The trustee fee is regular income to the trustee. Most trustees are not the beneficiary of trust. BTW, I am assuming that it is still an estate so he is an executor... same tax result though.


Like other post, should be reimbursed for expenses. I would also be charging the trustee fee based on time spent... use a reasonable hourly rate.

Thanks, I made the correction.

Cheers!

 

[SecondCor521]

He'd have to determine in each case what the payment to him was for.

Reimbursement for expenses would not be taxable.

Payments for serving as executor would probably be earned ordinary income.

Distributions of his portion of the estate would generally not be taxable to him but might be subject to estate or inheritance taxes depending on where the decedent lived.

He should check the will and applicable state and federal law to see what they say about each of these three categories.

 

[Texas Proud]

/snip/

Distributions of his portion of the estate would generally not be taxable to him but might be subject to estate or inheritance taxes depending on where the decedent lived.

Be careful with this.... the income of the estate will be distributed based on the distributions...


As an example.. say the estate made $10,000 in dividends... and the estate distributed $10,000... then all the distribution will be taxable..


If the estate distributed $100,000... only the $10,000 is taxable...


If the estate distributed $5,000, then that is taxable to the person and the estate will also have $5,000 of dividend income that will be taxed...

 

[SecondCor521]

Be careful with this.... the income of the estate will be distributed based on the distributions...


As an example.. say the estate made $10,000 in dividends... and the estate distributed $10,000... then all the distribution will be taxable..


If the estate distributed $100,000... only the $10,000 is taxable...


If the estate distributed $5,000, then that is taxable to the person and the estate will also have $5,000 of dividend income that will be taxed...

Oh, I know, but you're right, the way I wrote it was not as clear as it could be. I was referring to distributions of principal, not income. OP should be sure to understand the distinctions from both the executor point of view (completing the 1041s etc and issuing K-1s) and as a beneficiary (receiving a K-1).

 

[Badger]

Thanks for the replies. Since this only involves reimbursement it looks like he has no tax from documented expenses. There is no actual cash involved and he has to sell everything off at less than wholesale. It is next to impossible to place a value or appraise the massive amounts of cut, polished, and uncut gems, geodes and specimen crystals, as well as rare insect collections, old lapidary tools, etc. There are files on what they were bought for and they are being sold for much less with everything being documented. I doubt there will be taxes on the cash distribution after they are sold and the house is sold.

Cheers!

 

[38Chevy454]

Thanks for the replies. Since this only involves reimbursement it looks like he has no tax from documented expenses. There is no actual cash involved and he has to sell everything off at less than wholesale. It is next to impossible to place a value or appraise the massive amounts of cut, polished, and uncut gems, geodes and specimen crystals, as well as rare insect collections, old lapidary tools, etc. There are files on what they were bought for and they are being sold for much less with everything being documented. I doubt there will be taxes on the cash distribution after they are sold and the house is sold.

Cheers!

If the executor has the records of the purchase vs sale prices on the "collectible" stuff, it sounds like those sale losses could be used to offset any income. The proceeds from the sale is not taxable since it is just a recovery of a portion of the original purchase. No capital gain, in fact is a capital loss.

 

[Badger]

Should he plan that all the hours/days/weeks he has put in to settle the estate would be taxable if he were to claim his time? Is there any way around that being taxed?
If the value of his time is taxed then it may be to his advantage to simply hire someone to conduct an estate sale who has connections for buyers interested in what he has to offer and get out from under this mess and start enjoying his retirement.
The house (about $300k) is the one big item that should sell easily with a realtor and the last to be disposed of when everything else is gone.

Cheers!

Cheers!

 

[OldShooter]

Should he plan that all the hours/days/weeks he has put in to settle the estate would be taxable if he were to claim his time? Is there any way around that being taxed?

Well, he should be very aggressive about recording and getting paid back on all expenses as those payments are not taxable. Aggressive but not to the point of fraud, of course. But for example, every mile on his car should be claimed for reimbursement from the point he leaves his home driveway to the point where he returns.

If the value of his time is taxed then it may be to his advantage to simply hire someone to conduct an estate sale who has connections for buyers interested in what he has to offer and get out from under this mess and start enjoying his retirement. ...

In larger cities firms that do that sort of thing exist. DW, when she was in the megabank trust dept., used several. A call or two to local banks should result in some leads. Same-o calls to local attorneys who advertise being estate specialists. Such a firm might actually pay for itself by getting better prices/knowing where to sell speciality items.

 

[cathy63]

If the executor has the records of the purchase vs sale prices on the "collectible" stuff, it sounds like those sale losses could be used to offset any income. The proceeds from the sale is not taxable since it is just a recovery of a portion of the original purchase. No capital gain, in fact is a capital loss.

When the previous owner of the "collectibles" died, the estate's basis in those items was stepped-up to their value on the date of death. The estate has a long term capital gain/loss which is equal to the sales price of each item less the basis and costs of selling it. The estate can pass the gains/losses to the heirs by issuing K-1s.

 

[cathy63]

Should he plan that all the hours/days/weeks he has put in to settle the estate would be taxable if he were to claim his time? Is there any way around that being taxed?
If the value of his time is taxed then it may be to his advantage to simply hire someone to conduct an estate sale who has connections for buyers interested in what he has to offer and get out from under this mess and start enjoying his retirement.
The house (about $300k) is the one big item that should sell easily with a realtor and the last to be disposed of when everything else is gone.

Cheers!

Cheers!

He should do some research or consult with an attorney to figure out how much he can be paid for the work he's doing and whether it's even possible to be paid by the hour. It depends on the state law and how the will and trust are written. Many (most/all?) states cap the executor's fee at a flat percentage of the estate, somewhere between 1.5% and 5% but the will or trust may specify otherwise.

I wouldn't think an executor can choose between the fee specified by law or charging by the hour for his own labor, but he should consult an attorney in the state where his father died to find out for sure. The attorney's fee is an expense that the estate should pay for.

Whatever he receives specifically as payment for being the executor/trustee is reported as "other income" on his tax return. Sadly it's not earned income, even though he's doing a lot of work, so he can't use those funds to contribute to an IRA or Roth IRA. Reimbursement received for travel expenses or other expenses incurred on behalf of the estate is not taxable income.

If he hires someone to conduct an estate sale for the goods, then they will take ~40% of the receipts as commission, so he needs to figure out whether the time he would spend selling these items on his own is worth 20% of their value (i.e. the portion he would have received as his half of the estate). If he's the sole executor/trustee, then he doesn't have to consult the nieces and can make the decision on his own.

 

[Texas Proud]

If the executor has the records of the purchase vs sale prices on the "collectible" stuff, it sounds like those sale losses could be used to offset any income. The proceeds from the sale is not taxable since it is just a recovery of a portion of the original purchase. No capital gain, in fact is a capital loss.

Remember that everything gets a reset in basis... including the stuff that could have lost value...


You cannot use the purchase price to value something.... you have to use FMV at time of death (if you do not use the other date)...


Do not expect a large capital loss.

 

[SecondCor521]

Payments for serving as executor would probably be earned ordinary income.

I was guessing on the "earned" word in the above and didn't check. My bad.

Whatever he receives specifically as payment for being the executor/trustee is reported as "other income" on his tax return. Sadly it's not earned income, even though he's doing a lot of work, so he can't use those funds to contribute to an IRA or Roth IRA. Reimbursement received for travel expenses or other expenses incurred on behalf of the estate is not taxable income.

@cathy63 (as usual) correctly points out that it is not earned income, at least in the scenario described on this thread.

The following IRS tool might be of interest:

https://www.irs.gov/help/ita/are-th...xecutor-or-administrator-of-an-estate-taxable