How Should Money Flow When Selling Property in Irrevocable Trusts?
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Question:
My husband and I each have an irrevocable trust. Each trust holds a 50% interest in each three properties. We are selling one income-producing property next month. Should our closing attorney issue two checks given that there are two trusts? Can we have the closing attorney give us a check for the $32,000 that we paid out-of-pocket to make improvements to the property just prior to the sale so that it would sell for more? *Can we have the closing attorney pay our trustee a fee of $1,000 because they have had to sign documents and appear at the closing?
Response:
The first question is easiest: yes, you should receive two separate checks, one for each trust.
Your follow-up questions have more to do with logistics than legalities. Certainly, your trusts can reimburse you for expenses you fronted and your trustee can be compensated for his work as trustee. The question is whether the funds should first be deposited in the trusts and then paid out or come directly from the sale proceeds. With respect to your reimbursement, I don’t think it matters. If it’s okay with everyone, it’s fine for you to be paid from the funds at closing.
The trustee’s fee is a bit more complicated. The trusts can take a deduction on their 1041 income tax returns for trustee fees since they are trust expenses and the trustee should report it as income on their tax return. It’s cleanest if these funds pass through the trust accounts. But you could ask the accountant who prepares the tax returns for the trusts whether it’s possible to account for this if the funds are simply paid out at closing without passing through the trust account. (Given the relatively small amount involved, it may be simpler for you to pay the trustee from your own funds as a gift rather than to do everything by the book and involve lawyers and accountants.)
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