S-corp & Testamentary Trust SH & Basis

[dsi]

Husband was a 40% SH in an S-corp. H dies and leaves 20% to Wife and 20% to his Testamentary Trust.

CA is a community property state. Does W and the Trust each get a full step up in basis on their stock? If so, it is my understanding that this would be "outside" basis?

Many thanks.

[DMICPA]

Step Up

I am researching this right now for a 50% shareholder wife that passed away and the 50% shareholder husband inherited it.

My understanding is that the entire stock gets a step up to the FMV at date of death.

Now, I assume this also means that the basis of the Husbands shares are increased. If there is a loss in the operations, that loss may be deductible as there is now adequate basis due to the step up.

[dsi]

DMICPA, do you agree that this is "outside" basis? Also, in my situation I thought an trust couldn't be an S-corp SH>

[DMICPA]

Trust and S-Corp

At one time S-Corporation rules prevented virtually all trusts from being a shareholder in an S Corp. but these rules have been substantially liberialized.

In the case of a Testamentary Trust, It is my understanding that the Trust is eligible to hold the stock for a period of two years after date of death. During this time, I would imagine that some kind of planning can be done to handle what happens after the two years has expired.


I would agree that the basis adjustment would be considered outside basis.

Now, knowing this, can this basis be used to recognize any loss in the S Corporation because the shareholder would now have additional basis?

[dsi]

I would argue that yes, this increase in basis would allow any s-corp loss.