Remainder Trust Basis

[Nashville]

This is a tough one, and not for a novice.

Mortimer dies and his will calls for a trust to be enacted upon his death.

In the trust are three rental properties, unencumbered with mortgages. Each property is valued at $100,000 as of his date of death, just to make the example simple. The beneficiaries of the trust are his two natural daughters by his deceased first wife.

However, although the property is left via the trust to his daughters as a remainder, his will also provides that all the income (and responsibility for expense) from the properties belong to his second wife for her lifetime. This includes any capital gain proceeds in the event any of the property is sold. The second wife is not the mother of the children.

What is the basis that the two natural daughters have in the trust property...
1) Upon his death?
2) In the event ONE of these properties is sold and the proceeds go to wife #2?
3) If the basis changes between 1) and 2), how is the difference reported by
the [trust/beneficiaries]?

And no, I don't know the answer myself. I'm not playing "stump the band..."

[Nashville]

Tough Research

The OP is tough, at least to ignoramoose like me. I don't think there will be much response.

I don't mind research this myself. The situation is akin to a partnership whose capital ownership % and income distribution % are unequal.

Can anyone point the way to good reading material?

[JoshinNC]

My stab at it

The Trust property is an asset of the wife and if sold is a sale by the Trust with the income passing through to the surviving wife. If both properties are still in the Trust at wife's death they pass to the daughter's at FMV on wife's DOD.

The daughter's have no basis in the properties while the surviving wife is alive, so if they recieve funds from the Trust after the property(ies) are sold it is a de facto Trust distribution to the surviving wife and then a gift (maybe taxable, based on amount) from the surviving wife to the daughter(s).

[Maribeth]

This is a tough one, and not for a novice.

Mortimer dies and his will calls for a trust to be enacted upon his death.

In the trust are three rental properties, unencumbered with mortgages. Each property is valued at $100,000 as of his date of death, just to make the example simple. The beneficiaries of the trust are his two natural daughters by his deceased first wife.

However, although the property is left via the trust to his daughters as a remainder, his will also provides that all the income (and responsibility for expense) from the properties belong to his second wife for her lifetime. This includes any capital gain proceeds in the event any of the property is sold. The second wife is not the mother of the children.

What is the basis that the two natural daughters have in the trust property...
1) Upon his death?
2) In the event ONE of these properties is sold and the proceeds go to wife #2?
3) If the basis changes between 1) and 2), how is the difference reported by
the [trust/beneficiaries]?

And no, I don't know the answer myself. I'm not playing "stump the band..."

The surviving spouse receives all the income from the trust during her lifetime. Any gains/losses in the trust, per your example, will pass through to the wife on her K-1 at the end of every year.

There is no basis to the daughters at the time of death.

The daughters will receive their share of the remaining trust assets and those assets will be distributed to the daughters at the basis that the trust has in the assets.

Your example is very common.

(I cannot address this example and its complexities under tax year 2010 law)

Maribeth

[Gretel]

I agree ....and if I understand the poster and the rules correctly here is what I see happen:

Trust gets stepped up basis (normal rules) upon death. Wife gets income. If trust sells a property capital gain income or loss will flow through to wife.

If after wife dies, one or more properties are still in the trust, daughters will get carry over basis and trust ends.

[Snaggletooth]

Thanks to All

Thanks to everyone - I believe the answers are reasonable and accurate. I started the thread with Nashville.