Basis

[TAX4US]

Momma died, setting up trust with stock. Dad gets dividends until he dies. Dad died and stock distributed to children. This was an irrevokable trust. Question is: Is basis to children determined at moms death or at dads death? Niether the children or dad could sel that stock until dad died. There also was a piece of real estate in the trust also that was being use as a rental. Can someone give me some direction? Many thanks.

[outwest]

Bypass trust?

This sounds like a common estate planning tool that I've heard referred to as a bypass trust. With large estates, a trust is established for the first spouse to die funded to the extent of the estate tax exemption amount. The remaining assets transfer to the surviving spouse. At the death of the second spouse, those assets also receive the benefit of the estate tax exemption amount. This mechanism allows the couple to receive the benefit of both estate tax exemptions.

Assuming that is the structure, the assets in the trust have basis as of the death of the first spouse. There is no step up on the death of the second spouse as the assets are outside of the second spouse's estate.

Note: the estate tax currently in place until 2012 permits pooling the exemptions for the spouses and avoids the need to set up this structure. Unless it expires in 2013. Or gets extended in some variation. Or...

[MAJ]

Irrevocable trust

Based on limited information and assumptions.

I believe the stock would go on the basis of dad's death. But there are factors we don't know. Was the Trust in both Mom & Dad's name or just Mom's? Was Dad the Trustee?
What does the DOC say??

If they transferred before Mom died it would go on Mom's cost basis. Since they both died then it would be the cost at the final death.

Under current law, if the assets are held in the trust until the parent’s death, the assets in trust will receive a “step up” in cost basis. That is, the assets will be revalued for tax purposes using the value at the parent’s date of death. For example, if a share of stock with an original cost basis of $10 is given outright to a child and then sold for $100, the child will have a taxable gain of $90. If the same stock is placed in the trust and held until death with a date of death value of $100, the same sale will produce no taxable gain.

Good Definition

http://www.mid-hudsonlaw.com/CM/Articles/Irrevocable%20Trusts%20for%20Asset%20Protection%20final.pdf

Momma died, setting up trust with stock. Dad gets dividends until he dies. Dad died and stock distributed to children. This was an irrevokable trust. Question is: Is basis to children determined at moms death or at dads death? Niether the children or dad could sel that stock until dad died. There also was a piece of real estate in the trust also that was being use as a rental. Can someone give me some direction? Many thanks.

[TAX4US]

Basis

Family Trust created at death of mom. Trust doc says "Until the death of my spouse my Trustee shall pay out the net income of the trust to my spouse for his support. The Family trust shall not terminate for any reason while my spouse is living. Upon the death of my spouse. principal and income in the Family Trust shall be distributed to my children.

It would appear based upon this language that the children could not take the assets from the trust untill dad's death, therefore do we get basis at dads death(step up/step down).

Sounds almost like a life estate in which children get to step up basis at time of death since children could not receive anything until death.

Am I on the right track or am I woefully wrong?

Thanks

[natiro]

Basis

Based on the information you provided, you would use mom's date of death to determine basis. The trust was formed in order to keep those assets out of dad's estate even although he gets the income during his lifetime (that is, when dad dies, the value of the trust is not included in his estate). The assets do not get any additional basis adjustment on dad's date of death. Although it may sound like a life estate, it isn't actually one.

[Burke]

I agree. Assuming these stocks were in Mom's name and therefore entirely in her estate, Dad did not have any rights to the stocks, only the income. No step-up basis at Dad's death. Basis is at Mom's death FMV. Same goes for rental property -- assuming in Mom's name only and she had the right to include that in the trust to begin with. I have seen cases where the trust had cash which was used to purchase real estate. Basis in that case would be what the trust paid for it.

[MAJ]

That's what the DOC said...

See what happens when you have the details....