Distribution to beneficiaries of long term capital loss from Irrevocable Trust

[Zane]

Taxpayer created a Revocable Trust (created many years ago) and used his Social Security number for reporting income. His 3 children are the equal beneficaries of this trust. His brokerage account (and all of his other assets) was in name of the Trust and he suffered sizeable capital losses over the years (over $1mm). Taxpayer could only deduct $3,000 per year capital loss. Upon his recent death, the taxpayer's Revocable Trust automatically becomes an Irrevocable Trust (with new Fed. ID#) - with all of the same provisions and beneficiaries. There is no probate proceedings since all of his assets were titled in the Revocable Trust. The Irrevocable Trust will now distribute all of the assets (in kind or in value) equally to each of the 3 children. There is now over $1mm of unused capital loss carryforwards incurred during the life of the taxpayer and while the brokerage account was in the Revocable Trust.
QUESTION: Does the capital loss carryforward get distributed equally (to each of the 3 children) from the Irrevocable Trust ?? to apply to each of their future capital gains ?? Indefinitely ??
REPORTED ON: Schedule K-1 for each child ?? According to IRC #1212 ?? According to Tax Book page #21-17 ??

ZG

[Rapid Robert]

QUESTION: Does the capital loss carryforward get distributed equally (to each of the 3 children) from the Irrevocable Trust ?? to apply to each of their future capital gains ?? Indefinitely ?? REPORTED ON: Schedule K-1 for each child ?? According to IRC #1212 ?? According to Tax Book page #21-17 ??ZG

None of the above.

You should be looking at TheTaxBook page 6-10. The capital loss carryforward goes away at death, it does not carry into the trust. With basis step up/down, the trust gets the stock with basis equal to FMV at time of death, so if distributed in kind to the beneficiaries, they start with that basis.

"Death of taxpayer. Capital losses cannot be carried over after a taxpayer’s death. They are deductible only on the final income tax return filed on the decedent’s behalf. The annual $3,000 ($1,500 MFS) limit still applies in this situation. Even if the loss is greater than the limit, the decedent’s estate cannot deduct the difference or carry it over to following years."