Inheritence From Father's Living Trust

[John3cpa]

This is a continuation of a previous question. Father died 5/24/07. Two sons are named as co-trustees of father's living trust which contains mutual fund investments which, unlike IRA's have no beneficiary designations. No where in the trust document are the sons named as beneficiaries (using that exact term), but in one section titled "Distribution of My Trust Property" it states that..."remaining trust property is to be divided into equal shares for each of my living children" and the two sons are named. To me that is the same thing as naming them as "beneficiaries", thereby giving them "stepped up basis".
My client, the one who is handling all of this, wants the trust to sell all the investments and have checks issued 50/50 to each. Wouldn't this create a taxable event for the trust reported on a 1041 using the original basis and not "stepped up basis"?

[abby]

step up for non-IRA

I believe the investments are stepped up because the trust assets are included in the estate (whether an estate return is required or not and whether a beneficary is named or not) and since it's not IRA mutual funds, they are not pre tax assets and therefore the step up is in effect whether they're sold before or after distribution.

Hope that helps.

[JoshinNC]

The brokerage account has a beneficiary

This is a continuation of a previous question. Father died 5/24/07. Two sons are named as co-trustees of father's living trust which contains mutual fund investments which, unlike IRA's have no beneficiary designations. No where in the trust document are the sons named as beneficiaries (using that exact term), but in one section titled "Distribution of My Trust Property" it states that..."remaining trust property is to be divided into equal shares for each of my living children" and the two sons are named. To me that is the same thing as naming them as "beneficiaries", thereby giving them "stepped up basis".
My client, the one who is handling all of this, wants the trust to sell all the investments and have checks issued 50/50 to each. Wouldn't this create a taxable event for the trust reported on a 1041 using the original basis and not "stepped up basis"?

All brokerage accounts have a beneficiary designation. The fact that they are not IRA assets is irrelevant for that purpose. Now, the father may not have named a beneficiary, but there is a provision to have one. If the trust was not named as beneficiary and the kids were not named as beneifiaries than the trust becomes part of the deceased's estate, and is distributed based upon his will, or if none, state laws of intestancy. If you are not well versed in trust and estate language, as it sounds that you may not be, it most likely makes sense to contact a probate attorney to have him/her handle the distribution of the assets. The trust can't sell the assets to the kids because the trust doesn't own them. If he wanted to do that he should have talked to Dad before Dad died.

Once again, this is why I handle my clients investments, to minimize potential issues like this one.

[natiro]

If the trust was not named as beneficiary and the kids were not named as beneifiaries than the trust becomes part of the deceased's estate, and is distributed based upon his will, or if none, state laws of intestancy.

I disagree with JoshinNC's answer. If I'm reading the post correctly, the brokerage account was held in the name of the revocable trust. The revocable trust became irrevocable at death. The assets of the trust should be distributed according to the terms of the trust. At least from the little we know, it sounds like the trust was correctly written to distribute the assets of the trust to the sons upon death of the grantor (their father.) They are the beneficiaries of the trust. The trust was the owner of the mutual funds.

I agree with Abby's answer about the step up in basis. The funds will be stepped up to date of death value no matter who sells them (i.e. the trust, or the sons.)

If you are not well versed in trust and estate language, as it sounds that you may not be, it most likely makes sense to contact a probate attorney to have him/her handle the distribution of the assets. The trust can't sell the assets to the kids because the trust doesn't own them. If he wanted to do that he should have talked to Dad before Dad died.

Again, I disagree. First of all, the trust does own the assets. Secondly, the trust itself would not have to go through probate. Probate may be required for other assets that were not put into the trust but not for the trust itself. You would not need a probate attorney to effect the distribution. The trust wouldn't have to sell the assets to the sons because the assets passed to the sons through the trust.

The funds can either be distributed outright to the sons who can sell them upon receiving them and report gain or loss based on date of death value. Or the trust can sell the funds and distribute the proceeds. If the trust sells the funds and assuming that all assets will be distributed from the trust in the current year, and that this will be the final Form 1041, gain or loss on the sale (using date of death stepped up value) will be passed out to the sons on their K-1s.

Also, as a side note, I disagree with JoshinNC's answer to the first post regarding the question: "did Dad name the living trust as benefiary of the account or owner. If he named it as owner and not beneficiary he screwed up." The point of a living trust is to title the assets in the name of the trust. Assets not held in the name of the trust become part of the probate estate.

Again, these answers are based on my reading of the question. There's always the chance I misunderstood the facts!

Good luck!

[JoshinNC]

Natiro

you may be correct that the trust owns the mutual funds. From the other post ( a couple of days ago) it sounded that the trust neither owned nor was named as beneficiary. If the trust owns the account than yes, the income beneficiaries of the trust recieve the assets outside probate and with the step up in basis. I may have confused two different posts and apologize for that.

However, I do stand by what I said under the circumstances I assumed.

[Roberts]

It says the trust contains the mutual funds. From this I would think it is safe to assume the original owner wrote up a trust, opened a brokerage account in the name of the trust and transferred funds into the trust, investing those funds in mutual funds. With a trust account you DO NOT name a beneficiary. A trust account nor a normal investment account held in personal name or joint name does not have the beneficiary option. They may have a TOD account but that's still not the same thing.

Lastly as was said, date of death cost basis is taken. Depending on the investments involved, it might be cheaper to just sell and distribute the money via wires or checks. I would personally just leave it up to the two sons for how they want to receive the assets. I've seen cases where one of the family members just took all of a few stocks, had them transferred into their name and they liquidated the rest and distributed accordingly. For example, some families feel a tie to a local corporation and might want to own those shares grandpa bought 50 years ago. I've got a co-worker who is very proud of the fact that one of his holdings can be directly linked to shares his grandfather purchased over 100 years ago. His kids will keep the shares I'm sure.