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Author: forester75 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120820  
Subject: Trust Taxes Date: 10/22/2006 5:27 PM
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My wife is one of five beneficiaries of a trust established in the 80's by her father upon his death. Her mom had access to the income generated since the beginning. Recently her mom passed away and the trust will be divided among the five children. The trust investments are mostly stocks, some bonds and some cash.
Each heir's distribution will probably in shares of the equities,thus getting a stepped-up basis for each stock.
My question is will the trust have to pay capital gains tax on all stocks appreciation once the distribution to the heirs occurs?
Thanks for any guidance.
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Author: ibnana Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89193 of 120820
Subject: Re: Trust Taxes Date: 10/22/2006 6:42 PM
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Each heir's distribution will probably in shares of the equities,thus getting a stepped-up basis for each stock.

The cost basis date for the shares will be the date of her father's death, not her mother's recent death.

My question is will the trust have to pay capital gains tax on all stocks appreciation once the distribution to the heirs occurs?

The stocks will be distributed to the heirs according to the terms of the trust. EG: If there are five heirs and there are 100 SH, each will get 20 SH if the terms of the trust say it is to be divided equally. If/when she sells her 20 SH she will pay the capital gains with the cost basis being as of the date of your father's death. The trust should supply her with the correct cost basis.

I inherited shares of stock from my dad's trust. He died in 1986 and my mom had the income from it until she died in 1996 when the shares were distributed to my brother and me. That was how it was handled. I still have some of the stock, but what I have sold I paid capital gains in the year it was sold and based on the 1986 cost basis. I don't think any of the rules have changed since then.

Carol



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Author: sashamore Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89195 of 120820
Subject: Re: Trust Taxes Date: 10/22/2006 7:48 PM
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hi carol.........question...

if your mother had inherited the stock, and SHE established the trust
for her childres, is the cost basis still re your father's ownership,
or does it change to HER ownership, thus the cost basis changes.....

thanks,

sasha

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89197 of 120820
Subject: Re: Trust Taxes Date: 10/22/2006 8:51 PM
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Each heir's distribution will probably in shares of the equities,thus getting a stepped-up basis for each stock.
My question is will the trust have to pay capital gains tax on all stocks appreciation once the distribution to the heirs occurs?

_______________________________________

There is really not enough information given.

Generally, a trust does not recognize a gain on distributions - although it could elect to, by electing to treat the assets as being sold to the beneficiaries.

And there may or may not be a step-up in basis at your MIL's death;
If the trust was the subject of a QTIP election at your FIL's death, to qualify the trust for the marital deduction, it would be includible in your MIL's estate, and subject to a basis step-up at her death.

You need to discuss this with the attorney who is handling MIL's estate, who I assume is familiar with the trust, as well as the will.

Bill

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Author: ibnana Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89200 of 120820
Subject: Re: Trust Taxes Date: 10/22/2006 10:35 PM
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if your mother had inherited the stock, and SHE established the trust
for her childres, is the cost basis still re your father's ownership,
or does it change to HER ownership, thus the cost basis changes.....


Hi sasha,

I would assume that if mom had inherited the stock outright and then she established the trust, it would no longer be father's ownership, but hers so the cost basis would be as of her death.

Bill had a more detailed answer. I had assumed the OP was referring to a simple A/B trust. That's what my dad had and also what DH and I have, but as Bill pointed out, it does depend on the terms of the trust.

We each have equities, etc. titled to each of us and whoever dies first the securities will go into a trust with the income from it going to the survivor if needed.

My mom and dad had theirs before the now more generous estate amounts, so by having my dad's stock go into a trust instead of to her as joint owner, it kept the stock out of her estate and lessened the estate tax hit when she died.

Carol



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Author: forester75 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89201 of 120820
Subject: Re: Trust Taxes Date: 10/22/2006 10:44 PM
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Thanks Carol for your reply. I was under the impression that any assets you inherit allows for a stepped up basis at either date of death or an alternative evaluation date but it appears your situation is identical to my wife's, so trust assets must be handled differently.

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Author: forester75 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89202 of 120820
Subject: Re: Trust Taxes Date: 10/22/2006 11:05 PM
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Thanks for your reply Bill. Concerning a trust, under what circumstances would a trust chose to treat the assets as being sold at a distribution to the heirs?
I was wrong about the date of the trust, it was an irrevocable trust established in 1974 with proceeds of life insurance flowing into the trust at the death of my FIL. The trust company then handled all investment decisions to generate income and growth.
I'm pretty sure the trust is not part of my MIL's estate.

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89203 of 120820
Subject: Re: Trust Taxes Date: 10/23/2006 12:19 AM
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Thanks for your reply Bill. Concerning a trust, under what circumstances would a trust chose to treat the assets as being sold at a distribution to the heirs?
____________________________________________
It doesn't usually happen, but it probably happens often enough that the IRS provides a box to check, on the 1041, to make the election.

Maybe if:
>The securities (or other property to be distributed)has a low basis, but has appreciated in value;
>the trust or estate has a capital loss carryover of its own, to shelter any gain on the distribution, but if it terminates, the capital loss carryover flows out to the beneficiaries, who wouldn't or couldn't use it soon.
>i.e., they plan to keep the securities to be distributed, which probably have appreciated in value, and acquire the securiites, or other property, with a resulting higher basis.

With an estate, you just about always have a stepped-up basis; with a trust, you may or may not.

Now, if the heirs plan to keep the property a long time, they may not give a hoot what the basis is. If you know you'll never sell something, you don't care what the basis is.

Big exceptions:
>if the trust property in question is stock in an S Corporation, where the stock basis limits your deductible losses;
>or a fully-depreciated building, where you can start taking more depreciation, by treating the distribution as a purchase;
> and I'm sure there are others.

Situations like these would seem to be applicable with an old trust, where there has been no step-up due to the most recent death, or other pertinent event, and getting a basis step-up seems more important than might usually be the case.

A loss recognized on the sale to a beneficiary is not deductible unless the distribution is in satisfaction of a pecuniary bequest; that's been the rule since 1997; before that, an estate of trust could recognize gain OR loss on a deemed sale to a beneficiary.

Bill





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Author: forester75 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89206 of 120820
Subject: Re: Trust Taxes Date: 10/23/2006 10:16 AM
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Thanks again Bill, too bad this stuff is so complex--looks like a knowledgeable tax attorney or accountant is in our future.
Brian

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Author: sashamore Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89207 of 120820
Subject: Re: Trust Taxes Date: 10/23/2006 10:21 AM
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you better believe it !!

//sasha

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