Irrevocable Trust

[Corporate ORphan]

Our mother died recently and she passed some investments to us via an irrevocable trust and have a couple of questions. Can anyone help us?

A. Shares of Stock (common and preferred)
1. The trust was set up to convert from a revocable trust to an irrevocable trust at the time of her passing, 11/10/2014. Me and my 2 siblings are now the successor trustees.

2. She had some shares of stock in that trust at FIDO and their ownership was transferred to us in a like kind transfer of shares of the same stock in a new account at
FIDO in our name (DH and mine) which they required us to open for them to perform the transaction on 12/10/2014.

3. A friend of ours (an accountant) told us that our cost basis (for use in determining capital gains in any future transactions) of the shares would be the value of the stock
on the date of the transaction (ie. 12/10/2014) and that any gain or loss on the shares between 11/10 and 12/10 would be reported on the Irrevocable Trusts tax return.
We have been searching and searching through the documents on the IRS www page for any publications, regulations, forms or form instructions for information that
would confirm this and have had no luck so far. Specifically, we've searched through the 1040 forms, the related schedules as well as any instructions associated wtth
them and we've looked through form 706 as well as the instructions for that form and had no luck. We found references to inherited assets, but no leads to assets
acquired as proceeds from the liquidation of a trust.

We've also looked through publications 551 with no luck as well. Instructions for inheriting assets from an estate, but nothing covering assets received from a trust.

B. We also received some shares in some mutual funds (both stock funds and bond funds) and have a similar quandary.

Establishing our cost basis for these investments seems rather straightforward (if what our friend tells us is true), but we'd really like to find the IRS instructions, publication or code sections where this is explained because we want to make sure we report our taxes correctly for 2014 and any additional information we might be required to supply to support the amounts we use as well as support the decisions we made on how to report it will be so much easier to track down now versus some date in the future.

Thanks so much.
Any help or guidance will be appreciated.
BTW, DH was a licensed CPA back in the early 80's but hasn't practiced in around 30 years, so he's familiar with the terminology, but hasn't remained current with the detailed changes in all the rules in regulations

[2B]

I am sorry about your mother passing away.

I think you can justify getting a CPA that is an expert in trusts involved in this. I wouldn't trust something that appears this complicated to comments from this or any forum. You have a double whamy. You will need to straighten out the trust tax return and your own.

[KB]

My Mother passed away in 2014 and my Father as trustee had the cost basis reset to the value on the date of her death. He had to prompt both Merrill Lynch and Vanguard to get this accomplished. Then any gain or loss afterwards is on the recipient.

Whoever distributed the shares to you and your siblings should have had the cost basis updated before distributing.

[wolf]

Quote:

Originally Posted by 2B I am sorry about your mother passing away. I think you can justify getting a CPA that is an expert in trusts involved in this. I wouldn't trust something that appears this complicated to comments from this or any forum. You have a double whamy. You will need to straighten out the trust tax return and your own.

Plus 1. Agree. Can be complicated. And difficult to explain on forum.

Normally, when a spouse passes, there is a "step up in basis".
And when the 2nd spouse passes, there is a "2nd step up in basis."

However, depending how the Original Trust was set up. Was there a A/B
provision, setting up Irrevocable Trust and Revocable Trust, at passing of
first spouse. Assets in Irrevocable Trust not entitled to 2nd step up in
basis.

Again, agree with poster, hire competent CPA.

[Gill]

I'm afraid your CPA is wrong. If these shares were in your mother's revocable trust they will take on a new basis which is known as the "mean market" of the value of the stock on her date of death, 11/10/14. Any sale after that date will result in long term capital gain or loss based on that value.
Bruce

[wolf]

Quote:

Originally Posted by MBMiner I'm afraid your CPA is wrong. If these shares were in your mother's revocable trust they will take on a new basis which is known as the "mean market" of the value of the stock on her date of death, 11/10/14. Any sale after that date will result in long term capital gain or loss based on that value. Bruce

Which is why, you need to hire, competent CPA.

[Brat]

What MBMiner said.


A revocable trust becomes an irrevocable trust at the death of the grantor. At that date the assets are 'stepped up'. I don't think the assets are again stepped up (or down) when the irrevocable trust assets are distributed.

[GrayHare]

Quote:

Originally Posted by MBMiner I'm afraid your CPA is wrong. If these shares were in your mother's revocable trust they will take on a new basis which is known as the "mean market" of the value of the stock on her date of death, 11/10/14. Any sale after that date will result in long term capital gain or loss based on that value. Bruce

This sounds like the correct way.

[Gill]

Quote:

Originally Posted by GrayHare This sounds like the correct way.

It is the correct way. The OP's CPA is thinking of a situation where an asset is distributed to satisfy a pecuniary bequest. Say, for example, the decedent leaves person A $10,000. The executor has Stock ABC which now has a basis of $9,000 based on date of death values but it's now worth $10,000. The executor distributes Stock ABC to A to satisfy the $10,000 bequest. The estate or trust will have a gain of $1,000 taxable to the estate or trust and A will have a basis in the stock of $10,000. That was not the example in the OP.

As full disclosure, I dealth with these matters my entire career with major trust institutions and am very fmailiar with the tax consequences.
Bruce

[Gill]

Quote:

Originally Posted by Brat What MBMiner said. A revocable trust becomes an irrevocable trust at the death of the grantor. At that date the assets are 'stepped up'. I don't think the assets are again stepped up (or down) when the irrevocable trust assets are distributed.

They aren't unless the distribution is to satisfy a pecuniary bequest as I outlined above.
Bruce

[Corporate ORphan]

Thanks all for your help.

Re the pecuniary bequest...
Agree, this distribution does not qualify as a pecuniary request.
Talked with the CPA today that is preparing/filing our estate and trust tax returns for us. He advised us that determining the cost basis is covered in IRS publication 551 is assigned as of the death of the decedent. He said that 551 is used even though it doesn't specifically state that it covers distributions from a trust like these.

We was hoping for references saying something a little more specific to our particular situation. The way that he explained it sounded a little too good to be true. Basically, if the trust
- purchased 1,000 shares of stock in the 70's for $1 per share and
- they remained in the trust until the passing of the trustee in 2014 when they were worth $10 per share.
- on the date of her death (when the trust converted to an irrevocable trust and new trustees are assigned) the cost basis of the shares is stepped up from $1 to $10.
- the shares are distributed in a like kind transfer to one of the new trustees a year later when the stock is worth $12 per share.
- the shares are sold 10 years later when they're worth $15 and the new trustee has a taxable $5,000 capital gain. No taxes are ever paid on the $9,000 appreciation that occurred prior to the decedent's death. (the $12 price at the time of the distribution is irrelevant).

This just seems too good to be true! Somehow, the taxman always seems to figure out how to take his cut.

I always like to get thorough documentation of the rules and methods in situations like this when it seems to be true and/or I get conflicting advice from people I trust and look up to. After all, it's gonna be me answering to the tax man if I'm ever challenged re what we did!

Any references to relevant publications, regulations, forms, instructions, whatever would sure be appreciated.

Thanks again,
CO

[Gill]

Quote:

Originally Posted by Corporate ORphan Thanks all for your help. Re the pecuniary bequest... Agree, this distribution does not qualify as a pecuniary request. Talked with the CPA today that is preparing/filing our estate and trust tax returns for us. He advised us that determining the cost basis is covered in IRS publication 551 is assigned as of the death of the decedent. He said that 551 is used even though it doesn't specifically state that it covers distributions from a trust like these. We was hoping for references saying something a little more specific to our particular situation. The way that he explained it sounded a little too good to be true. Basically, if the trust - purchased 1,000 shares of stock in the 70's for $1 per share and - they remained in the trust until the passing of the trustee in 2014 when they were worth $10 per share. - on the date of her death (when the trust converted to an irrevocable trust and new trustees are assigned) the cost basis of the shares is stepped up from $1 to $10. - the shares are distributed in a like kind transfer to one of the new trustees a year later when the stock is worth $12 per share. - the shares are sold 10 years later when they're worth $15 and the new trustee has a taxable $5,000 capital gain. No taxes are ever paid on the $9,000 appreciation that occurred prior to the decedent's death. (the $12 price at the time of the distribution is irrelevant). This just seems too good to be true! Somehow, the taxman always seems to figure out how to take his cut. I always like to get thorough documentation of the rules and methods in situations like this when it seems to be true and/or I get conflicting advice from people I trust and look up to. After all, it's gonna be me answering to the tax man if I'm ever challenged re what we did! Any references to relevant publications, regulations, forms, instructions, whatever would sure be appreciated. Thanks again, CO

Your CPA is correct. I realize this is not a pecuniary bequest. I was just using that to show the situation where an in kind distribution changes the basis.

The only additional point I'd make is that the death of the trustee has no bearing on this. It is the death of the grantor/beneficiary of the revocable trust that caused the trust to be included in her estate and therefore received the new basis. She may also have been the trustee, of course.

This is so basic that it is known to anyone working in the field of trusts and estates. I'm too lazy to search out citations for you, but suffice to say, I'm also a CPA as well as an attorney and career trust executive and worked with this my entire career. You can go to the bank on it.
Bruce

[Helen]

Corporate Orphan, I am very sorry for the loss of your mother. Take good care of yourself.

[Taxman59]

As a CPA who practices with trusts and estates, this is correct. The step up in the tax basis at death is one of the things Obama is proposing to eliminate in his SOTU address.


Sent from my iPad using Early Retirement Forum

[2B]

Quote:

Originally Posted by Taxman59 As a CPA who practices with trusts and estates, this is correct. The step up in the tax basis at death is one of the things Obama is proposing to eliminate in his SOTU address.

As a practical matter, having some stock and mutual funds in my FILs basis being set on the date of his death was a great benefit. I had tried to research what his cost basis was for these assets that had been in his accounts for decades. The mutual funds had dividends reinvested. Records only existed for a few years back with the firms involved. It was a total mess. I had my "best guess" estimates ready for IRS entertainment if we needed to sell these to pay for his care. This was the worst mess I had to deal with concerning his finances.

From a tax standpoint, other than eliminating the problem I had what was the intent when this was put in place. It goes way back as far as I know. I suspect it has its origin somewhere in the FDR era when income taxes started seriously hitting the (mythical) middle class. It would avoid paying income taxes on inheritances like the family farm but would subject the entire current value of the farm to estate taxes. FDR liked estate taxes too so was their method to the taxing "madness." If there is no step up in basis would that reduce the estate tax to the purchased value? I don't recall POTUS mentioning this in the SOTU. I know "fairness" is a vague label but it doesn't seem fair to have to pay inheritance tax of the value of an appreciated asset when doing so requires selling the asset which triggers an income tax event.

[JoeWras]

I'm dealing with the step up basis issue right now in a trust. Very helpful for the beneficiaries.

On this topic, I saw last night about this family that found 100 year old baseball cards in grandpa's attic. So far they've grossed over $1.5M, and expect to go over $3M.

It got me thinking... These must also be stepped up in basis too. I'm not 100% sure how the executors will determine market value since they are almost creating the market, since the cards are so rare.

[Gill]

Quote:

Originally Posted by JoeWras I'm dealing with the step up basis issue right now in a trust. Very helpful for the beneficiaries. On this topic, I saw last night about this family that found 100 year old baseball cards in grandpa's attic. So far they've grossed over $1.5M, and expect to go over $3M. It got me thinking... These must also be stepped up in basis too. I'm not 100% sure how the executors will determine market value since they are almost creating the market, since the cards are so rare.

There definitely should be an apparaisal made of the collection. I once administered an estate with a huge coin collection. It took over two weeks just to list all the coins and then several months for it to be appraised. Each coin had its individual appraised value and that became the basis when most of the coins were later auctioned. You need to do the same with the baseball cards.
Bruce

[JoeWras]

Quote:

Originally Posted by MBMiner There definitely should be an apparaisal made of the collection. I once administered an estate with a huge coin collection. It took over two weeks just to list all the coins and then several months for it to be appraised. Each coin had its individual appraised value and that became the basis when most of the coins were later auctioned. You need to do the same with the baseball cards. Bruce

Right. Appraisals, etc. Actually, the TV program had interviews with the appraiser, come to think of it. And appraisal is from the day of death, so this should be do-able.

The reason the case is interesting is they found a bunch of very rare Honus Wagner cards. There were only a few (less than 5?) in existence. The price was well known, so there's your appraisal. However, now they are "flooding the market" with 20 or so more, which may drop the price. I guess it doesn't matter since the basis is determined before they sell.

Footnote: they are very carefully and deliberately selling these so as not to drop the price too much.