Gain on sale of house when spouse dies

[Cat-tirement]

I think this depends on the wording of the trust. Mine specifically says that trust property held in both names (A and B, as trustees of the C Trust) is community property. The surviving spouse would get 100% step-up in basis.

Ours has no such language, but essentially says that upon the first death the trust estate remains in trust and unaffected by that death. (And we're not in a community property state.)

The house remains owned by the trust, but the surviving spouse should still have it valued to step up the tax basis. Any appreciated trust assets such as taxable brokerage accounts and collectibles should be valued to adjust the basis.

That is my understanding as well... for tax purposes it is as if the beneficiaries of the trust owned the assets directly even though legal title is in the name of the trust.

It's also been my understanding that stuff (a legal term ) held in a trust is viewed as if owned directly. But if the trust is unaffected by the first death, isn't that conflicting with stepping up the basis?

 

[pb4uski]

.... It's also been my understanding that stuff (a legal term ) held in a trust is viewed as if owned directly. But if the trust is unaffected by the first death, isn't that conflicting with stepping up the basis?

No, I don't think so... for example, while he was living my Dad was the beneficiary of his trust... upon his death my Mom became the beneficiary... upon her death us kids become the beneficiaries.... there is a step-up in the basis of assets owned by the trust in each event... when Dad died and when Mom dies.... just like there would be for an asset that Dad owned and that Mom inherited upon his death and then we inherit upon her death. YMMV.

 

[Done]

IMHO, having the Qualifed Appraisal done by a Qualified Appraiser seems to be more of a Safe-Harbor than a requirement.

Thanks for pointing this out. So if one wants to save the appraisal fee on an inherited property and use a comparable FMV analysis, the IRS may accept the cost basis provided. If they question it, would IRS perform their own appraisal to determine if there was an underpayment, or would it be up to the taxpayer to then get a qualified appraisal?

Large estates are required to file a Form 8971 documenting the cost basis, and beneficiaries must use this value.

 

[Cat-tirement]

No, I don't think so... for example, while he was living my Dad was the beneficiary of his trust... upon his death my Mom became the beneficiary... upon her death us kids become the beneficiaries.... there is a step-up in the basis of assets owned by the trust in each event... when Dad died and when Mom dies.... just like there would be for an asset that Dad owned and that Mom inherited upon his death and then we inherit upon her death. YMMV.

Thanks, your description makes sense. I had not really thought of us as beneficiaries of our own trust. Our primary goals were to avoid probate and exert more control over how things are paid out after we're gone.

Were you involved in documenting the step-up for your parents that required anything beyond looking at bank/brokerage statements, like property? If so, how did you do it?

 

[Done]

Were you involved in documenting the step-up for your parents that required anything beyond looking at bank/brokerage statements, like property? If so, how did you do it?

For brokerages, ask them to prepare a letter documenting the date-of-death value. Some have a form for this which also adjusts the recorded cost basis.