Tricky Trust Questions

[camfused]

My Mom and Dad had a Trust that was set up in the early 90s, that was complex, and written to help avoid taxes, back in the day. The Trust has an account of stocks at a brokerage.

My Mom passed away in February, so we visited an estate attorney. He said the Trust was really old, with confusing wording, and the easiest thing to do was to have my Dad resign from the Trust, leaving my sister and I as the trustees. We considered the money his, and we both just left it alone.

My Dad passed away in October. We are about to dissolve the assets in the Trust.

1) So is the money from the Trust considered inheritance, or did my sister and I become owners when my Dad resigned? At the time we did not know/care, but we do now.

2) The brokerage agent says they will be calculating the basis cost from the day my sister and I became the sole trustees. I was thinking it would be from the day of hist death (but I guess answer #1 is a factor). Is the brokerage agent correct?

Thanks. I am hoping someone else has gone through something like this before.

 

[Ginny]

The brokerage is incorrect, the IRS rules state that the death is the time when the step up occurs. There was no change in ownership when the the new trustees stepped into their role. They are only the managers. Get yourself a good tax lawyer and CPA.

 

[bingybear]

So you became trustees when your dad resigned being trustee. I assume you both were defined in the trust as successor trustee?

you question now that dad has passed, is the trust money inheritance? Depends. What does the trust state should be done with the assets. It is hard to know without knowing what the trust states.

 

[camfused]

Thank you Ginny. Yes, I will be shopping for a tax attorney and CPA.

bingybear, yes, we were both defined as successor trustees. It says that after both parents are gone, and after paying the estate closing and funeral expenses, all remaining assets shall be distributed 50/50 with my sister and I.

It also says that if there was one remaining of the two of them, the other could resign, and the successors (my sister and I) would be successor trustees. This is exactly what happened.

All this is why I think we did not own the money, or inherit it yet, until it is distributed to us. And, like Ginny says, that means the step up and cost basis would occur on the day of his death. But, I am not a lawyer, and need smarter people that me (like y'all) to help.

Now having said all that, the Trust also states that after the first person dies, the Trust should be split into an A trust and a B trust. This was never done.

 

[Texas Proud]

Being trustee has nothing to do with who owns the assets...


You need to look at the beneficiary section... it seems your mom and dad were beneficiaries when they were alive... who not steps into that beneficiary slot?


One of the problems that I see is that you said they set up the trust to avoid taxes... I am assuming that you mean estate taxes... if that is true, then I do not believe that the assets would be included in your dad's estate and as such would not get a step up in basis... if this is the case then the assets keep the original basis when the trust was set up or when the trust bought the asset... cap gain would have to be paid...


I think you need a good tax attorney to read what kind of trust you have and either give you good news (step up to date of dad's death) or the bad (no step up at any time)....


BTW, I am not an attorney but did estate taxes when I was very young... saw one where there was not a step up... but it still save lots of money as they were way higher than the taxable estate exemption...

 

[steelyman]

I’m also not an attorney but went through a similar situation a few years back.

One thing that was important was to determine how the assets in question were titled. In this case, there were two trusts, one for each spouse. Assets not titled in the trusts became part of the “probate estate”, governed by the will. In that particular situation, the wills and trusts were identical except for the name of the owner and were “pour over” wills, meaning that assets not explicitly titled under the trusts “poured over” into the trust on death.

[ADDED] One discussion that came up as relating to stocks was the option of transferring assets to beneficiaries “in kind” and what the tax treatment (basis) would be in that case.

I agree that it would be worth it to work with an attorney and CPA to make sure things are done properly. I believe things can vary under laws of different states.

 

[OldShooter]

... I will be shopping for a tax attorney and CPA. ...

This is the real answer; SGOTI is not to be relied on for tax advice.

That said, I agree that your roles as trustees is completely separate from your roles as beneficiaries. Until the assets are distributed, they are owned by the trust not by whatever beneficiaries there may be.

 

[camfused]

Ok, I emailed the estate attorney, and he said I was right. My sister and I are just the Trustees and the Trust owns the assets in it. Cost Basis is determined at date of death of my Dad. I showed the email to the brokerage and they said ok, they will recalculate the cost basis.

Problem solved. Thanks all.

 

[SecondCor521]

cap gain would have to be paid...

Capital gains tax would only be due if the assets were sold. It is probably possible for the beneficiaries of the trust (probably the OP and the sister but they have to check the trust document to be sure) to inherit the assets via in kind distributions.

Estate taxes would be due, of course, if the Dad's estate exceeds the limit (about $5M at the moment IIRC).

 

[bingybear]

Ok, I emailed the estate attorney, and he said I was right. My sister and I are just the Trustees and the Trust owns the assets in it. Cost Basis is determined at date of death of my Dad. I showed the email to the brokerage and they said ok, they will recalculate the cost basis.

Problem solved. Thanks all.

One problem solved. So now what do you have to do as trustee? If earnings in the trust are not distributed, then they are taxed at trust rates which are typically higher than individual rates.

As trustee you are responsible running the trust as a fiduciary. Sounds like your fun is just getting started.

 

[wolf]

Ok, I emailed the estate attorney, and he said I was right. My sister and I are just the Trustees and the Trust owns the assets in it. Cost Basis is determined at date of death of my Dad. I showed the email to the brokerage and they said ok, they will recalculate the cost basis.

Problem solved. Thanks all.

Curious. Trust had A/B provision, but never acted on. Was this an "option", written in the original trust. Or just ignored.

Normally, with A/B. At death of one spouse. 1/2 of assets put into "irrevocable trust" (step up basis). The other 1/2 of assets remain in original trust. (step up in basis.).

AT the death of remaining spouse. Original Trust gets step up in basis.

However, the assets in the "irrevocable trust", do NOT get a 2nd step up in basis. (my understanding, in California).

Any lawyers out there? Can one ignore Trust instructions for setting up A/B?

If one were suppose to follow A/B instructions, and did Not. Then took a step up in basis of "all" assets at passing of remaining spouse, would the IRS even know ?

 

[Texas Proud]

Capital gains tax would only be due if the assets were sold. It is probably possible for the beneficiaries of the trust (probably the OP and the sister but they have to check the trust document to be sure) to inherit the assets via in kind distributions.

Estate taxes would be due, of course, if the Dad's estate exceeds the limit (about $5M at the moment IIRC).

I never said when... just that if the trust was not set up where you get a step up in basis then cap gain would have to be paid... your are correct, it would only be due when a sale occurred....


But, OP got confirm that the trust does qualify for step up so it is now not an issue...

 

[KB]

However, the assets in the "irrevocable trust", do NOT get a 2nd step up in basis. (my understanding, in California).

Any lawyers out there? Can one ignore Trust instructions for setting up A/B?

If one were suppose to follow A/B instructions, and did Not. Then took a step up in basis of "all" assets at passing of remaining spouse, would the IRS even know ?

I am not an attorney but I just completed executing the A/B trust my parents set up. I had to send a copy of the trust to each asset I requested a step up basis on. The irrevocable trust had been stepped up when my mother died in 2014 and was titled in her name.

When my father died in 2018, his assets were the ones I requested a step up and the trust supported that. I also had to send a death certificate with the copy of the trust.

If you deal with companies like I did (Merrill Lynch, Vanguard and selling an apartment) they would not allow me to do something outside of the trust.

Even retitling the apartment and requesting some of the capital gains be waived (parent/child transfer exclusion in CA) required a copy the trust to be submitted also.

 

[bingybear]

Curious. Trust had A/B provision, but never acted on. Was this an "option", written in the original trust. Or just ignored.

Normally, with A/B. At death of one spouse. 1/2 of assets put into "irrevocable trust" (step up basis). The other 1/2 of assets remain in original trust. (step up in basis.).

AT the death of remaining spouse. Original Trust gets step up in basis.

However, the assets in the "irrevocable trust", do NOT get a 2nd step up in basis. (my understanding, in California).

Any lawyers out there? Can one ignore Trust instructions for setting up A/B?

If one were suppose to follow A/B instructions, and did Not. Then took a step up in basis of "all" assets at passing of remaining spouse, would the IRS even know ?

keep going with this. It may or may not be half the assets. It could be the assets associated with the 1st to die. IRAs may or may not follow into the trust.
Many things could have happened... such as:

The assets never got put in the trust. -- may not be an issue other than trust is unfunded
Or it could mean that assets were not distributed per designations.

Skip the guessing.

You need to know where things are at. Are any of the assets titled in the names of the A or B trust? Or any trust created at the 1st death. Were any of the financial accounts in the name of the trusts?

We can guess on things. You need to pay a professional to size up the situation and help you understand your responsibilities. There are too many unknowns to give you actionable directions.

 

[MarieIG]

Glad to hear that you are retaining an estate tax attorney. I did that when my dad passed. I suggest that you do that before you take any assets out of the trust, other than to pay taxes or expenses owed by the trust (if you know what they are.) I recall we still had to file his personal tax returns for the year he passed, the estate tax returns, income tax returns for the estate, and finally there was a period when his assets (not yet transferred) were on a schedule on my tax return (would not have seen that one coming).

Also, different States have different tax reporting requirements - and there is income tax as well as estate (or trust) taxes to deal with. Your tax attorney will also be aware of the timing of required returns and payments. He/she, may also be able to help you with the timing of the dissolution (unless it is mandated) and disbursements to you and your sister.

Timing is also important. You want to get it right. IRS penalties for missing a deadline can be ugly.

My condolences for your loss; and good luck.

 

[Gill]

Just to clarify one point. If there are A/B trusts and A is the marital trust for the surviving spouse, the assets in A would receive a new basis on the death of the surviving spouse, the assets in B would not. If it was not necessary to fund the A trust and all assets went to the bypass B trust there would be no stepup on any of the assets.

Gill

 

[CaliKid]

It depends on if the AB trust was a "disclaimer" AB trust or a "mandatory" AB trust. If disclaimer then the surviving spouse usually chooses to not fund the AB and thus full step-up at second death. If the AB was mandatory then arguably the IRS could say the AB should have been funded and thus 1/2 (typically) of the assets would get a step only to first death not second. Some people get a court order to amend the trust so as to not require the AB split. In the real world it's hard to imagine the IRS taking a hard stance on an ignored AB funding but I believe they certainly could. Definitely a place for highly experienced tax and legal help. This is not for the general practitioner as it's more in depth than many of them know about.

 

[Gill]

It depends on if the AB trust was a "disclaimer" AB trust or a "mandatory" AB trust. If disclaimer then the surviving spouse usually chooses to not fund the AB and thus full step-up at second death. If the AB was mandatory then arguably the IRS could say the AB should have been funded and thus 1/2 (typically) of the assets would get a step only to first death not second. Some people get a court order to amend the trust so as to not require the AB split. In the real world it's hard to imagine the IRS taking a hard stance on an ignored AB funding but I believe they certainly could. Definitely a place for highly experienced tax and legal help. This is not for the general practitioner as it's more in depth than many of them know about.

You’re referring to an “AB” trust in the singular. If the marital share is disclaimed and thus all assets go to the bypass trust there would be no stepup. I don’t follow your analysis.
Gill

 

[SecondCor521]

To throw another monkey wrench into the works, basis step-up may also depend on if one lives in a community property or not.

Often I think we share what is true in our particular situation and state and don't mention that it may be different based on jurisdiction.

Seek experienced legal and financial advice who are licensed to practice in the applicable jurisdiction(s), I would say.