DF, DeeJay-- Cost basis for stocks under a Revocable Trust

[smitcompton]

Hi,
MY assets are in a revocable trust. My stock account has big gains and I think I learned that upon my death the original cost basis is used when the stocks are sold by the trust. If the account was held in just my name, with my son as beneficiary, the cost basis would be as of the date I died. This makes a big difference in capital gain taxes. I want to change the owner of the account to myself as an individual to avoid those taxes. Can anyone verify this is correct before I change it.

Yes, I have spent time on the phone and looking for the answers on IRS.Gov, with no help. I thought maybe DF would have the answer. or DeeJay. Or anyone else. I do appreciate it.

Annette

 

[Dee*Jay]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

Annette, I'm out with a client but I will look at your question more carefully and reply when I get home this afternoon. (Although you may have the answer by then!)

 

[Dee*Jay]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

OK, have a few minutes to give you some info. Note that my comments below only apply in a scenario where one person is inheriting from another person (so no trust consideration here).

The value of the stock on the date of death is the new basis to the person who inherits it. That price could be more or less than what was actually paid for the stock originally.

BTW, that basis is now considered long term for gains purposes regardless of how long the decedent held the stock and/or how long the recipient holds it.

If the decedent passes on a weekend or stock market holiday I think technically the basis is the average closing price between the close date prior and the close date after death, but honestly I doubt the IRS would be a stickler about about that if one or the other date were picked, and the most commonly chosen date is the day prior to death because arguably that was the value of the stock at the time the decedent passed.

Note that there are circumstances under which an estate can choose an alternative valuation date up to six months beyond the date of death, but that is a more complex conversation and I hesitate to go into it in depth here. I will say that if an alternate valuation date is chosen the entire estate has to be valued in that way, not just a portion (e.g., stocks or a particular stock) so that is a more complex consideration if there are other things to account for (real estate and other non-financial assets for example).

I am also not addressing any state-specific considerations here either, so please be conscious of that. Also, there may be consequences to the changing of ownership of the stocks from the trust as the legal entity that owns the assets to an individual owner (which is what I understand you to be considering doing here). That is definitely worth a call to an accountant who has all of the details around this (as opposed to me with very limited information so I am speaking in generalities).

Is any of this helpful? And please understand I'm definitely not trying to be evasive by qualifying my answers around some points but I have to say that any advice specific to your situation must be given by a qualified professional knowledgeable about your specific situation. Once a compliance officer, always a compliance officer!

If you have other questions let me know and I will do my best to assist. And you said you've looked around, including at IRS guidance, but if you haven't seen IRS Form 706 (and the instructions that go with it, which are frankly the useful part of that guidance) I just want to point you in that direction. https://www.irs.gov/uac/form-706-united-states-estate-and-generation-skipping-transfer-tax-return..

I'll be in showings for the next 4-5 hours so if you reply and don't get a response from me don't think I've gone MIA!

 

[Dancing Fire]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

Our's is under a revocable trust too but I have no ideas about the tax rules...

 

[diamondseeker2006]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

"The value of the stock on the date of death is the new basis to the person who inherits it."

Oh, wow, this is extremely awesome!

 

[Efe]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

"The value of the stock on the date of death is the new basis to the person who inherits it."

The stock basis value for a revocable trust is the same as if it were an individual -- date of death.

 

[smitcompton]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

Hi All,

Thank you so much for your answers. Thank you Deejay for your explanation and Effe for the other side, which I'm happy for, as I won't have to change the ownership of the stock account. My attorney did set it up this way, but somehow I got it into my head, that my son, who will be the new trustee after my death would end up paying more tax on the gain. I don't want him to be mad at me, after death.

Several years ago. I had a tax question that someone answered for me on here, they saved me lots.

So thank you again.

Now to answer a recent question that someone asked, maybe Pierrebear?, What is the best investment vehicle to use. Warren Buffet, just this past week said he told his wife when he died she should put 90% of his estate in Index funds, Since Buffet is considered the best investor of our time, I would heed his advise. So, index fuds it is.

Annette

 

[Elizabeth35]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

Specifically--Warren Buffet's trust for his wife (from what I have read) is to be in S&P 500 Index funds.
As opposed to NASDAQ or Dow Jones. S&P is considered the better overall indices, as DJIA is only 30 stocks.

 

[Dee*Jay]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

Annette, I'm glad you are getting the info you need! And I didn't do a good job of stating in my post that I was only addressing the scenario of one person inheriting from another as I was under the impression that was the direction you had already decided to go in so I'm glad effe chimed in regarding the trust.

About what to invest in... that decision can be impacted by your investment objectives (growth vs. preservation of capital for instance), risk tolerance (are you OK with market fluctuations or do you prefer more "stability"), time horizon (are you closer to 32 or 92), and a slew of other things so it's difficult to say what YOU should be putting your money into. *In general* I also favor low fee S&P 500 Index funds, but I can't say with certainty that is the best investment alternative for you without knowing your full circumstances. However, Warren Buffet didn't get rich doing stupid things so... !

 

[LLJsmom]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

Being held in your revocable trust does not change the basis of your stock. It is as deejay said valued on the date of death or on an alternative 6 month after date. That would be chosen by the trustee or executor of your estate.

If your trust is not a revocable trust, that could change the answer. You would need to specify exactly the type of trust I which the assets are held. Revocable trusts just keep your assets from being put through the probate process after you die.

 

[ringo865]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

I would think that YOU would have to pay the capital gains taxes on the original cost basis if you transferred ownership from the trust to yourself. THEN at the time of your death, your beneficiary would pay the cap gains tax with the cost basis at the date of transfer. So. Someone pays it. Whether you or your son. However you can set up a trust to make payments incrementally, such as one-third at the time of your death, one third five years later, and the final distribution five years after that. Doesn't avoid taxes, but would prevent a giant tax bill should he make liquidation of the entire trust at once. <also not a trust expert, merely a successor trustee>

 

[liaerfbv]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

OK, have a few minutes to give you some info. Note that my comments below only apply in a scenario where one person is inheriting from another person (so no trust consideration here).

The value of the stock on the date of death is the new basis to the person who inherits it. That price could be more or less than what was actually paid for the stock originally.

BTW, that basis is now considered long term for gains purposes regardless of how long the decedent held the stock and/or how long the recipient holds it.

If the decedent passes on a weekend or stock market holiday I think technically the basis is the average closing price between the close date prior and the close date after death, but honestly I doubt the IRS would be a stickler about about that if one or the other date were picked, and the most commonly chosen date is the day prior to death because arguably that was the value of the stock at the time the decedent passed.

Note that there are circumstances under which an estate can choose an alternative valuation date up to six months beyond the date of death, but that is a more complex conversation and I hesitate to go into it in depth here. I will say that if an alternate valuation date is chosen the entire estate has to be valued in that way, not just a portion (e.g., stocks or a particular stock) so that is a more complex consideration if there are other things to account for (real estate and other non-financial assets for example).

I am also not addressing any state-specific considerations here either, so please be conscious of that. Also, there may be consequences to the changing of ownership of the stocks from the trust as the legal entity that owns the assets to an individual owner (which is what I understand you to be considering doing here). That is definitely worth a call to an accountant who has all of the details around this (as opposed to me with very limited information so I am speaking in generalities).

Is any of this helpful? And please understand I'm definitely not trying to be evasive by qualifying my answers around some points but I have to say that any advice specific to your situation must be given by a qualified professional knowledgeable about your specific situation. Once a compliance officer, always a compliance officer!

If you have other questions let me know and I will do my best to assist. And you said you've looked around, including at IRS guidance, but if you haven't seen IRS Form 706 (and the instructions that go with it, which are frankly the useful part of that guidance) I just want to point you in that direction. https://www.irs.gov/uac/form-706-united-states-estate-and-generation-skipping-transfer-tax-return...

I'll be in showings for the next 4-5 hours so if you reply and don't get a response from me don't think I've gone MIA!

To clarify on the bold, if a decedent dies on a weekend, the new basis is the average of the average of the high and low trading prices on Friday and average of the high and low market prices on Monday. In my experience, the IRS is actually particular about this issue (at least on the estate tax return audits I've been involved with). Most financial institutions run these calculations for you.

 

[Dee*Jay]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

Please see the language in bold below.

That beings said, I 100% advocate that Annette receive qualified advice from a professional familiar with HER situation (as I have said before in this thread).



CostBasis.com

Trust Distributions
Stocks which you receive as a
distribution from a trust present
a special case for the determination
of cost basis. The correct cost basis
depends on what kind of trust it was.

If the shares are coming to you as a
distribution from a trust, ask the
trustee to provide you with a letter
stating your cost basis and holding
period date.

Some trusts do not take on a new basis at the date of the most recent death. The trustee or estate attorney should know what kind of trust it is and whether a "step-up" to market value at the date of death (or six months later) is applicable to the trust that is making the distribution.

Bypass Trusts
A "bypass trust" is one that literally passes by the estate tax return at the time of the second death of a married couple. In the typical bypass trust, when the dad dies (no gender offense intended -- it's just the mortality tables being applied), the dad's estate tax exemption is set aside in a separate "bypass" trust from which the wife can draw income and principal as needed during her lifetime. At her death, the remaining principal is inherited by the children or other beneficiaries free of any levy of estate tax at her death. Stock which was owned at the time of dad's death was stepped up to market value at the time of his death, but stock which was acquired within the trust after his death has a cost basis of the purchase price. There is no further stepup at the time of mom's death.

Credit Shelter Trusts
A credit shelter trust is another name for a bypass trust.

Generation Skipping Trusts (GST)
In the typical situation, a generation-skipping trust (from one of your grandparents) would normally not receive a stepup at the time the assets are distributed to you. The cost basis of the assets in the hands of the GST trust carries over to you, the recipient.

Grantor Deemed Owned Trusts (GDOT)
If your dad (or mom) established a "grantor deemed owned trust," any transfer of stock between your dad (the creator) and the GDOT trust has no effect on the cost basis. There is no stepup at the time of dad's death because it is not included in the grantor's estate for estate tax purposes. Whatever the cost was inside the GDOT is the cost that will be passed to you as beneficiary if you receive a distribution from the GDOT after your dad has passed away.

Intentionally Defective Grantor Trust (IDGT)
Intentionally Defective Grantor Trust is another name for a GDOT trust.

Marital Trust
A Marital Trust is often used for the assets in your dad's estate which exceed the unitary estate tax exemption, i.e. the amount which funded the bypass trust. The marital trust is created to hold the rest of the assets to support mom during her lifetime. There is no estate tax levied at dad's death because the marital exemption is used. At the time of mom's death, all the assets in the marital trust are included in her estate tax return and a stepup to market value at the date of her death (or six months later) is applied. Note that it could also be a stepdown to market value if she happens to pass away during a stock market decline. All the assets you inherit from the marital trust are eligible for long-term capital gain treatment, no matter when the stocks were purchased.

Qualified Terminable Interest Property (QTIP) Trusts
A QTIP trust is generally one in which the surviving spouse has a right to all the income for rest of his or her life. It offers additional creditor protection. The cost basis method is the same as with marital trusts.

Residuary Trusts
This term usually refers to the marital trust which is the remainder (residual) amount after the credit shelter/bypass trust is funded with the maximum unitary estate and gift tax exemption available.

Revocable Living Trusts
If you have created a revocable living trust, any transfer of stock between you and the revocable living trust has no effect on the cost basis. Whatever the cost basis was when it was registered in the individual name of the grantor (creator) of the trust will remain the cost basis when it is transferred to or back from the revocable living trust. The assets of the revocable living trust will normally then pass to the bypass trust and the marital trust at the death of the grantor and receive a stepup or stepdown in cost basis at that time.

Survivor Trusts
This term refers to the surviving spouse's 50% share of a joint revocable living trust. Cost basis method is generally the same rules as joint tenancy.

Next Step
Once you determine the initial cost per share and acquisition date of the stock you received, you then must look at corporate actions (spinoffs), reorganizations, and return of principal payments since the date you received the trust distribution shares.

 

[Dee*Jay]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

OK, have a few minutes to give you some info. Note that my comments below only apply in a scenario where one person is inheriting from another person (so no trust consideration here).

The value of the stock on the date of death is the new basis to the person who inherits it. That price could be more or less than what was actually paid for the stock originally.

BTW, that basis is now considered long term for gains purposes regardless of how long the decedent held the stock and/or how long the recipient holds it.

If the decedent passes on a weekend or stock market holiday I think technically the basis is the average closing price between the close date prior and the close date after death, but honestly I doubt the IRS would be a stickler about about that if one or the other date were picked, and the most commonly chosen date is the day prior to death because arguably that was the value of the stock at the time the decedent passed.

Note that there are circumstances under which an estate can choose an alternative valuation date up to six months beyond the date of death, but that is a more complex conversation and I hesitate to go into it in depth here. I will say that if an alternate valuation date is chosen the entire estate has to be valued in that way, not just a portion (e.g., stocks or a particular stock) so that is a more complex consideration if there are other things to account for (real estate and other non-financial assets for example).

I am also not addressing any state-specific considerations here either, so please be conscious of that. Also, there may be consequences to the changing of ownership of the stocks from the trust as the legal entity that owns the assets to an individual owner (which is what I understand you to be considering doing here). That is definitely worth a call to an accountant who has all of the details around this (as opposed to me with very limited information so I am speaking in generalities).

Is any of this helpful? And please understand I'm definitely not trying to be evasive by qualifying my answers around some points but I have to say that any advice specific to your situation must be given by a qualified professional knowledgeable about your specific situation. Once a compliance officer, always a compliance officer!

If you have other questions let me know and I will do my best to assist. And you said you've looked around, including at IRS guidance, but if you haven't seen IRS Form 706 (and the instructions that go with it, which are frankly the useful part of that guidance) I just want to point you in that direction. https://www.irs.gov/uac/form-706-united-states-estate-and-generation-skipping-transfer-tax-return....

I'll be in showings for the next 4-5 hours so if you reply and don't get a response from me don't think I've gone MIA!

To clarify on the bold, if a decedent dies on a weekend, the new basis is the average of the average of the high and low trading prices on Friday and average of the high and low market prices on Monday. In my experience, the IRS is actually particular about this issue (at least on the estate tax return audits I've been involved with). Most financial institutions run these calculations for you.

That's interesting -- thank you for the information! In the instances where I have been involved the financial institution has typically used the closing price of the day prior so I appreciate this perspective. (Having worked at several financial institutions over the years it makes me wonder how much stuff is being done "wrong"! )

 

[liaerfbv]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

That's interesting -- thank you for the information! In the instances where I have been involved the financial institution has typically used the closing price of the day prior so I appreciate this perspective. (Having worked at several financial institutions over the years it makes me wonder how much stuff is being done "wrong"! )

You are right! We always have to explain to brokerage firms that no, we can't use the closing price for Friday, and yes, their software allows them to run these numbers.

 

[smitcompton]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

Hi All,

You are super women. Thanks so much. Yes, I do understand what you are saying. I'm good just leaving it the way it is.

I hope others have gotten some good info.

Annette

 

[liaerfbv]

Re: DF, DeeJay-- Cost basis for stocks under a Revocable Tru

"The value of the stock on the date of death is the new basis to the person who inherits it."

Oh, wow, this is extremely awesome!

Also, this can be a step up in basis (awesome), or a step down in basis (less awesome in some cases). Though this all may change in the next year or so depending on any overhauls of the tax code.