This is a long shot but wondered if someone may have had experience. My brother is executor/trustee of a trust for someone who passed away in November. The trust holds some cash and some stocks & bonds. Some beneficiaries want to inherit stocks & bonds and some just want cash. Even though the assets have not been distributed, do the stocks in the trust all have a stepped up basis set on the date of death? For distribution of the trust assets, what date should be used for the value of the stocks? Some of them (PG&E) have tanked in value or fluctuate, so using the value on the date of death wouldn’t make sense. Anyone dealt with this?
Stepped up will be on the date of death, I would think. Not sure how that applies to real estate. For distribution, you could pick a future date to set the value. That’s what I do when I transfer my shares to someone else.
Picking a future date makes sense, so on that date things will be divided evenly depending on the value of assets on close of trade for the date specified. Real estate is also involved, but that value was determined based on the date of death. The appraiser was given a specific date to calculate the value on that date.
It does depend on the type of trust, but if it was a living trust, the stepped up basis in the date of death. It doesn’t matter if the executor liquidates immediately, distributes them as shares etc. The inherited fair market value is determined on the date of death.
I should add that my info above is in determining the new tax basis of the assets. You cannot use a future date for the IRS.
It depends on the specifics of the trust whether there’s a date of death adjustment to basis.
Theoretically, it shouldn’t matter what date you use, because there’s no date involved. You divide everything up into interests, then cash out some interests and distribute the others in kind. So if there are three equal benes, and the trust owned 90 shares of Stock A and $300 in cash, each share would get 30 shares of stock and $100.
I think that giving some a distribution in cash and some a distribution in kind is likely to end up with an ugly DNI problem, though, unless the separate share rule applies (which it may). If you can distribute entirely in kind, then immediately sell whatever was distributed to the ones who want cash, that’s going to be a lot cleaner. With the covered basis stock rules, the tax reporting to the ones who want cash is not likely to be much worse than a K-1 would be.
The answer varies so much by the language in the trust that one cannot speculate well enough to be really helpful re the stepped up basis triggers (if you even get them or not). Urge your brother STRONGLY to consult a tax attorney (not a CPA, but someone versed in tax law/trust law).
Also strongly urge your brother not to let the beneficiaries dictate how they receive the proceeds. That is asking for trouble… and includes the “family has no problems” because it is OK with the sibling or cousin or whomever…yet their spouse starts feeling like someone got more. So my advice is every body gets EXACTLY the same thing at the same time.
Since my Mom’s trust was taking time to wrap up, we considered giving out some in property and some in other stuff but it never ever balanced.
There are 2 valuations that are kind of getting conflated in the discussion.
- Assuming this was a trust created by the will, or was a revocable living trust owned by the deceased, then the value on the date of death is the value to be used when the asset is sold to determine whether there is a gain or loss. So whether the trustee liquidates the assets or distributes them in kind and the beneficiaries eventually sell them, the cost basis is the value on the date of death. (for some kinds of trusts there may be other ways the cost basis is determined, so it depends on the details of the trust.)
- The value on the date things are split up for the beneficiaries is the one to use to make sure everyone gets an equal value, or whatever the trust calls for.
But I would recommend liquidating everything, especially any stocks, as soon as possible so the trustee/executor doesn’t get blamed for things like the PG&E stock tanking. Maybe you miss out on some gains, but that’s better than realizing some big losses.
And people can prefer whatever they want, but the trustee gets to decide what to do. The beneficiaries can then buy whatever stocks or bonds or land or whatever else they want with the cash.
Great replies, thank you so much. The trust is a living trust with 3 equal beneficiaries and my brother was a co-trustee, now trustee. He is working with both an estate attorney and a tax specialist but questions keep surfacing.
I guess this is what I was wondering, and makes the selection of a specific future date of distribution appealing. The real estate complicates things if property values decline significantly before the assets are distributed. That value is set as of the date of death, so the person keeping the real estate (me) will be ‘buying out’ the interest of the other two beneficiaries at a premium to the value of the asset on distribution day. I’m not losing sleep over it, but it is very easy to see why people end up estranged over inheritance details.
We were told that for my SisIL’s estate, everything was basis as of date of death. It included real estate and stocks. All appraisals were as of date of death, regardless of when they were performed or distributed. Same with stocks and other investments. Interest accrued on life insurance until distribution. The proceeds were distributed with each beneficiary getting his share of the interest until date of distribution.
My understanding is that stepped up basis is generally are as of date of death.
Also, unrealized gain or loss can affect the value of something. I.e. a share of stock worth $50 but was worth $80 on the date of death can be more valuable than $50 cash, since immediately selling it would generate a $30 capital loss to reduce income taxes. But if the stock was worth $30 on the date of death, it can be less valuable, due to the capital gain coming with a higher tax liability. Trying to equalize these issues seems like an accounting nightmare with a moving target, unless cash and shares are each divided equally (e.g. “everyone gets $X/n cash and Y/n shares of this stock” like the example in reply #4), or all shares are converted to cash before distribution.
If I were trustee, I’d want a release of liability from all the benes before I’d agree to a “you get this asset, I get this one” kind of split. If the trust says you get a third, you get a third of every asset, not a third of the value of some date.
Being sole trustee and not the sole beneficiary is a thankless task fraught with liability.
Agree—if the assets aren’t to be divvied upbexactlt equally for each asset, there has to be an agreement on the value of the assets in question. For example if there is property a, property b and stocks xyz, easiest is to give each of the beneficiaries equal shares of a, b and xyz.
If the beneficiaries want brother to get b and sister to get a and an adjustment of xyz, that can work as long as there is a consensus on the valuations of everything.
As a practical matter, owning real estate with another party can be challenging, especially if the parties disagree on holding the asset vs remodeling and/or selling, and/or one lives rent free or at a reduced rate in the property.
Yes, we have co-owned real estate with others and are contemplating selling and moving on separate properties to each instead of a single jointly held property.
The estate assets are values at date of death. That’s the final estate tax return. Depending on estate value, taxes may or may not be owed. Beneficiaries then take the assets at the stepped up basis. Upon sale they’ll have a gain (or loss) that they will pay (or offset) taxes on.
As for distribution, part of the deal will be a release of liability.
For estate tax valuation, you can value real estate at the date of death or six months later.
I suppose if I was trying to be fair, for buyout purposes, I would value the asset with a professional appraisal at the date of transfer, yes, you get a basis of the date of death, but by the time the estate/trust is ready to sell the asset, the values are different. If you sold them all, you would split the value on that date of sale, not the value on the date of death.
You only get the alternate valuation date for estate tax purposes if you both have a taxable estate and the alternate valuation date value is lower. It has nothing to do with real estate; the assets in the estate aren’t relevant.