When is better to sell stocks in trust on death versus transferring in kind to beneficiaries?

[gap2042]

Stock cost basis 10

Current value 50

Stock held in irrevocable trust which needs to be terminated  and sitributions made because of death

Is it better to sell stock in trust and pay taxes or transfer in-kind to beneficiaries and have them pay taxes whenever they sell?

[DJS]

Does the trust receive the stepped up basis? Would the the beneficiaries receive a stepped up basis?

[gap2042]

stepped up cost basis for trust or beneficiary is 10 as stated

[DJS]

Usually for a simple inheritance the basis of the asset is stepped up to the fair market value on the date of death of the decedent. I'm unsure whether this applies to assets in an irrevocable trust, or whether it's treated as a gift at the times it's placed in trust and therefore retains it's basis at that time. If the beneficiary would get the stepped up basis if distributed to them directly, but the trust would not, then it's clearly better that it be distributed to the beneficiary to be sold with the stepped up basis when they choose.

[ScruffyCurmudgeon]

When a trust becomes irrevocable upon the death of the Grantor, if there is Federal or Estate tax  ($5.6 million starting point, 2018) to be applied because of the value of the assets [state levels start as low as $635,000 in 2018) Depending on which state] the Estate Tax is applied to the value of the assets at time of death irrespective of whether in securities or cash.

Capital Gains Tax: the assets are valued at the date of death and not at the cost basis (Value is "STEPPED UP") that the Decedent had purchased the shares at originally. 

For Capital Gains Tax purposes, whether the shares are transferred to the Beneficiaries in kind, or the Estate sells the shares and transfers the proceeds, the issue will be that Capital Gains Tax will not be liable if the shares either are transferred or liquidated if the value at time of transfer is the same or lower than at date of death.  If the value has increased (STEP-UP in BASIS), the Beneficiaries will have a cost basis of the value at date of death, so if the shares are transferred, it is their call on when to sell and whether or not they will be liable to Capital Gains Tax.

  If the Estate sells the shares and thus recognizes Capital Gains, which in cash will be distributed, then the Beneficiaries will find the K-1 Schedule does indeed report to them a Capital Gain on which they will be liable outside of their control.  Thus it may be better to transfer the shares if it can be done equitably.

[ScruffyCurmudgeon]

Not sure why anyone disliked this factual answer to the specific question asked

[fanfare]

not enough white space, maybe ?

[abramsbenjamin]

Yes, there is a step-up in Basis

[Pnaideth]

Yours is the only reply responsive to the question.  good job

[rchead037]

The stepped up basis, as stated in the question, is _50_, not 10 -- that is, the stepped-up basis is the value of the stock or other asset _on the day of death_. As far as I can tell (I am not a lawyer or tax accountant), the stepped-up basis applies both to the trust and the beneficiary for capital gains purposes (assuming no estate taxes, etc., which all make things more complicated). 

That is, it does not seem to matter for the capital gains calculation whether the trust sells the asset and transfers cash, or the asset is transferred: the basis is the value on day of trustor's death. It _may_ matter in terms of tax filings, because in one case the trust must file a tax return after the sale, in the other, the transfer out creates no taxable event per se.

However, remember that _income_ (e.g., dividends and interest) that the trust earns is separately taxable, again, either to beneficiary or to the trust itself. The trust may need to file its own income tax return depending how long it exists after the trustor's death. 

Presumably, if the value of an asset _declines_ after the day of death, the beneficiary can take a loss if they receive it and then sell, or the trust could take a loss (?) by filing a separate return. This then involves a K-1 (getting over my head, here).

(There's also an option, maybe, to select 6 months after the death day as the day the asset basis is determined? -- IANAL, again, and that may apply only to some more complex trusts).

[tagteam]

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@rchead037 wrote:

(There's also an option, maybe, to select 6 months after the death day as the day the asset basis is determined? -- IANAL, again, and that may apply only to some more complex trusts).

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Just to clarify that point since there appears to be a lot of confusion surrounding the alternate valuation date, the election can only be made if (a) the estate is subject to federal estate tax and (b) the alternate valuation date will reduce the value of the gross estate and the sum of federal estate and GST tax liability.

See https://www.irs.gov/instructions/i706#idm140621886980784

See also, IRC §2032(c)

[ECollins93]

I’m looking for the same info and I’m not sure the answers given here accurately pertain to the OP’s question, which specified an IRREVOCABLE trust. 

It’s my understanding there is NO STEP UP in cost basis when beneficiaries receive inheritance of stock which was part of an an irrevocable trust.

So (if the above is true information) keeping that in mind, is it better to sell stock right away and pay the tax, or transfer ownership to beneficiary and let them pay the tax when they sell in the future? Is there a tax benefit to leaving it in trust? Should beneficiaries leave the stock in trust and take periodic distributions but never actually sell the stock?

Thanks

[tagteam · Accepted solution]

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@ECollins93 wrote:

It’s my understanding there is NO STEP UP in cost basis when beneficiaries receive inheritance of stock which was part of an an irrevocable trust.

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There is no step in basis unless the property is included in the decedent's gross estate which could be the case with respect to assets in an irrevocable trust (but not necessarily, particularly in the instance where a grantor trust became irrevocable upon the death of the grantor).

[tagteam]

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@ECollins93 wrote:

So (if the above is true information) keeping that in mind, is it better to sell stock right away and pay the tax, or transfer ownership to beneficiary and let them pay the tax when they sell in the future? Is there a tax benefit to leaving it in trust? Should beneficiaries leave the stock in trust and take periodic distributions but never actually sell the stock?

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You absolutely should seek professional tax guidance as well as guidance from a financial planner, particularly if the trust has substantial assets. The terms of the trust control and you have only stated that the trust is irrevocable.

Note that the tax bracket for trusts is highly compressed which means the trust will generally pay tax at a higher rate than if the income/gain had been distributed to the beneficiaries.

Also note that if distributions are made every year from the trust, then typically a Form 1041 (and associated K-1s) will have to be prepared every tax year. Alternatively, the stock could most likely be distributed in-kind to the beneficiaries who would then take the trust's basis in the stock.

[ECollins93]

Thanks!