Treatment of MLP's upon death of owner

[Anonymous_]

See https://ttlc.intuit.com/community/retirement/discussion/1-do-my-heirs-take-my-master-limited-partner...

[fjz001]

I understand the step up on DOD, but my MLP's are held in a Trust and on my death I want the Trustee to sell all my MLP's (approx $2.5 million).  Now my questions:

1. My Trustee sells all MLP's the day after my death. Does the Trust have no gain or loss upon sale due to step-up?

2. I have held these Mlp's for years. Will the Trust have no recapture?

[Anonymous_ · Accepted solution]

There will be a step-up assuming this is a typical grantor trust (the assets are included in your estate).

In terms of recapture (depreciation), that essentially disappears since depreciable assets are stepped up to FMV on the date of death.

Internally, I will page @Mike9241 for input on MLPs.

[fjz001]

Thanks for the response! This was also my understanding but wanted confirmation. My Trust is a grantor trust and the beneficiaries are not market knowledgeable so best to give them cash after the MLP sale.

[Mike9241]

an interesting question for which I cannot answer with any assuredness.  If Section 751 is ordinary income is income in respect of a decedent (IRD) there is no step-up for this, so upon sale this income would need to be recognized for income tax purposes.  

In the case of a sale or exchange, Regs. Sec. 1.751-1(a)(1) provides that

To the extent that money or property received by a partner in exchange for all or part of his partnership interest is attributable to his share of the value of partnership unrealized receivables or . . . inventory items, the money or fair market value of the property received shall be considered as an amount realized from the sale or exchange of property other than a capital asset. The remainder of the total amount realized on the sale or exchange of the partnership interest is realized from the sale or exchange of a capital asset under section 741.