Basis for gifted stock

[install4you]

I'm sole trustee for an irrevocable trust created by my parents. They stipulated that EVERYTHING they had was gifted into the trust at the time it was established, even if it was not actually transferred on paper. After they died, we found that some stock was never transferred. This stock had come because of life insurance &/or annuities with the company and had a basis of $0.

We all thought the trust eliminated the need for a will. Actually, it did, except for these stocks. Looooong story, but I finally got ownership of the stocks into the trust & sold them.

Does the original $0 basis for the stocks follow into the trust or do I use the share price from the date of transfer? I'm not trying to finagle my way out of paying proper taxes. The trust is closed with all funds distributed. I already filed for 2021 for both myself & the trust (trust's final return). I just received a 1099-B (LATE) for a portion of the stocks & now know to expect 1 or 2 more.

I filed the 1041 claiming a basis of the share price on the date the stock was officially owned by the trust. I'm concerned I might have made a mistake that will appear to the IRS to be a deliberate misrepresentation. If the trust was only responsible for taxes for gain/loss from date of receipt to date of sale, does any tax liability for the gain from $0 to the date the stock went into the trust just go away since the prior owners are deceased?

ANY help will be appreciated so very much.

[Anonymous_]

The stock gets a stepped up basis whether it becomes trust corpus or part of the estate.

[install4you]

Thanks so very much for answering. If my follow up questions seem like I'm rather illiterate on this subject, it's only because I am. I apologize for that. I've read a lot on the subject & looked up the term "stepped up basis." I think I understand the general concept, but I am such a detail person I guess I need to take some baby steps.  I read somewhere that tax matters for trusts are one of the most complicated things the IRS throws at us. I'd like to state or restate some facts to see if they affect the details of how "stepped up" applies in this case. I don't know if the stock is an inheritance, estate, or something else.

Based on life insurance policies &/or annuities my parents bought, stock was given to my parents during corporate changes & spinoffs at $0 basis in 1999 and 2017. They established the irrevocable trust in 2011 with me as sole trustee. All current and future property, real, financial, & personal, was designated as gifted into the trust. Their house and all investments (except the stock) were officially transferred. The trust stated that anything not transferred should be considered as though it had been transferred. The beneficiaries were to be me @ 50% and each of my 2 children @ 25%. Those distributions have been made and the trust is depleted.

Assuming I understand the "stepped up" rule, tax liability for the trust on stock gains does not go back to the date my parents acquired the stock. After that, I see 3 possible dates for the start of the trust's tax liability: the date the trust was formed, the dates my parents died (2015 & 2019), or the dates the ownership of the stock actually transferred to the trust. We thought that trust ownership of everything effectively eliminated any estate. In principle & intent, the trust already owned the stock when my parents died. Maybe the failure to actually complete the transfer complicates this. Also, some of these facts may change everything or they may be moot depending how tax reg's define things. I just don't know.

I really want to do the right thing here. If I need to consult a tax attorney, someone please just say so. If someone who understands this is patient enough to guide me through this, I'll be in your debt. (How about free professional advice on how to hang almost anything on the wall?)

THANKS!!!

[Anonymous_]

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@install4you wrote:

I really want to do the right thing here. If I need to consult a tax attorney, someone please just say so.

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You need to contact local legal counsel (and probably a local tax professional), because trusts, although many have much in common, are generally drafted for each individual scenario (including the property involved). As a result, any advice would, of necessity, have to be based upon the terms of the trust (which none of us here can read).

[Anonymous_]

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@install4you wrote:

We thought that trust ownership of everything effectively eliminated any estate. 

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That is what trusts generally do, but sometimes property exists that does not get transferred to the trust. Hence, the rationale for having a pour-over will.

Regardless, if this trust is the typical, plain-vanilla, variety, then the assets would receive a stepped up basis on the date(s) of death of the grantor(s).

[install4you]

Thanks for any insights.

I'm not going to press on & on for more answers because I don't want to be a pest; however, I'll add a couple more facts. If this info makes a difference in how you understand the situation, please reply.

This trust was created for the purpose of legally protecting assets from being taken by any of the many ways senior adults lose their money from scams to liability to seizure. Also, the Medicaid (just in case) lookback ended 5 years after the transfer of the property and funds,

As it was explained to me, the full description of the trust was an Irrevocable Intentionally Defective Grantor Trust. I don't know everything that means, but some of the tax advantages afforded to people were supposed to apply to the trust. My parents had no control of or access to trust holdings. I also had authority to distribute funds as I saw fit as long as the trust didn't give anything directly to my parents.

Since I already filed the 1041 for 2021, I think I'll wait to see if the IRS kicks it back. I thought I had everything figured out correctly until I received 1099-B's from the stock company.  They missed their deadline for mailing them to me, but claim that it was OK because they filed an extension. They didn't file an extension with me!

Thanks

[Anonymous_]

Unlike a typical revocable (grantor) trust, an IDGT effectively removes the assets transferred to the trust from the grantor's estate.

As a result, the grantor continues to pay income tax on the income generated by the trust during the grantor's lifetime, but there is generally no stepped up basis upon the death of the grantor (the valuation is "fixed" or "set" at the time the assets are transferred into the IDGT).

[Anonymous_]

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@install4you wrote:
They missed their deadline for mailing them to me, but claim that it was OK because they filed an extension. 

Yes, that is really not OK, but they tend to do that on a fairly regular basis (most often it is due to the fact that mutual funds restate). Regardless, you will probably need to file an amended 1041 if the 1099-B statements change the dynamics here.

[install4you]

OK. I used the share price the day the stocks transferred as basis. I used the share price less broker fees for proceeds. From 4 batches worth a total of about $7,500 there were some gains & some losses. I found my way through all the forms & the trust ended up owing $3. What concerned me about the 1099-B's was that they reported the sale of the shares & said nothing about basis. Using what I read & what you said, I think I was right. I reported all the same numbers as on the 1099-B's plus other applicable info from the various transfer and sales docs sent to me as each step of the transfers & sales happened. I wouldn't know what to amend at this point.

As I said, I think I should wait to see if the IRS comes back to me on anything. If I get a notice, I'll contact a tax professional and review everything. Then I'll have documentation showing why I was right or that I made an ignorant but honest mistake.

I don't know if "tagteam" is an individual's screen name or if it is really a group. Whoever you are, THANK YOU for being patient with me, digging through my various replies, and being willing to share your knowledge and expertise.

Reverse (kinda) disclaimer--People share what they know & think in forums but using forum advice is totally my choice. If I make decisions about filing taxes based on your shared knowledge, I'm fully responsible for my choices.

Thanks again, Eddie