Irrevocable Trust Tax return

[mitchden1]

My dad had a revocable trust brokerage account. Him and I were equal trustees. My wife was a successor trustee. He recently passed away. My brokerage company told me that the account is frozen until I provide them his death certificate and a TIN for the new irrevocable trust. The TIN will be for the newirrevocable trust where where my wife and I will be trustees.

I have the value of his brokerage account on the date he died. It will take several weeks to get the death certificate. If the value of his investments are higher when the brokerage firm changes it to a irrevocable trust, who is responsible to pay taxes on the capital gains?  I plan on immediately liquidating the account and distributing the cash according to his Will.

Do the individuals in the Will have any tax liability or does the Trust have the tax liability on the gains? What happens if the value is lower when I close the Trust and distribute the cash according to his Will?

[tagteam]

I am sorry for your loss.

First, the value of the securities in the brokerage account will be stepped up (or down) to their fair market value on the date of your dad's death (assuming this was a typical revocable trust). However, you will need to value each security, which is done by adding the high and low price on the day of his death and dividing by two (e.g., High of $50 per share, Low of $48 per share = $98 per share divided by 2 which equals a FMV of $49 per share).

Next, you need a thorough review of all of the documents. The assets in the trust will virtually always pass outside the will, which makes the will irrelevant in terms of who receives the trust assets. Who are the beneficiaries of the trust and are they the same as those named in the will?

If the trust sells the assets and distributes the proceeds then, generally, the beneficiaries will be responsible for paying any tax due on their share (to the extent of distributable net income). The governing instrument typically states how the assets are to be handled in terms of a sale, to whom the assets (or proceeds) are to be distributed, and whether or not the trust will pay any tax due. 

[mitchden1]

The brokerage company will value the securities on the date of dad's death and send it to me. Since it will be several weeks before I can give them a death certificate, I will have to wait to liquidate the account. I obtained a tax ID for the Trust. There will be taxes due on any gains, dividends received during the period between dad's death and the date I liquidate the Trust. As the Trustee, I want to be responsible for any taxes due and distribute the proceeds net estimated taxes due. In that way, the beneficiaries won't have any tax liability. Does that make sense?

[tagteam]

---

@mitchden1 wrote:

Does that make sense?

---

Yes, but you should consider the amount of income and gain as well as the financial situations of the beneficiaries.

The trust tax bracket is highly compressed and distributing the income and/or gain to the beneficiaries may actually result in a lower total federal tax liability.

[rabird]

Trust files 1041 which includes k-1s to show income/interest/div/gains etc distributed to Trust owners.

[tagteam]

---

@rabird wrote:

Trust files 1041 which includes k-1s to show income/interest/div/gains etc distributed to Trust owners.

---

A trust does not issue K-1s if it retains income/gain, pays any taxes due, and does not make distributions.

[rabird]

"A trust does not issue K-1s if it retains income/gain, pays any taxes due, and does not make distributions."

the OP wants to distribute all proceeds (assets/gains/losses/div/int/etc).

[tagteam]

---

@rabird wrote:

the OP wants to distribute all proceeds (assets/gains/losses/div/int/etc).

---

If the only distributions are assets (corpus), then not even a 1041 is required, much less K-1s.