When terminating an irrevocable trust (bypass trust) upon death of the second spouse, can the final distribution include stock and not be recognized as a gain by the beneficiary until sale? Trust governed by Texas law.

When terminating an irrevocable trust (bypass trust) upon death of the second spouse, can the final distribution include stock and not be recognized as a gain by the beneficiary until sale?  Trust governed by Texas law.

I do intend to discuss this with an estate attorney but was looking for some introductory concepts.  According to the trust documents it will be disolved upon death of the second spouse and given to the then named next generation benificiaries.  During the surviving spouse's lifetime he/she is the beneficiary.  This question relates to the increase in unrealized gains from stock investments since the cost basis was determined on setting up the trust.


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I am not familiar with the specifics of Texas laws as to Estate, but assuming that Texas follows the Uniform Trust Code, this answer should be reasonable on target.

Assets, such as shares of stock, that were in the Revocable Living Trust at the time of the death of the Grantor [here we are talking about the first spouse to die] would pass in to one or more share trusts, with the share that is totally excludable from Federal Estate Tax into the irrevocable trust or bypass trust you cite.  The cost basis would be that as the average price on the day of death and next day of the Grantor [so-called "stepped up" cost basis.]  Generally, this bypass trust's corpus remains untouched unless the needs of the surviving spouse require distribution.  Income within the trust during its existence may or may not be distributed, again dependent on the surviving spouse's needs or requirements.

When the Irrevocable Trust is dissolved and the assets distributed, the assets continue to carry that cost basis [which was stepped up as cited above].  No gain is realized until the asset is sold by the receiving or successor beneficiary.
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Scruffy_Curmudgeon , Firefighter/medic IAFF retired

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