Trust Asset

[peggysioux5]

Residence was placed in trust with two beneficiaries.  Trust became irrevocable at time of grantor passing.  Prior to residence being sold while still in trust (many years passed from grantor passing), one beneficiary passed away leaving his 50% to his children.  Would the deceased beneficiary's children receive a step-up in basis at their father's passing of residence so that when residence did sell, original living beneficiary would have a step-up in basis based on grantor's passing several years ago, but deceased beneficiary's children would have a step-up based on father's passing?  If that is the case, would the sale of the residence by the trust list the residence as two separate assets - 50% for original beneficiary with lower basis and 50% for secondary beneficiaries with basis based on father's passing?

[Lee B]

Excellent question

[Abby Normal]

I had one like this, and I got the lawyer who placed the house into the trust to send me a letter stating that the house did get a step up in basis at date of death.

[peggysioux5]

Another tax professional provided the following information:  being the house was in an irrevocable trust at death of grantor and the step-up happened at that time (many years ago), when the first beneficiary passed away without closing out trust, there is no secondary step-up for first beneficiary's children at date of first beneficiary's passing being the home was titled to trust and asset had not been disbursed to beneficiaries.

Abby, did the lawyer confirm there was a secondary step-up at beneficiary's passing?

[Lee B]

My reading says no step up for the assets held in an irrevocable trust.

[Sara EA]

To condense what others have rightly noted, the deceased never owned the house, the trust did, so neither he nor his beneficiaries had any basis.  The trust got step-up when it received the home.  When it sold, it had a gain of the difference between the net sales price and its basis.  The gain is what will be distributed to the beneficiaries.

[mcbreck]

Sara has it figured out. But, would the beneficiarie's share of the trust that they have a legal right to receive a stepped up basis?

For example a person owns property in an S corp. They die they company doesn't get a stepped up basis. The shares of the company get a stepped up basis so if you sell the property you must liquidate the business to not have to pay taxes on the gain.

[mcbreck]

And no I don't think the beneficiaries get another stepped up basis if one was already taken. But I have heard attorney's argue otherwise.

[DANRVAN]

19 hours ago, mcbreck said:

But, would the beneficiarie's share of the trust that they have a legal right to receive a stepped up basis?

Since the assets were held in trust at death of deceased beneficiary, there is no step up in basis upon his death.  The beneficiary’s do not have any current legal ownership or rights of the trust assets; they are only entitled to distributions. Beneficiaries do have not basis in a trust; so there cannot be a step up on their death.

Even if the house had been distributed out of the trust to beneficiaries, there would not be second step up as governed by the Uniformity of Basis Rule.

19 hours ago, mcbreck said:

For example a person owns property in an S corp. They die they company doesn't get a stepped up basis. The shares of the company get a stepped up basis.

There is a difference.  The shares of stock represent legal ownership, the holder has a right to transfer.  Beneficiary of a trust cannot transfer interest.