TAX140 - GUIDE: Determining the Basis of Trust Assets

Determining the Basis of Trust Assets

Presented by Tim Weller

Determining the basis of assets held in trust depends on whether the trust is revocable or irrevocable, on the trust’s tax identification number, and on whether the assets are included in the grantor’s estate. Although there are some exceptions—and you should always seek help from your tax advisor—these fundamental principles should get you started.

Revocable Trusts

When a revocable trust is funded by a grantor, the assets continue to be treated as the grantor’s own for tax purposes. Upon the grantor’s death, the trust assets are included in the grantor’s estate and receive a new basis equal to the fair market value (FMV) on the date of the grantor’s death (or an alternate valuation date). The trust then becomes irrevocable, and when the assets are distributed to the beneficiaries, the basis is carried over—meaning the beneficiaries’ basis is the trust’s adjusted basis.

Irrevocable Trusts

For assets held in irrevocable trusts, the basis depends on whether the trust is deemed a grantor trust. An irrevocable trust is a grantor trust when the trust continues to use the grantor’s tax identification number. While the assets are removed from the estate for estate tax purposes, the grantor continues to be liable for the trust’s income taxes. The trust assets will carry over the grantor’s adjusted basis, rather than get a step-up at death.

Assets held in an irrevocable trust that has its own tax identification number (i.e., nongrantor trust status) do not receive a new basis when the grantor dies.

When the grantor transfers the assets to the trust as a gift, the grantor’s adjusted basis as of the date of the gift continues to be the basis of the trust assets. When assets are distributed to the beneficiaries, there is a carryover basis of the trust’s adjusted basis as of the date of the distribution.

Marital/Credit Shelter Trusts

The treatment of basis for assets held in a revocable tax planning trust, commonly known as an AB trust or a marital/credit shelter trust, is more complex. Upon the grantor’s death, the trust becomes irrevocable, and the trustee is directed to divide assets between the credit shelter trust (estate tax exemption) and the marital trust.

Assets transferred to the credit shelter trust get a new basis based on the value of the assets at the grantor’s date of death. When assets are distributed to the beneficiaries, the beneficiaries retain the trust’s adjusted basis.

The marital trust also gets a new basis upon the death of the grantor. Because the assets are also included in the surviving spouse’s estate upon death, however, the assets receive a new basis at the time they are transferred to the remaining beneficiaries.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Tim Weller is a financial professional with Weller Group LLC at 6206 Slocum Road, Ontario, NY 14519. He offers securities as a Registered Representative of Commonwealth Financial Network®, Member FINRA/SIPC. He can be reached at 315-524-8000 or at tim@wellergroupllc.com.