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Cost basis of stock sold in an estate account?

 
 
Stuart A. Bronstein
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      09-21-2006, 01:10 AM
>> No offence intended, but generally a person gets conflicting
>> answers because he/she doesn't know how to ask the right
>> question. ...


> TP set up two trusts, A (spousal) and B (bypass).


Generally a couple has a single trust. When one of them
dies it gets divided into two. The spousal trust contains
all the property belonging to the surviving spouse, while
the bypass trust contains the property of the deceased
spouse.

The spousal trust, therefore, remains revocable (e.g. all
income taxed to the surviving spouse) while the bypass trust
becomes irrevocable (a separate tax-paying entity).

Pennsylvania is apparently not a community property state.
So generally the property in the bypass trust will have its
basis increased to the value at the date of death, while
property in the spousal trust will have as its basis the
original purchase price (with whatever adjustments are
appropriate under the circumstances).

> In 2006 spouse died, funds were sold, and proceeds were
> divided among children of TP&spouse.
>
> How should basis of funds be calculated for income-tax
> purposes?


The basis of property in the bypass trust stays the same -
date of death value for the first spouse who died. The
basis of property in the bypass trust will take on as its
basis the value at the date of death of the second spouse.

> How should capital gain/loss be split between long-term and
> short-term?


It's a per-item issue. Short term gains and losses are
netted separately while long term gains and losses are also
separate.

Stu

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MyVeryOwnSelf
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      09-26-2006, 06:34 AM
>> TP set up two trusts, A (spousal) and B (bypass).

> Generally a couple has a single trust. When one of them
> dies it gets divided into two. The spousal trust contains
> all the property belonging to the surviving spouse, while
> the bypass trust contains the property of the deceased
> spouse.


That's this case. TP was grantor; TP and spouse were
trustees originally.

> ...
> The spousal trust, therefore, remains revocable (e.g. all
> income taxed to the surviving spouse) while the bypass trust
> becomes irrevocable (a separate tax-paying entity).
>
> Pennsylvania is apparently not a community property state.
> So generally the property in the bypass trust will have its
> basis increased to the value at the date of death, while
> property in the spousal trust will have as its basis the
> original purchase price (with whatever adjustments are
> appropriate under the circumstances).


>> ...
>> In 2006 spouse died, funds were sold, and proceeds were
>> divided among children of TP&spouse.
>>
>> How should basis of funds be calculated for income-tax
>> purposes?


> The basis of property in the bypass trust stays the same -
> date of death value for the first spouse who died.


You mean "spousal trust" here, right?

Also, if securities were traded in the spousal trust years
ago, with none of the original holdings remaining, would the
basis now be the purchase price of each security? No
adjustments are apparent. Assets were muni bond funds. Each
reinvested distribution presumably would be counted as
another purchase. (This means tracking down the history; oh
well...)

> ...
> The basis of property in the bypass trust will take on as its
> basis the value at the date of death of the second spouse.
> ...


>> In 2006 spouse died, funds were sold, and proceeds were
>> divided among children of TP&spouse. ...
>> How should capital gain/loss be split between long-term and
>> short-term?


> It's a per-item issue. Short term gains and losses are
> netted separately while long term gains and losses are also
> separate.


For the bypass trust, does step-up of basis include step-up
of acquisition date? If so, it'd all be short-term in this
case.

OTOH, instructions for Schedule D say "If you disposed of
property that you acquired by inheritance, report the
disposition as long-term gain or loss, regardless of how
long you held the property." Does this not apply to either
trust?

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Stuart A. Bronstein
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      09-28-2006, 01:43 AM
>>> How should basis of funds be calculated for income-tax
>>> purposes?


>> The basis of property in the bypass trust stays the same -
>> date of death value for the first spouse who died.


> You mean "spousal trust" here, right?


The property in the bypass trust is what belonged to the
spouse who died first. That's the property that gets a
stepped up basis to the value on the date of death.

The property in the spousal trust belongs to the spouse who
is still alive. It doesn't get a stepped up basis because
there is no date of death. Of course when the second spouse
dies, it gets a stepped up basis to the value on the date of
death of the second spouse.

> Also, if securities were traded in the spousal trust years
> ago, with none of the original holdings remaining, would the
> basis now be the purchase price of each security? No
> adjustments are apparent. Assets were muni bond funds. Each
> reinvested distribution presumably would be counted as
> another purchase. (This means tracking down the history; oh
> well...)


Have both spouses died? If so then the property that came
from each spouse gets a basis based on that spouse's date of
death. If one is still alive, the securities in the spousal
trust will have the purchase price as the basis, unless
there was some adjustment to basis for some reason.

> For the bypass trust, does step-up of basis include step-up
> of acquisition date? If so, it'd all be short-term in this
> case.


Step up of acquisition date? What do you mean? That the
acquisition date would be considered the date of death?

No, it's a gift not a purchase. And a special rule applies.

> OTOH, instructions for Schedule D say "If you disposed of
> property that you acquired by inheritance, report the
> disposition as long-term gain or loss, regardless of how
> long you held the property." Does this not apply to either
> trust?


It only applies to the trust holding property belonging to
someone who died. If one spouse is still alive, it won't
apply to the property in the spousal trust.

Stu

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<< that may be imposed upon the taxpayer. >>
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MyVeryOwnSelf
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      10-09-2006, 11:54 AM
>> TP set up two trusts, A (spousal) and B (bypass).
>> State is Pennsylvania.


> The property in the bypass trust is what belonged to the
> spouse who died first. That's the property that gets a
> stepped up basis to the value on the date of death.
> ...
> Have both spouses died? If so then the property that came
> from each spouse gets a basis based on that spouse's date of
> death.


The "bypass trust" basis still puzzles me. The confusing
part is when bypass trust assets get sold with the proceeds
invested in new assets after the first spouse's death but
before the second. I can't help thinking that the basis of
the new assets would be their purchase price (adjusted as
needed). Is it really necessary to somehow trace back the
basis of the new assets to the first spouse's date of death?
This would be kind of like an IRA where trades along the way
have no tax consequence.

Maybe a simplified artificial example would help. (A
realistic example would have lots more trades, staggered in
time.)

At death of first spouse, trust has
Asset A: $10,000
Asset B: $20,000
Asset C: $30,000

Ten years later, values have changed; trust sells:
Asset A: $20,000
Asset B: $10,000
Asset C: $50,000

and buys
Asset D: $70,000
Asset E: $10,000

After death of second spouse four years later, trust sells:
Asset D: $80,000
Asset E: $20,000

With no adjustments, what's the basis of Asset D and Asset E?

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<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
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Stuart A. Bronstein
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      10-12-2006, 06:00 AM
MyVeryOwnSelf <(E-Mail Removed)> wrote:

> The "bypass trust" basis still puzzles me. The confusing
> part is when bypass trust assets get sold with the proceeds
> invested in new assets after the first spouse's death but
> before the second. I can't help thinking that the basis of
> the new assets would be their purchase price (adjusted as
> needed). Is it really necessary to somehow trace back the
> basis of the new assets to the first spouse's date of death?
> This would be kind of like an IRA where trades along the way
> have no tax consequence.


It's called a "bypass trust" because it contains the
property of the spouse who died first, and it bypasses (is
kept out of) the estate of the surviving spouse.

Since the property in the trust all belonged to the deceased
spouse, it all gets an adjusted basis on the date of death.

Without the bypass trust the couple would incur what I call
the marital penalty in the estate tax. It works like this:

Say a couple together have assets worth $2,000,000. Let's
assume the exempt amount is $1,000,000, which it will go
back to in 2010.

When one spouse dies his half incurs no tax. Normally he
will leave it to his spouse. So when she dies she's got a
total estate of $2,000,000, and a tax of about $380,000.

The bypass trust keeps the first million out of the second
estate. The surviving spouse can manage it, take all the
income, and can even withdraw principal if she needs to.
But she is not considered the owner of the property in the
trust. So that when she dies only her $1,000,000 is counted
in her estate, and she doesn't pay any estate tax either.

> Maybe a simplified artificial example would help. (A
> realistic example would have lots more trades, staggered in
> time.)
>
> At death of first spouse, trust has
> Asset A: $10,000
> Asset B: $20,000
> Asset C: $30,000
>
> Ten years later, values have changed; trust sells:
> Asset A: $20,000
> Asset B: $10,000
> Asset C: $50,000
>
> and buys
> Asset D: $70,000
> Asset E: $10,000
>
> After death of second spouse four years later, trust sells:
> Asset D: $80,000
> Asset E: $20,000
>
> With no adjustments, what's the basis of Asset D and Asset E?


If assets are acquired after the death of the spouse, they
certainly won't use the date of death value to determine
basis. Only property actually owned by the spouse while he
was alive gets a changed basis. Property acquired by the
trust after death takes the purchase price as the basis.

Stu

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
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Herb Smith
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      10-12-2006, 06:00 AM
>>> TP set up two trusts, A (spousal) and B (bypass).
>>> State is Pennsylvania.


>> The property in the bypass trust is what belonged to the
>> spouse who died first. That's the property that gets a
>> stepped up basis to the value on the date of death.
>> ...
>> Have both spouses died? If so then the property that came
>> from each spouse gets a basis based on that spouse's date of
>> death.


> The "bypass trust" basis still puzzles me. The confusing
> part is when bypass trust assets get sold with the proceeds
> invested in new assets after the first spouse's death but
> before the second. I can't help thinking that the basis of
> the new assets would be their purchase price (adjusted as
> needed). Is it really necessary to somehow trace back the
> basis of the new assets to the first spouse's date of death?
> This would be kind of like an IRA where trades along the way
> have no tax consequence.


The "bypass trust" becomes a SEPARATE tax entity upon the
death of the first spouse, and the cost basis of assets in
the trust at that point are the date of death values. If
those assets are sold, and the funds invested in new assets,
the cost basis of the new assets is their purchase price.
Death of the second spouse will have NO effect on the cost
basis of assets in this "bypass trust", as it is not part of
the estate of the second spouse.


> Maybe a simplified artificial example would help. (A
> realistic example would have lots more trades, staggered in
> time.)
>
> At death of first spouse, trust has
> Asset A: $10,000
> Asset B: $20,000
> Asset C: $30,000
>
> Ten years later, values have changed; trust sells:
> Asset A: $20,000
> Asset B: $10,000
> Asset C: $50,000



Resulting in the following taxable gains/losses:
Asset A: +$10,000
Asset B: -$10,000
Asset C: +$20,000
Capital gains taxes are paid by the trust, not the second spouse.

> and buys
> Asset D: $70,000
> Asset E: $10,000
>
> After death of second spouse four years later, trust sells:
> Asset D: $80,000
> Asset E: $20,000
>
> With no adjustments, what's the basis of Asset D and Asset E?


Same as their purchase price ($70,000 and $10,000), since
what goes on in this trust has nothing to do with what the
second spouse does. It became a separate tax entity upon the
death of the first spouse.

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
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ed
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      10-12-2006, 06:00 AM
>>> TP set up two trusts, A (spousal) and B (bypass).
>>> State is Pennsylvania.


>> The property in the bypass trust is what belonged to the
>> spouse who died first. That's the property that gets a
>> stepped up basis to the value on the date of death.
>> ...
>> Have both spouses died? If so then the property that came
>> from each spouse gets a basis based on that spouse's date of
>> death.


> The "bypass trust" basis still puzzles me. The confusing
> part is when bypass trust assets get sold with the proceeds
> invested in new assets after the first spouse's death but
> before the second. I can't help thinking that the basis of
> the new assets would be their purchase price (adjusted as
> needed). Is it really necessary to somehow trace back the
> basis of the new assets to the first spouse's date of death?
> This would be kind of like an IRA where trades along the way
> have no tax consequence.
>
> Maybe a simplified artificial example would help. (A
> realistic example would have lots more trades, staggered in
> time.)
>
> At death of first spouse, trust has
> Asset A: $10,000
> Asset B: $20,000
> Asset C: $30,000
>
> Ten years later, values have changed; trust sells:
> Asset A: $20,000
> Asset B: $10,000
> Asset C: $50,000
>
> and buys
> Asset D: $70,000
> Asset E: $10,000
>
> After death of second spouse four years later, trust sells:
> Asset D: $80,000
> Asset E: $20,000
>
> With no adjustments, what's the basis of Asset D and Asset E?


At the death of the first spouse the bypass trust gets a
step-up in basis of all its assets at DOD and the
acquisition date is automatically "long term" for those
assets. So, when sold, they are long term and the basis of
anything bought new is its purchase price and new assets
when sold are either long term or short term. Ignore the
death of the second spouse as to assets in the bypass trust
in a non-community property state.

The assets in the spousal trust do NOT get a DOD step up
until the second death. Trades, until then, are either long
term or short term from original acquisition date. Upon
second death spousal assets get step-up to DOD value and
when sold are long term

The sale of any assets in either trust bought after its DOD
is either short term or long term.

In a community property state the spousal trust assets ALSO
get a step-up to DOD valule of first spouse, and ONLY the
spousal trust gets another step up at DOD of second spouse.

MF

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DORFMONT@aol.com (Linda Dorfmont)
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      10-12-2006, 06:20 AM
MyVeryOwnSelf wrote:

> At death of first spouse, trust has
> Asset A: $10,000
> Asset B: $20,000
> Asset C: $30,000
>
> Ten years later, values have changed; trust sells:
> Asset A: $20,000
> Asset B: $10,000
> Asset C: $50,000
>
> and buys
> Asset D: $70,000
> Asset E: $10,000
>
> After death of second spouse four years later, trust sells:
> Asset D: $80,000
> Asset E: $20,000
>
> With no adjustments, what's the basis of Asset D and Asset E?


The basis of A, B and C, acquired by the trust through
inheritance, is the FVM at date of death; the basis of D and
E, purchased by the trust, is their purchase cost.

Linda Dorfmont E.A., CFP, CSA

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