Discussion:Change in basis for a CRT after date of death?
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Discussion Forum Index --> Tax Questions --> Change in basis for a CRT after date of death?
Murphyqu03 (talk|edits) said: | 28 October 2009 |
| This question is in addition to a question I already posted about a week ago. Thank you for everyone that responded-
I have a client that created a CRT. After his death his wife becomes income beneficiary until her death. He died and the entire amount of the CRT was included in his estate because of the annuity payment to my client. My question is - Does the CRT (for purposes of the time between the death of my client and the death of his spouse) receive a step-up in basis of the stock held at date of death due to the inclusion of the value in the estate tax return? I do not believe it would, but am in a disagreement with colleagues. I cannot find definitive law, examples or anything to further my case. Any ideas? thanks! | |
| 28 October 2009 | |
| Perhaps I explained this badly the first time. There is no step up for income. Nada. Revaluation of the trust for estate tax purpose does not change an income interest into a capital asset. The taxability of payments from the CRT to the survivor will be no different than if they had been received by the decedent. That is the nature of IRD. If there is a tax due on the value of the income interest there will be a corresponding credit for estate taxes paid. The step up in basis accrues solely to the residual beneficiary which is the charity and therefore meaningless. | |
Murphyqu03 (talk|edits) said: | 28 October 2009 |
| Thanks Dennis for your input. I was hoping you would find this thread!
I guess I was concerned with if the trust sells an asset during the life of the surviving spouse for a large gain. When the beneficiary receives a K-1 from the trust it might be different depending on what the trust's basis is in those shares right? You'll have to forgive me I do not have much experience with CRT's. | |
Murphyqu03 (talk|edits) said: | 28 October 2009 |
| i.e gains passed through to the income beneficiaries on the K-1 will be more or less depending on whether the assets receive a step up in basis or not. | |
| 28 October 2009 | |
| Net Unrealized Appreciation is specifically an item of IRD. If you want to get really picky about the journal entries (which are not material to a CRUT) you can book NUA as an asset to match book and estate tax value and keep track of undistributed NUA. Lord knows how you would fill out the 5227. (And Lord knows how I would handle this if the remainder were not a charity.) Appreciate that my discussion is purely theoretical and that the tax code most certainly has holes. | |
Murphyqu03 (talk|edits) said: | 29 October 2009 |
| Thanks Dennis.
Maybe I'm still missing it, but I am talking about actual realized gains. If the trust sells stocks during the life of the surviving spouse, the trust will realize some sort of gain/loss (based on FMV at death or original basis). Then the beneficiary will receive income, and then receive a K-1 from the CRT for all the income. If there are gains during the year, the gains will be reported to the bene. The size of the gains will depend on the basis and therefore change the bene's income for the year. Right? | |
Murphyqu03 (talk|edits) said: | 29 October 2009 |
| Are the IRD rules that apply to the CRT the same as, say, for an IRA? | |
| 30 October 2009 | |
| Yes the rules are basically the same. A basis adjustment for Net Unrealized Gain would have no effect on the amount taxable to the beneficiary, just make it harder to report. The beneficiary is not necessarily reporting all of the trust income, just the income component of the unitrust amount. If Net Unrealized Gain becomes realized on a sale and is part of the distribution it is taxable as a capital gain whether that gain is reported as trust income or not.
Perhaps it might be easier to understand if the trust value for estate purpose has no individual basis adjustment, but instead includes the IRD component as a separate asset. Code revisions specific to S Corporations and Partnerships make this a requirement. | |
Murphyqu03 (talk|edits) said: | 30 October 2009 |
| Thanks Dennis. So it is fair to say it would make a difference if there is a step up in basis for when the trust realizes gains and then distributes income because the beneficiary would need to report capital gains. But I am still unclear if those capital assets would or would not receive the step-up and why... | |
Murphyqu03 (talk|edits) said: | 30 October 2009 |
| I suppose if it is exactly like the IRA, the the assets are included in the Gross Estate, not stepped up, then the beneficiary pays the income tax on the gain with the original basis? | |
| 30 October 2009 | |
| Close enough. There is no step up in basis. The difference between original basis and estate value is IRD to the beneficiary. The Net Unrealized Appreciation that exists at death will be taxable to the beneficiary as capital gain when recognized and distributed
whether the trust reports the gain or not. | |
