When a person (“Trustor”) establishes a revocable living trust during his or her lifetime for the Trustor’s benefit and transfers assets of the Trustor into the Trust, the income tax basis of the Trust asset remains the same as when the assets were owned by the Trustor individually. For example, if the Trustor transfers real estate with an income tax basis of $350,000.00 and Apple stock with an income tax basis of $100.00 per share into the Trust, the income tax basis of these Trust assets remains the same during the Trustor’s lifetime. In the event the Trust sells the real estate for $375,000.00 and the Apple stock at $115.00 per share during the Trustor’s lifetime, there would be capital gain of approximately $25,000.00 on the real estate sale ($375,000.00 sale price minus $350,000.00 income tax basis and sale expenses) and $15.00 per share capital gain on the Apple stock sale ($115.00 sale price minus $100.00 income tax basis and sale expenses).
However, what if the Trust sold the assets after the Trustor’s death? Upon the death of the Trustor, these Trust assets acquire a new income tax basis equal to the fair market value of the asset on the date of Trustor’s death. This is commonly referred to as the “stepped up basis”. The reason for the adjustment is that federal estate tax is based on the value of the assets as of the date of death. If we take the above example and assume the value of the real estate was $375,000.00 and the value of the Apple stock was $115.00 per share on the date of Trustor’s death and the Trust sold the assets after the Trustor’s death for $375,000.00 and $115.00 per share, there would be no capital gain. Accordingly, it is very important that the fair market value of the Trust assets are determined as of the date of death, particularly when Trust assets are not sold for a number of years after the date of death of the Trustor.
So how does one establish the date of death values? The best proof of the value of the Trust assets as of the date of death is a federal estate tax return (Form 706) filed with the IRS. If the return is accepted by the IRS, the income tax basis is the value of the asset as reported on the return. However, many trusts and estates are not required to file federal estate tax returns. In that case, written real estate appraisals as of the date of death should be obtained, a written record of the average of the high and low bid price for the stock on the date of death obtained, et cetera. The Jeffrey Burr law office has over thirty (30) years of experience in administering trusts when a Trustor dies, and the attorneys and support staff of the Trust Administration Department can assist in establishing and documenting the stepped up basis of the Trust assets for future use.
-Attorney John R. Mugan
