Revocable Living Trust & Step Up Basis

[Joel]

A long time client of mine (age 98) had a revocable living trust and passed away Oct 20, 2014.  The successor trustee sold all the stocks in the trust on Oct 24, 2014.  The broker sent a 1099B with the original basis and with the clients tax ID number. 

Would not the trust get the stepped up basis on the date of death? Shouldn't the trust have gotten a tax ID number and reported the sale of the stock in that ID number with a stepped up basis?

[mcb39]

A long time client of mine (age 98) had a revocable living trust and passed away Oct 20, 2014.  The successor trustee sold all the stocks in the trust on Oct 24, 2014.  The broker sent a 1099B with the original basis and with the clients tax ID number. 

Would not the trust get the stepped up basis on the date of death? Shouldn't the trust have gotten a tax ID number and reported the sale of the stock in that ID number with a stepped up basis?

 

This is a good and interesting question as I will be handling one of these soon.   Client died on Jan 8 and all of the stocks and her house were in the trust.  I would also like an answer to that same question.  My client, the trustee, really doesn't have a handle on this thing.  With all that money involved, they should be hiring someone with a lot more expertise than me.

[BulldogTom]

My first question?  Were the stocks actually titled in the trust name?  If so, why are they being reported on the individual's tax ID number?

 

Tom

Newark, CA

[OldJack]

Obviously the stocks were never in the trust as the taxpayer never bothered to tell the broker to put the trust name on the account.  It really does not make a tax difference.  It should be reported on the individuals estate 1041 with a step-up cost basis.

Edited March 22, 2015 by OldJack

[joanmcq]

Does the trust have a pour over clause? If so, the stocks went into the trust at the date of death. Most revocable living trusts are reported under the grantor's SSN since you don't need to get an SSN until the trust becomes irrevocable,and it becomes a separate reporting entity. Clients are notorious for not notifying the broker that the person has died and that the 1099s should be issued as of DOD under the trust's EIN. And brokers are notorious for not issuing short year statements.

[Randall]

Too many people have a trust created but don't do the necessary things to accomplish what they want done.  Too many attorneys prepare a trust document, maybe explain to the client about putting assets in the trust, but nothing gets done.  The accountant is usually the last one to know a trust even exists.

[kcjenkins]

This situation often occurs when the person named as trustee, often a family member with little financial knowledge, is in a rush, as this was clearly was, to 'cash out' the assets and distribute the money.  Sounds like the sale may even have preceded the funeral.   DOD Oct 20, 2014  SALE Oct 24, 2014.

 

I agree with Old Jack, It should be reported on the individuals estate 1041 with a step-up cost basis.

[fredazcpa]

How did the successor trustee sell the stock, if the stock was not in the trust, then the broker should not have sold with hearing from the client, 

agree with both Old Jack and KC

[DANRVAN]

How did the successor trustee sell the stock, if the stock was not in the trust, then the broker should not have sold with hearing from the client, 

agree with both Old Jack and KC

Joel said the client was 98 years old, so maybe the successor was already acting under a durable power of attorney.

[mcb39]

My trustee client was able to cash in the stocks almost immediately; and last week they sold the house.  As KC so aptly said; he has little taxation knowledge and even though they are inheriting a considerable amount of money from the dear aunt; they don't want to hire an attorney to handle it.  He did come here to get an EIN for the trust, so what now?   This will definitely be an extension.

[Joel]

If I report the capital gains on the decedents personal return, as is indicated by the tax ID on the broker statements the decedent owes about $15000. If the trust had received a tax ID number and then sold the stocks using the stepped up basis then there would be no tax owed.  

 

When the successor trustee first told me (long after the stocks were sold, but I did not know it) that the client had passed away, I sent her written information about revocable living trusts, stepped up basis and estate income tax returns.  Apparently she has ignored this information. I just recently received the 1099B from the broker.

[joanmcq]

READ THE TRUST DOC! Like I said, if there is a pour over clause anything they 'forgot' to title in the trust automatically goes into the trust at death.

Did I mention the CSTC symposium has an excellent trust class?

[Max W]

The stocks could have been transferred under a "TOD (transfer On Death) to beneficiary"  registration.  This would have avoided probate for the stocks and having to declare them in the estate.

 

http://www.sec.gov/answers/todreg.htm

[OldJack]

Having the taxpayer's ID# on the 1099B is not a real problem.  The taxable income should be reported in the correct way regardless of the 1099B ID#.  Since the stocks were sold after the taxpayer's death it should never be reported on a 1040, rather a 1041 form.  From a tax standpoint it makes no difference if the 1041 is called a trust return or an estate return.  Who gets the money and/or pays the tax could certainly make a difference between being a trust or estate.  Distribution of the proceeds is irrelevant from a tax standpoint (TOD, Probate, Trust, etc).  Regardless of what form it is reported on there is a step-up in basis unless it was a non-revocable trust that owned the stocks and had already received a step-up in basis on the stock.

[Joel]

Thanks for all your supporting comments.  Since an estate tax ID was never applied for, extension! extension!

Will be discussing this with the successor trustees.

[OldJack]

Why wait?

 

Form 1041 Instructions, page 17, quote:

 

"Every estate or trust that is required to file Form 1041 must have an EIN. An EIN may be applied for:

Online by clicking on the EIN link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated."

[Joel]

That is the easy part.  The successor trustee lives out of state, plus we need to get the brokerage 1099B corrected to the correct tax ID number and stepped up basis. The broker is also out of state.

[jasdlm]

Power of attorney doesn't entitle someone to act as successor trustee.  If the person stepped in as a successor trustee during the Grantor's lifetime, a separate trust EIN could have been applied for at that time but wasn't.  At the date of the Grantor's death, the Revocable Trust became irrevocable.  I would get a tax ID number for the trust, report the income as 'nominee' and file the appropriate 1099, and report the sales on the 1041 with the step-up in basis.  I believe this follows what OldJack is saying.

 

Good luck getting the broker to reissue the 1099 in the new tax id.  I think that is unlikely to happen, because it does not reflect what actually transpired (from the broker's perspective).  If they will do it, obviously that's great, but if not, I think your option is nominee.

[OldJack]

Thanks for all your supporting comments.  Since an estate tax ID was never applied for, extension! extension!

Will be discussing this with the successor trustees.

You got me confused!  Do you need to file an estate return or a trust return?  Who actually owned the stock accounts, the individual or a revocable trust.  If the individual owned the stock you get an estate ID, if the stock was an asset of the revocable trust you need a trust ID.  You must determine the legal owner of the stock on the day before the date of death.