Trusts & Estates Law/Trust and Taxes
I will apologize in advance for the vague information.
My wife is a co-beneficiary of a trust established by her deceased grandmother. The trust was setup for the grandchildren in order to avoid some sort of inheritance taxing.
The trust includes an operating farm and some stocks that were left behind and my wife has been collecting quarterly dividends for about 6 years now.
The trust itself expires in 2013 and it is more than likely that we will sell our share. Whether all beneficiaries choose to sell their share is still undetermined.
What kind of taxation should we be expecting and how is it determined?
How would you recommend proceeding and where is the best place to start for advice, attorney, CPA, or other?
Again, sorry for the vagueness, but we are just trying to find a starting point in the process and do not want to get screwed along the way.
Taxation will be assessed on a gain or loss.
Gain or loss is determined by the difference of the sale price (whatever you can get at sale) and the "Basis". Your "basis" should have been the fair market value of the assets at the time your Grandmother-in-Law passed away, or her orginal purchase value when she put it into the Trust.
If your wife had a 1/6th interest as a beneficiary, and
If the assets had a value of 1.2 million dollars when your grandmother passed away, and
If her grandmother allowed the basis to "step-up" at her death,
Then your wife's basis would be $200,000.
If the basis was not stepped up because she put it in an irrevocable trust before she passed, and her grandmother's original purchase price was $300,000, then your wife's basis would be $50,000.
The devil is in the details, obviously, how the trust was created and how the assets were put in trust will make a difference. If it was a "Living Trust" (Family Trust and Intervivos Trusts are similar trusts) then Grandma, stepped up the basis to fair market value (FMV) at her death. For an estimate on the stocks you could actually research the exact day of her passing and find the FMV to determine basis. The Farm would take a little more effort for an estimate. But her estate tax return form 706 would have declared the exact values applied to the assets and what the real basis that was passed would be. That is what the IRS will use to verify your tax return values.
If the entire group of heirs agree to sell the farm and stocks for 1.8 million your wife's portion of that would be $300,000 and she would pay tax on either $100,000 or $250,000. This would be a long term capital gain tax rate, Federally, but don't forget your State taxes too.
Now if your wife's co-beneficiaries do not what to sell, you may not get much of a choice. there is no market for a 1/6th interest in a farm that is held by a bunch of distantly related family members.
There is certainly room for some negotiating. Possibly trade stocks for farm ownership. Or one of the primary heirs might want to buy out your wifes farm interest to have a greater percentage of the farm. Options do exist but they become more rare the less flexible you are willing to be.
Hope that helps as a starting point and a general overview. As to getting someone to advise you. Every Attorney or CPA is willing to charge you to talk to you. You need to figure out what questions you really need answered and who is the most appropriate source for that answer.
Asking an attorney what your wife's basis would be, would not be the most effective. All he could do is charge you an hourly rate to send letters and make phone calls to find a copy of the 706 form. Those letters and calls would be to the trust administrator. You can make that call.
If you are looking to get the most from what you have, you can't leave that in the hands of someone else to negotiate. You have to be the one.
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