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Trusts & Estates Law/Testamentary Trust Tax Question


QUESTION: A testamentary trust was established FBO the testator's wife during her lifetime and funded with cash from the testator's estate. The wife recently died and I am one of the two remaindermen named in the original testamentary trust document. Assuming the trust is now dissolved and the assets (stocks) sold or distributed to the remaindermen, what taxes come into play and who is responsible for the taxes?

ANSWER: While the trust existed, the taxes would have been either attributed to the grantor, the FBO, or the trust paid the taxes itself.

After the trust ceases to exist then it no longer has any impact on the assets. Those have been distributed to the remaindermen and all increases are taxable to the remaindermen.

Richard Fritzler

---------- FOLLOW-UP ----------

QUESTION: For tax purposes then, is there a difference if the gains are realized inside the trust before the funds are distributed or if the assets (stocks) are distributed and then sold or possibly held indefinitely? Thanks again.

Well, since the trust kept the assets out of the estate, the assets would NOT enjoy a step-up in basis.

The assets have the same basis that existed before the transfer.

And the taxable event comes at the time the of sale. So. . .

If the stock was purchased for $10 a share originally, by the grantor, the trust ceases to exist and now they are worth $30 a share. If you sell them you would realize a $20 gain and pay taxes on that. If you do it immediately after receiving them, that would be a short term gain, you would have to pay your income tax rate on them.

If it was a long term gain you would pay the long term gain rate.

If you were hoping for better, you will need some help.

Call me.

Richard Fritzler
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