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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.

Answer
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
800 658-5105  

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Richard Fritzler

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Comparing the advantages and requirements of traditional estate practices, and unconventional methods? Are Trusts a viable asset protection vehicle? Is there an alternative to buying life insurance to reduce the impact of the estate tax. Is the elimination of the estate tax during the next decade good for everyone? I can review the benefits and misinformation that exists.

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I have been in the business of assisting business owners in reducing their taxes and liability for over 17 years. We specialize in developing plans that eliminate the estate tax, not find a way to prepay it. Most small businesses do not survive the death of the principal. We want small businesses to not only survive, but flourish.

Organizations
National Small Business Owners Association.
Nevada Association of Listed Resident Agents.
Citizens Legal Association

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Contributing author to "The Corporate Standard Newsletter".

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