So I’m hopefully wrapping up the affairs after mom died. Schwab is dragging their feet, but almost everything else is done. All the IRAs have been rolled-over (and put on a 10-yr payout schedule). Her taxable brokerage is in the name of her trust, and I’m the co-trustee. Schwab is moving that to a new account. Not sure why, but whatever. I don’t plan to keep it there that long.
I know all the assets in that account experienced the stepped-up basis when she died. So her trust shouldn’t owe any taxes. But if I inject that cash into our family trust, and zero-out her trust, would that be regarded as income for us? Her trust has a separate tax ID. I’m thinking that almost might be a “gift” for tax purposes (from her trust to ours).
If the assets are still in her trust, and her trust sells the assets, her trust will owe the taxes, using the proceeds minus the stepped up cost basis to determine gain/loss. Generally, when closing out a trust, the trust can then distribute all of the income and associated gains/losses to the trust beneficiaries, if that’s what you want to do.
If her trust sells the assets and you transfer cash from her trust to your trust, you should be able to choose which trust you want to pay the taxes - her trust as the seller, or your trust as the beneficiary of her trust that received the cash. And then, depending on the terms of your trust, you may be able to distribute the cash and the taxes to your trust’s beneficiaries. If you don’t distribute the cash, it’s likely that one of the trusts will have to pay the taxes on any asset sales - again, depending on the terms of each trust. That said, I wouldn’t think that there would be that much in taxes due, because of the step up in basis on the assets.
If you have your mother’s trust sell the assets and then transfer the cash to you, there will some taxable gain/loss for the change in value from her date of death to the date of sale. That is calculated on the trust return for her trust. Then the distribution of cash to you is not a taxable event. If you distribute cash that is larger than any net gain, you can then choose to pay any taxes due on your mother’s trust return or on your personal return (assuming her trust has language to allow that - which most do). If you do not distribute any cash to you, then her trust MUST pay any taxes. And lastly, if you distribute all of the cash and any other remaining assets to you so that you can file a final trust return, then any income must be taxed on your personal return. This is also the only way to benefit from any net losses in the account. Those net losses cannot be used on your return until the trust is closed and it’s final tax return is filed.
The other option would be for your mother’s trust to distribute the assets directly to you without selling them. In that setting, there would be no taxes due on the transfer, but you would then have a cost basis in those assets of their FMV (the stepped up value) as of the date of her passing. That is the same value the trust would use to calculate any gain or loss on sale. You would need to keep track of those values yourself as many brokerages struggle with this setting and can’t properly track the cost basis. This might be useful if there are some assets that have gone up significantly in value since her passing that you would like to continue to own.
Importantly, this is not an all or nothing decision. You can sell some assets and transfer others. It’s all up to you.
The stocks were sold for cash a few days after her death. I don’t recall now who recommended that, but it was a posting on this board. So there is only cash in her taxable trust account. So once Schwab settles everything, I can transfer the funds to our Schwab trust account (Schwab seems to be gobbling up everything…moved away from Schwab years ago, but they bought our brokerage anyway). Then her trust can file a final tax return, next year, and we’re done. If I’m understanding correctly.
I plan to keep most of that in cash. It’s a few years’ living expenses, which I’m told is good to have in cash. As we approach Medicare/SS age, it seems prudent since we don’t have decades to ride the waves of the market.
Was her trust revocable or irrevocable? If revocable, then all the income in the trust should be pass through and thus reported on her taxes, not filed under a separate trust tax return.
Additionally, Irrevocable trusts do not get stepped up cost basis under the new rules unless the assets are added back to the estate (her date of passing may weigh on whether this rule applies or not):
Previously, the IRS granted the step-up in basis for assets in an irrevocable trust but the new ruling – Rev. Rul. 2023-2 – changes that. Unless the assets are included in the taxable estate of the original owner (or “grantor”), the basis doesn’t reset. To get the step-up in basis, the assets in the irrevocable trust now must be included in the taxable estate at the time of the grantor’s death.
It was revocable, but converted to irrevocable upon her death. She also had RMDs from retirement accounts, and a monthly LTC payment. Plus SS. I was going to let her accountant file a final tax return for her estate and trust, before closing the trust. Though I haven’t spoken to him yet (he wants to have a phone call with me). I planned to keep the estate/trust separate from our finances for the rest of this year.
I think, therefore, that her estate satisfies the condition of “included in the taxable estate”. I think.