Dear Tax Talk:
The grantor of a revocable trust has died, and the trust assets are to be disbursed to the beneficiaries.
For tax reporting, are the stocks transferred at a basis at time of death, as is the case for inheritance?
There are basically two types of trusts: Revocable and irrevocable. A trust is created when a person (the grantor)
transfers assets for the benefit of either themselves or others or a combination of both. A trust's assets are
governed by the trust document that expresses the grantor's wishes.
The grantor can make the transfer of the assets permanent, in which case the trust is irrevocable. The creation of
an irrevocable trust is a current gift to the beneficiaries and would not be included in the grantor's taxable estate
at his death.
Because gift tax and estate tax are
essentially the same tax on the value of the assets,
in certain circumstances it makes sense to make
a gift currently, rather than wait until death.
For example, an individual may irrevocably transfer
a rental property or stock portfolio to a trust
to lock in the current value as a gift, rather
than wait until his or her death when the value of
the asset is greater. The downside is that the
grantor no longer controls the assets transferred
and cannot later change the trust beneficiaries.
If an individual wants to transfer
assets but retain control of his or her disposition,
he would create a revocable trust. The trust document
allows the grantor to change the trust terms at
any time -- he can change the beneficiaries, reclaim
transferred assets and break the trust if he so
wishes. Because the grantor retains control of the
assets to his death, the trust is includable in
the taxable estate of the grantor. Because the
assets formed part of the decedent's taxable estate,
the trust or trust beneficiaries receive a stepped-up
basis to the fair market value of the assets at
the time of the grantor's death. For tax purposes
it is treated the same as if the assets were inherited
without regard to the trust.