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Old 02-19-2013, 06:41 PM
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Irrevocable Income Only Trust - Real Estate Property Cost Basis/Distributions Question. PART 2

Trust is a Irrevocable Income Only Trust, for income tax purposes it is a Grantor Trust. It was created in Nov of 2007 and its only asset is the house. It was created under the husband and wife. Dates of death of husband is 7/2011 and wife is 12/2009.

There was no income or requirement to file anything until now since the house sold in 2012 for $300,000 and the proceeds were equally divided in 6 parts for each one of the beneficiaries. Checks were sent to them in 2012, around $50k each.

Now, I believe that the trust assets will be included in the grantor's gross estate since they since the grantor retained all taxable income and a limited power of appointment over the final distributions of the trust, and these provisions prevent the funding of the trust from being treated as a "completed gift." The end result is that certain trust assets will receive an automatic step-up in basis. See IRC 1014(a). At the time of the grantor's death, assuming it occurred prior to 2010, if the house was worth $300,000.00, the beneficiaries would receive a tax basis of $300,000.00. Thus, if they later sold it for $300,000.00, or less, they would not owe any capital gains tax. The sale would be tax-free. However, as a result of IRC 1014(a) being repealed on December 31, 2009, the aforementioned tax result will not take place. Instead, if the grantor's death occurs in 2010, the beneficiaries will receive a tax basis of original cost plus any improvements - which is likely to result in the payment of capital gains tax when the property is later sold. The present law states that each trust asset will receive a basis equal to the adjusted basis of the property in the hands of the grantor/decedent, or its fair market value on the grantor/decedent's date of death, whichever is lesser. See IRC 1022. However if that happens then we can add ,as per Section 1022, $1,300,000 million basis to the assets which would also result in no capital gains.

My question would be, if either way there will not be any capital gains, do we still need a valuation of house done with the date of death, and which date, the husband's or wife's? to be able to know how much it was worth then and use it as the cost basis?


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