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Old 01-25-2014, 02:22 PM
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More Trust/Estate (Form 1041) Questions

I posted similar questions in this section of the forum before and received some helpful information. I want to be sure that I understand the proper way to handle capital gains in inherited mutual fund accounts.

BACKGROUND (As contained in earlier question)

My mother died on Oct 2. I am the Personal Representative for taking care of her final estate. I have some questions about completing the Form 1041.

Most of her assets were mutual funds in a revocable living trust. There are 3 heirs. With one major mutual fund company there were holdings in 4 different funds. Those were handled by establishing a new account for each of the 3 heirs, then transferring 1/3 of the holdings of each fund to the new accounts. But these questions: The basis value of the holdings of each fund stepped up to the value as of October 2. When the new accounts were established on Nov 5, market prices were such that there were gains in each of the funds.

QUESTION. Do those "paper" gains from October 2 to November 5 have to be calculated, and capital gains taxes paid by the Trust on the increase in value of the distributed shares from October 2 to the 5 November date that they received them (If this is the case, would not the basis of the shares become the share price on Nov 5)?

OR Do the beneficiaries simply disregard that "paper" gain in value between October 2 and the time that their parts were distributed to them on November 5, and dealing with tax consequences when the inherited shares are actually sold (Using as a basis the value of the shares as of October 2)?

Is there an IRS publication that explains the procedure to be followed in such cases?


Second issue: There were more holdings with another major mutual fund company. Those were handled by liquidating the assets (turning it all into cash), then depositing that cash in a new checking account to be distributed. It took awhile to meet the mutual fund's liquidation requirements, i.e. medallion signature guarantees, copies of trust, so the liquidation was not done until January 6, 2014. The holdings all received dividends and capital gains distributions at the end of 2013, reported on a Form 1099.

QUESTION. It is my understanding that the year end dividends and capital gains are included on the Form 1041 and Form 1041 Schedule D such that the trust pays any taxes due. Is that correct?

Further, since the shares were actually sold in 2014, any capital gains/losses should be calculated using the share basis as of October 2 and accounted for on the Trust/Estate Form 1041 and Form 1041 Schedule D. As these shares were held in the trust for many years, the gains calculated will be long term gains(?), i.e. the fact that the basis stepped up on October 2 does not "restart the clock" with respect to what is a long term vs short term gain?

And.....since the trust will have paid taxes on the proceeds..... that any subsequent cash distributions from those proceeds to the 3 heirs will be without tax consequences?

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