I sent this over to my CPA last week and despite leaving messages and emails he hasn't gotten back to me. I need to know ASAP and if anyone here knows how to calculate it I'd greatly appreciate it.


There's a property held in trust. It was purchased in 1941 for $2000. In 1984 it was transferred into trust with 4 beneficiaries each having a 25% interest. The husband and wife who originally purchased the home passed in 1994 and 2002. According to my CPA each death would allow for a step up in basis and requested that I get the assessed value from the town for both those years. I did and forwarded the info to him.


When the wife passed in 1994 the assessed value was $90,500. In 2002 when the husband passed the value was $140,300. One beneficiary purchased another's interest so the breakdown is as follows:

Person A - 50% beneficial interest
Person B - 25% beneficial interest
Person C - 25% beneficial interest


The majority beneficiaries and the trustees want to terminate the trust and distribute the assets. The property (and only trust asset) sold last December for $335,000. The realtor fee was 6% or $20,100 and the closing costs were $2,457. What would the cost basis for each person be?


I didn't go over the exact calculation with the CPA but from what I recall it was the purchase price of the property plus 50% of the assessed value upon the 1st death plus 50% of the assessed value on the second death. Since the trust already paid the closing/realtor fees out of the sale proceeds the beneficiaries would not be able to claim those as part of their cost basis. The sum is then divided by each of the beneficial interest percentage so here's my math:


$2,000 + $45,250 + $70,150 = $117,400

$117,400 X 0.25 = $29,350 cost basis for Person B and C

$140,557 X 0.50 = $58,700 cost basis for Person A


Is that accurate? If not, where did I go wrong?

I’m not a CPA, but I am questioning any step up in basis after the property was transferred to the trust. I’m not saying that can’t happen, and again, I’m not a CPA, or an expert on Trusts. But it seems that once it’s transferred to the Trust, then the Trust owns it at whatever basis.

Regardless, good luck in getting it handled.

quote:

Originally posted by honestlou:
I’m not a CPA, but I am questioning any step up in basis after the property was transferred to the trust. I’m not saying that can’t happen, and again, I’m not a CPA, or an expert on Trusts. But it seems that once it’s transferred to the Trust, then the Trust owns it at whatever basis.

Regardless, good luck in getting it handled.

Acknowledged. The CPA read the trust documents and determined that there would be a step up on both grantors' deaths which is why I had to make a special trip to the town hall to get the assessment values for those years.

Seems you would need a date of death appraisal values. Market value and county tax assessor values can be very very far apart.

my grandparents 1940 home they paid 5,400 for in the bay area that was locked into a very low assessment value thanks to tax laws in CA. Their assessment the year they died was like 80k but their market value when the heirs sold it a year later was well over 1mm. Thankfully heirs had appraised at their passing and by the time costs and realtors commissions were added in no tax was due

I’d talk to an attorney.

First, if this were a revocable trust that allowed the grantors to take the house out of the trust during their lifetimes, then depending on the will of the first grantor to die, that person’s interest may have passed to the second grantor. The step up in basis for the trust would be the appraised value of the home at the death of the remaining grantor. The step up in basis on half the home at the first grantor’s death would be irrelevant now.

Second, the trust sold the house. The amount of capital gain is determined at the trust level. The capital gain is distributed to the beneficiaries.

What’s been going on with the house for the last 22 years? Was it being rented out? Depreciation as a rental property will affect the basis.

Also, I believe the person who purchased a 25% share gets to subtract what he/she paid from his/her share of the capital gain on his/her individual tax return. On the other hand, if the trust documents weren’t changed to reflect the change in beneficiaries, that person maybe SOL and only entitled to 25% and the seller still gets 25%.

I am not and never will be an attorney. I am a retired CPA, but you need to talk to an attorney that does trusts and estates.

Tell the beneficiaries to file for an extension because they aren’t getting K-1s from the trust until the trust files it’s 1041.

I'm no accountant, but shouldn't your numbers add up to $312,443 (sold price - all fees)? To me the date of a persons death doesn't have any bering unless their estate got paid out on the date of their death. Otherwise, I'd keep the math simple unless the Trust or Law dictates differently.

$335,000.00 = Sold Price

$20,100.00 = 6% Realtor Fee
$2,457.00 = Closing Costs

$312,443.00 = Sold Price - All Fees/Costs

$156,221.50 = Person A - 50% beneficial interest
$78,110.75 = Person B - 25% beneficial interest
$78,110.75 = Person C - 25% beneficial interest
$312,443.00 = 100% Sum

YOUR CALCS:
$117,400.00 = $2,000 + $45,250 + $70,150

$58,700.00 = $140,557 X 0.50 Cost Basis for Person A
$29,350.00 = $117,400 X 0.25 Cost Basis for Person B
$29,350.00 = $117,400 X 0.25 Cost Basis for Person C
$117,400.00 = 100% Sum

That's my $0.02 if I understood the situation correctly.

Following up my initial post now that I’ve had some caffeine:

I’m 99.5% certain the gain or loss on the sale of the trust assets are determined at the trust level.

That leads to a question: who are you, Hildur, that you are trying to figure this out? Are you the trustee? If so, I’m 100% certain you need to talk to an attorney. Yes, it will cost the trust some money, but it’s better to it right than wing and pay legal fees out of your own pocket in the future. That’s without this sale of one person’s beneficial interest to another. The tidbit adds another level of complexity. As trustee, you have to follow the trust. If the trust documents say you have to give 25% to individuals, that’s what you have to do. Whatever agreement the two beneficiaries have is between them and up to them to figure out.

I’m 95% certain the basis of the house is the appraised value of the home when the second grantor died. We did this two years ago when my mom passed. I made my dad get the appraisal so he would get the step up in basis on my mom’s half. The gain on the home would have exceeded what could be sheltered on the sale of a primary residence had he not done this. If he’s still living in the home when he passes away, the step up from my mom’s passing won’t matter. The basis will be the appraised value at my father’s passing. That’s what the $800/hour attorney down in Naples told us.

I’m 100% certain there’s no rush to get this done in the next week. The trust has until April 15, 2024 to file its 1041 if the sale happened in 2023. If the sale happened this year, then the trust has until April 15, 2025 to file its 1041.

Get an attorney.

quote:

Seems you would need a date of death appraisal values. Market value and county tax assessor values can be very very far apart.

Without a time machine this will be tough, but for others reading this keep that in mind. You want the number to come back just as high as possible at this time and as important to be completely supportable as a valid FMV. We had similar situation with second home in family trust and had an appraisal done within the month after my last surviving parent died for just this reason.

quote:

Originally posted by ElToro:
Seems you would need a date of death appraisal values. Market value and county tax assessor values can be very very far apart.

Agreed however none of the surviving family members were advised to get one done upon either death so there's no appraisal for either of those years. Assessed value is the next best option and it's better than paying Long Term Capital Gains on everything above the $2,000 purchase price.


trapper189 you bring up some excellent points and without going down the rabbit hole the following is true: I am working with a trust attorney and CPA to resolve this. The reason for terminating the trust and distributing the assets is because if the trust doesn't distribute the proceeds from the sale in 2023 to the beneficiaries then it's considered trust income and the taxes on trust income is HIGH. Much higher than if the beneficiaries paid 0-15% in Long Term Capital Gain taxes. In order to avoid having the trust pay income tax on the sale of the property it needs to be distributed to the beneficiaries in the 2023 tax year (the same year as the sale of the property) and the beneficiaries will pay Long Term Capital Gains on the proceeds. Both the attorney and CPA have given this their blessing.

As part of the termination of the trust the trustees must distribute the assets held in the trust and the attorney drafted documentation that notifies the beneficiaries of several things: the trust termination, the distribution coming to them and their estimated tax liability, among other things. For that reason the attorney requested the estimated cost basis so that he can include the estimated tax liability in the final disclosure. I am trying like hell to get the estimate from the CPA. I stressed in all the messages and emails to the CPA that this is high priority yet I haven't heard back from him and we're running out of time because the IRS allows trusts to make distributions within the first 65 days of the following year (that's March 4th, NOT April 15th) that can be elected to count as distributions for the prior year. There's another wrinkle I won't get into but it requires a 30 day period to object so even if all the beneficiaries sign today, that leaves very little time to make the distribution within the first 65 days of this year after the 30 day objection period passes. This is not a normal trust termination with normal beneficiary payouts and I'm not going to get into the why. It just isn't. The fact is that the CPA should be well aware of the circumstances and I need this calculation ASAP because everything is ready to go and the documents can't be sent to the beneficiaries without disclosure of their estimated tax liability.


I left another message TWO messages for the CPA today. I've made it crystal clear the importance of getting this back in a timely manner yet I haven't heard back. I tried calling other CPAs and they won't take on this case without doing a full discovery which is going to cost even more time and money when the CPA I hired has already been paid in full (because the trust settled all outstanding professional fees and is ready to distribute once the beneficiaries sign off and after the objection period passes). I know it's that time of year but for crying out loud I'm desperate and it's so fucked up to say this but it's probably better to disclosure the inaccurate Long Term Capital Gains estimate than to completely miss the distribution within the first 65 days and now the trust has to pay the tax at a much higher rate.

quote:

Originally posted by jcsabolt2:
I'm no accountant, but shouldn't your numbers add up to $312,443 (sold price - all fees)?

The $312,443 is the net sale price minus realtor and closing fees. That number less the cost basis is what the Long Term Capital Gain is. If the cost basis equals or exceeds that number then no taxes are due. However due to the lack of appraisals, receipts for upgrades to the property, etc. the cost basis will most definitely be less than that number and that's ok. The difference will be taxed as long term capital gains payable by the beneficiaries if the distribution occurs within the first 65 days of this year to count as a 2023 distribution.