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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3918
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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taxmanrog. Hi Roger, Client originally had an A/B trust.

Resolved Question:

taxmanrog.
Hi Roger,
Client originally had an A/B trust. The trust attorney had them rewrite the
trust when one of the two beneficiaries died in 2008. The new trust is called,
"power of appointment trust".
The husband died in 2011.
In 2013 the surviving spouse sold all her investments and stock.
The financial advisor wants to know what basis to use for these sales.
All were community property so I think the basis is their original cost
plus any dividend reinvestment.
What is a "power of appointment trust"?
Thanks again,
Fred
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi, Looks like Roger is not online.



I can help with this.



A power of appointment is where someone through either will or trust gives someone else the power to say how the will maker – or trustmaker – 's asset will be distributed,



A general power is where the document (again a will or trust) says that Bob, my son, for example, says who or what charities get what .. a SPECIAL power is where more direction is given., i.e., I leave my car collection to my children, and Bob can say who gets which car.



Here a trust was used to do this rather than a will.



Whether these asset will be included in the gross estate depends on several factors and gets quite complicated, depending on things like whether this was designed as an intentionally defective grantor trust, what powers were included (swap powers, ability to name charities, etc)



The basis in the assets, however, will be stepped up to the Fair Market Value as of the date of the husband's passing, because the tax liability belongs to the grantor, so the grantor’s payment of the tax is not extra income to the trust and it is not a gift to the trust’s beneficiaries. Treasury made this clear in Revenue Ruling 2004-64,38 stating: “When the grantor of a trust, who is treated as the owner of the trust under subpart E, pays the income tax attributable to the inclusion of the trust's income in the grantor's taxable income, the grantor is not treated as making a gift of the amount of the tax to the trust beneficiaries.


NPVAdvisor :

Hwt you need to get from the attorney is whether or not this is a grantor trust

NPVAdvisor :

Sorry "What" you need to get ...

NPVAdvisor :

To qualify as a grantor trust, such power must be exercisable by the grantor or a nonadverse party or both without the consent of an adverse party. Section 674(a). An “adverse party” is a person with a substantial beneficial interest in the trust that will be adversely affected by the exercise (or nonexercise) of a power possessed by this party. Section 672(a).



An interest in the trust is substantial if “its value in relation to the total value of the property subject to the power is not insignificant.” Treas.Reg. §1.672(a)-1(a).



Generally an interest of a remainderman is only adverse as to the exer-cise of a power over principal. Treas.Reg. §1.672(a)-1(d). The interest of an ordinary income ben-eficiary, however, may be adverse to just a power over income but could also be adverse to a power over principal. Treas.Reg. §1.672(a)-1(c). A “nonadverse party” is anyone who is not an adverse party. Section 672(b).

NPVAdvisor :

But again, in MOST trusts containing a power of appointment, there will be a step up in basis for inherited assets because they are grantor trusts

NPVAdvisor :

Further if it is an irrevocable trust, the trust will get the step up in basis

NPVAdvisor :

And finally, Community Property gets a "FULL Step Up in Basis" A special rule applies to Community Property. Regardless of which spouse dies first, the entire 100% of Community Property is revalued at the date of death of the first to die.

NPVAdvisor :

Hope this helps

NPVAdvisor :

Let me now if you have questions

NPVAdvisor :

Lanwe

Expert:  Lane replied 1 year ago.
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Expert:  Lane replied 1 year ago.

Hi Fred,

... just checking back in, as I never saw you come into the chat.

You may want to take a look at this, as well

http://www.wwlaw.com/stepup.htm


and

http://blog.sfgate.com/pender/2013/07/23/selling-losing-stocks-before-death-to-get-step-down-in-basis/

and finally,

http://www.justanswer.com/estate-law/7eyk2-will-step-cost-basis-property-one-use-irrevocable-trust.html

Let me know if you have questions

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3918
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 4 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.
Thanks Much, Fred

Let me know if I can help further.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3918
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 4 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3918
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 4 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thank you sir!

Lane'

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