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Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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In the tax law it states that prior to 2010 , the basis of

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In the tax law it states that prior to 2010 , the basis of inherited property is the FMV at the time of death. However, in community property states, the basis of the full property - even the half owned by the surviving spouse is changed to FMV(fair market value) at the time of the death of one spouse. However, it states that the property must be included in the deceased spouse's estate if an estate return had to be filed.

If a living trust is owned by both spouses and property is part of the trust, what happens when one spouse in a community property state dies? Does the property in the trust go to the FMV at time of death for the full amount or 1/2 FMV and 1/2 surviving spouse's basis?

Would doing a revised tax return because of this issue raise audit flags on this issue?


Hi and welcome to Just Answer!
If that is a grantor's trust which is a revocable until the settler dies - yes the full property gets stepped up basis.
The same is true for AB trust - instead of leaving their property to each other, the property is transferred into the which becomes irrevocable after the first spouse died.
In both situations before 2010 the property gets full stepped up basis in community property states.
Amended tax returns are mailed to the IRS and processed manually - generally the fact of amending the tax return is not a red flag. However if changes resulted large tax refund - this return may be a subject of so-called "desk audit" - it will be reviewed by the IRS agent who would decide it the return should be audited. Most "desk audits" do not trigger actual audits.


The trust is a living trust, which is revocable. I'm not sure if it is a grantor or AB trust. Does it being a revocable trust make it qualify for the full stepped up basis?


Yes - property held in a revocable trust is treated as owned by the settler for income tax purposes - and the property gets stepped up basis.


Thank you. That answers my question.


You are welcome.

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