AB Trust treatment within the Family 'B' trust

[boostm3]

What is the name of your state? New York

I have a question about the workings of AB trusts. In this example the father owns a $2million house and about $.7 million in stocks. He dies in 2007. The house will pass into the "B" Family trust which is ultimately designed to go to his two children tax free representing the entire estate tax exemption, while the remaining $.7million passes into the 'A' Marital trust which goes to support his surviving wife.

In this example, lets say the house is sold shortly after the father is
deceased by the successor trustee who takes over when the father dies. Lets say the purchase price of the house back in 1985 was $.5million, so that there is a potential capital gains tax hit of 2million - .5million = 1.5million x 15% = $225,000. The question is, who pays this capital gains tax and when; is it the 'A' trust which owns the house at the time of sale which must pay the tax which would lessen the inherited amount of the children?

In this case, for the children to get the full benefit of the $2million
estate exclusion, wouldnt it be better for the house to be sold before it passed into the 'A' trust so that the full exclusion amount could be
utilized and made up by his stock holdings? For instance, if the house was sold while he was alive, fetching a net value of $2million - $225,000 (capital gains amount) = $1,775,000, then an additional $225,000 of his stocks could be incorporated into the 'A' trust so that the kids could get the benefit of the full $2million exclusion.

Is this a correct analysis? Or should the property be sold first, and then the the proceeds could fund the 'B' trust, and if capital gains taxes brings the amount to below the exclusion amount ($2million), then additional funds from his remaining $.7million could be combined with the net house sale proceeds to make sure a full $2million is used to fund the B trust?

thank you.

 

[Dandy Don]

This is a question for the Tax Law Message Board, or better yet consult with a local CPA or tax accountant in your area who has experience with trusts.

DANDY DON IN OKLAHOMA ([email protected])

 

[boostm3]

Dandy Don, excuse my ignorance, for Im new to this forum. However Im surprised you dont consider this a valid question for this forum.. After all, this is an Estate Planning forum among other things.. AB Trusts are a basic element of estate planning. And, when a trustee funds a trust, issues of capital gains expenses arise all the time when trading within the confines of one of these trusts, or, in the case of a capital gains 'step up' provision, they are avoided. But either way, its hard to discuss Estate Planning with no mention of taxes..

To define this area so restrictively would dissallow many very relevant questions to estate planning. To allow no mention of taxes, or to not entertain any tax questions so far as they relate to estate planning would omit many useful discussions and would limit the utility of this forum.

>> better yet consult with a local CPA or tax accountant <<

Of course Ill do this... But that doesnt preclude my desire to get some discussion going on it!

 

[Dandy Don]

I didn't say it wasn't a valid question, but you are more likely to get the response you are looking for from the tax board. It is not very likely that a trust attorney experienced in this area will be reading this message board; therefore, there is likely to be almost no response to your query.

 

[mtpockets]

tax basis = date of death value

The basis of the house is the fair market value on the date of the father's death. If the house is sold shortly after his death, there will be no gain or loss.

 

[boostm3]

The basis of the house is the fair market value on the date of the father's death. If the house is sold shortly after his death, there will be no gain or loss.

Thanks very much.. I apparently totally pulled a brain cramp, and forgot about the step up value the cost basis of property receives at time of death. So once the property is placed in the Bypass Trust, it's already received its stepped up cost basis, hence, no capital gains, and the full amount of the property.