Need court citation or rule for calculating value of stocks into a trust

[154NH773]

Pennsylvania Orphans' Court

A trust exists that will eventually be divided between two families as a percentage of what was initially placed into the trust by each family.

If stocks are added to the trust by one family, what value should be placed on those stocks if they are all sold by the trust prior to the final distribution. Should the value attributed to the stocks be the sale price, or the value they were at 6 months prior to them being added to the trust (the only number available)?

I believe I saw a rule or citation in Pennsylvania trust law stating the sale value should be used, but I can't find it now.

Thanks for any help.

 

[tranquility]

There is no simple answer to your question. If the trust is irrevocable, the amount of the gift to the trust is the FMV at the time of the gift. But, this seems more than a simple gift to an irrevocable trust. From the way you are describing it it seems you are creating more of a joint venture or partnership rather than a simple (Or, complex.) trust. Without knowing all the goals and the actual structure of the "trust" it is very hard to determine how to value the stock. There can be many games played regarding valuations that affect basis in a partnership. Some of the most difficult areas of partnership law have to do with all the interactions between partners so there is not hidden compensation, sales or transfers within the partnership. I know you are talking about a trust and not a partnership. Its just that my tax-spidey-sense is tingling that this may be more akin to a family limited partnership than a trust.

 

[latigo]

Pennsylvania Orphans' Court

A trust exists that will eventually be divided between two families as a percentage of what was initially placed into the trust by each family.

If stocks are added to the trust by one family, what value should be placed on those stocks if they are all sold by the trust prior to the final distribution. Should the value attributed to the stocks be the sale price, or the value they were at 6 months prior to them being added to the trust (the only number available)?

I believe I saw a rule or citation in Pennsylvania trust law stating the sale value should be used, but I can't find it now.

Thanks for any help.

If I were you, I'd ask the person who "supposedly" drafted the stupid thing?

"Two families"? (The individual members being readily identifiable for distribution since no one ever dies or is born into a family, duh!)

And these "supposed" separate families each being both settlors and beneficiaries of the same trust? And pooled their assets in the same trust? (Must have been very close knit families.)

Where you write, "I can't find it now" does that mean that you found it earlier, only believe you found it earlier or that it never existed?

 

[154NH773]

If I were you, I'd ask the person who "supposedly" drafted the stupid thing?

The person who drafted it is now dead.

And these "supposed" separate families each being both settlors and beneficiaries of the same trust? And pooled their assets in the same trust? (Must have been very close knit families.)

My father remarried late in life, and when he died, a large portion of his estate went into his new wife's revocable trust. The terms of the trust are: My father's contribution to the trust would eventually be distributed to his sons in the same proportion as the percentage that it initially made when combined with the already existing trust assets.

However; a relative of the new wife has the right to receive income from the trust until she dies, and at that time the principal would be finally distributed, with one portion (based on the beginning percentage) going to my family, and the other portion to a church.

His new wife died. The relative is currently collecting the income, but when she dies, we need to know what the percent distribution will be.

The trust company has produced a percentage distribution using the value of stock contributed by my father's estate at the time he died, although they acknowledge the value was quite higher at the time the stock was actually received by the trust (6 months later after going through probate).

My question was simply; What value for the stock should the trust use to calculate the percentage of value contributed to the trust from my father's estate? The actual value when received, or the value 6 months prior when my father died?

Where you write, "I can't find it now" does that mean that you found it earlier, only believe you found it earlier or that it never existed?

I believed I had seen such a citation or rule, but that was several years ago and I can't remember if that is what it actually said. Further investigation reveals that I may have remembered seeing Pennsylvania Uniform Trust Act 7799, which actually doesn't refer to the subject at hand.

So; I would still like to know if anyone knows a citation or rule that would address the issue of the value of stock into such a trust.

 

[LdiJ]

The person who drafted it is now dead.



My father remarried late in life, and when he died, a large portion of his estate went into his new wife's revocable trust. The terms of the trust are: My father's contribution to the trust would eventually be distributed to his sons in the same proportion as the percentage that it initially made when combined with the already existing trust assets.

However; a relative of the new wife has the right to receive income from the trust until she dies, and at that time the principal would be finally distributed, with one portion (based on the beginning percentage) going to my family, and the other portion to a church.

His new wife died. The relative is currently collecting the income, but when she dies, we need to know what the percent distribution will be.

The trust company has produced a percentage distribution using the value of stock contributed by my father's estate at the time he died, although they acknowledge the value was quite higher at the time the stock was actually received by the trust (6 months later after going through probate).

My question was simply; What value for the stock should the trust use to calculate the percentage of value contributed to the trust from my father's estate? The actual value when received, or the value 6 months prior when my father died?


I believed I had seen such a citation or rule, but that was several years ago and I can't remember if that is what it actually said. Further investigation reveals that I may have remembered seeing Pennsylvania Uniform Trust Act 7799, which actually doesn't refer to the subject at hand.

So; I would still like to know if anyone knows a citation or rule that would address the issue of the value of stock into such a trust.

I honestly don't think that you are going to find a "rule" that specifically applies to this situation, because this situation is honestly quite odd.

 

[tranquility]

The value is going to be the FMV at the time things became irrevocable. If the stock had to go in the trust at dad's death that is the value. The basis can be at the time of death or at alternate valuation date. (Six months after death.) But that election would have been made at the time of the estate return and all assets would be the same valuation date.

The reality is, the trust is the rule for how the trust distributes.

 

[154NH773]

tranquility
The value is going to be the FMV at the time things became irrevocable. If the stock had to go in the trust at dad's death that is the value. The basis can be at the time of death or at alternate valuation date. (Six months after death.) But that election would have been made at the time of the estate return and all assets would be the same valuation date.
The reality is, the trust is the rule for how the trust distributes.

Thanks for answering.

The trust didn't become irrevocable until some two years after the stock was added to the trust, and by that time the stock had been sold. The stock was placed there voluntarily, and the trust didn't exist until 6 months after Dad's death.

The trust itself, in an accounting audit being done presently, has attributed the higher value of the "date of acquisition by the trust" when calculating the total initial value of the trust, but uses the lower "6-12 month old date of death value" to calculate the percentage. This causes the proportion to be lower by some 10%.

I think I can make the court see the problem with this calculation, but it would be nice if I could cite an authority on how this situation should be handled.

 

[tranquility]

It seems to me it became irrevocable on dad's death. While the trust the funds went into was revocable, that does not mean you can just disappear the terms. If mom would have revoked the trust, the stock would not have reverted to her ownership.

 

[TrustUser]

to me, this is key

The terms of the trust are: My father's contribution to the trust would eventually be distributed to his sons in the same proportion as the percentage that it initially made when combined with the already existing trust assets.

looking at that distribution statement, what should have happened is the value of the stocks at the day the stocks were placed into the trust should be used.

and a complete valuation/appraisal of the assets that were already in the trust should have been made.

knowing those 2 numbers can give one the exact percentage of the stocks and allow one to EXACTLY FOLLOW THE TERMS OF THE TRUST.

that being said, if those numbers are not known, then the terms can only be followed as closely as can be approximated.

 

[TrustUser]

at least from what i read, i think the idea was that both people wanted to give to their offspring based upon the percentage of the value of the assets that they placed into the trust ?

by that i mean, if hubby contributed 30% to the trust with his stocks, and the wife contributed the other 70% - that when the trust distributed, the hubby's beneficiaries would receive 30% of the value of the trust, while the wife's beneficiaries would received 70% of the value of the trust.

this is a very reasonable agreement between a husband and wife in a second marriage. so i am interpreting the trust that this is what the trust is saying ?

 

[154NH773]

looking at that distribution statement, what should have happened is the value of the stocks at the day the stocks were placed into the trust should be used.
and a complete valuation/appraisal of the assets that were already in the trust should have been made.
knowing those 2 numbers can give one the exact percentage of the stocks and allow one to EXACTLY FOLLOW THE TERMS OF THE TRUST.
that being said, if those numbers are not known, then the terms can only be followed as closely as can be approximated.

That is my assertation also, since the values are known, and are what was reported by the trust as the initial value; however, the trust is now trying to change the value to the 6-12 month prior date of death, when the value was much lower.

the value of the stocks at the day the stocks were placed into the trust should be used

I think that is the most reasonable way of valuing the stock, but would really like to cite some authority if possible.

i think the idea was that both people wanted to give to their offspring based upon the percentage of the value of the assets that they placed into the trust ?
by that i mean, if hubby contributed 30% to the trust with his stocks, and the wife contributed the other 70% - that when the trust distributed, the hubby's beneficiaries would receive 30% of the value of the trust, while the wife's beneficiaries would received 70% of the value of the trust.
this is a very reasonable agreement between a husband and wife in a second marriage. so i am interpreting the trust that this is what the trust is saying ?

That is essentially the correct interpretation.

The value placed on the stock will make about a 10% difference in the final distribution, depending on whether the value is when the contributor died, or when the stock was received by the trust (6-12 months after the contributors death, because of probate).

 

[tranquility]

It seems to me the ones needing an alternate valuation date needs the reason. I assume that was when the trust was made but not funded? Then the terms of the trust guide. While you say the trust does not guide, I can't agree. Such a complex trust would have dealt with the question somehow.

 

[154NH773]

Then the terms of the trust guide.

I apologize for not including more information initially. I thought, obviously wrongly, that I might find a simple citation that would apply to the situation. For that reason, I proposed the original question as somewhat of a hypothetical, not wanting to get too technical. I agree with Tranquility that the Trust agreement language should prevail; however, that is where I find the ambiguity.

I think the court would agree that the ultimate objective of the trust was to split the remainder of the trust between two principal entities, one being the father's family, and the other being the church of the second wife. The split would be equal to the percentage of the original trust that was contributed by each the father and the second wife. The problem comes when trying to determine the value of the stock that was acquired by the trust from the father's estate, and therefore the percentage of the trust's value that should be attributed to the father. Should it be the value at the father's death, or the value of the stock when it was actually received by the trust after probate some 6-12 months later?

The language of the trust states:
"...the part given to them [the father's family] shall be in the same proportion to the remaining trust estate as it is to my then trust principal when received by me [the second wife]."

The question then is; when was the stock "received"?

A query to the Pennsylvania Attorney General indicated that PA state law says that assets are "received" upon the death of the decedent, despite the fact that they may not actually be received until some time later due to probate. That is generally for estate tax purposes, etc., but it doesn't seem reasonable to use that value in calculating the "actual" value when depositing it into a trust 6-12 months later, especially when that value will ultimately be used to determine the equitable distribution percentage to each party.

I assert that the stock value should be the value when it is "received" into the trust, and that is the amount that the trust originally listed it on it's beginning inventory. The trust is now indicating it will use the stock value as of the date of the father's death when making the final distribution, making the father's contribution substantially smaller and the distribution to the father's family about 10% smaller.

 

[tranquility]

The language of the trust states:
"...the part given to them [the father's family] shall be in the same proportion to the remaining trust estate as it is to my then trust principal when received by me [the second wife]."

The question then is; when was the stock "received"?

A query to the Pennsylvania Attorney General indicated that PA state law says that assets are "received" upon the death of the decedent, despite the fact that they may not actually be received until some time later due to probate. That is generally for estate tax purposes, etc., but it doesn't seem reasonable to use that value in calculating the "actual" value when depositing it into a trust 6-12 months later, especially when that value will ultimately be used to determine the equitable distribution percentage to each party.

I assert that the stock value should be the value when it is "received" into the trust, and that is the amount that the trust originally listed it on it's beginning inventory. The trust is now indicating it will use the stock value as of the date of the father's death when making the final distribution, making the father's contribution substantially smaller and the distribution to the father's family about 10% smaller.

I don't think so and agree with the AG. As I wrote:

The value is going to be the FMV at the time things became irrevocable.

It is well settled the moment of death would be time the beneficiary/heir beneficially owns the asset, even though another may be the legal owner (administrator of the estate or trustee) for a time. Nothing would change that, it is irrevocable. The only possible issue would be if all the estate were not to be distributed to the same place. That is why I wrote:

If the stock had to go in the trust at dad's death that is the value.

If a percentage of the estate had to go to the trust and another portion to a different beneficiary, if the executor/trustee had the ability to choose which assets could go where, then you might be able to make an argument the time of decision/distribution would be the valuation guide. Certainly from a tax perspective it is valued at the time of death or alternate valuation date (six months later) if that election was made for all assets in the estate tax return.

 

[TrustUser]

the ruling by the ag makes sense.

if so, are they also using the value of the other assets at that same time ? (when the stocks became irrevocable)

the main point is that the entire value of this new trust needs to be evaluated as of one point in time.

i definitely see the argument that once the stocks became irrevocable, they belonged to their new owner (the combined trust), despite the fact that probate delayed the actual funding by 6 months.