Trust payout question

[Pgh_sportsfan]

What is the name of your state? PA

I am a benefactor to a trust. Upon death the payout is stated as 40%, 20, 20 and 20 to 4 benefactors as monthly payments over 5 years. It says it is from the income and any capital gains from the trust. The trust is made up of cash, stocks and real estate. It also has 401K distribution s into it monthly.

Questions...

How is the value established? Is it just the total cash along with current stock and real estate values factored in?

What about 401k? Not sure but I assume the trust is the benefactor. Does that get added to initial value too?

After the 5 year period the remaining value is distributed as lump sums in the same percentages.

 

[TrustUser]

i would need to read the trust to know for sure. but here is some feedback and maybe some educated guesses

1) assuming the beneficiaries are related, there is a step-up in basis when the grantor dies, so there is no capital gains at the time of inheritance

2) the trustee should get valuations. cash is cash. stock value is from the newspaper. you could get a real estate appraisal, but you could also get a bpo from a real estate professional, as to its value.

3) these values are needed, so the gain can be calculated after the 5 year period

4) it seems odd about capital gains being distributed ? that complicates things a lot. it would make a lot more sense to distribute just the income from the trust, during the 5 years. and then distribute the principal less capital gains taxes at the end of the 5-year-period.

but like i said, i would need to read the actual trust document to make sure.

 

[Pgh_sportsfan]

i would need to read the trust to know for sure. but here is some feedback and maybe some educated guesses

1) assuming the beneficiaries are related, there is a step-up in basis when the grantor dies, so there is no capital gains at the time of inheritance

2) the trustee should get valuations. cash is cash. stock value is from the newspaper. you could get a real estate appraisal, but you could also get a bpo from a real estate professional, as to its value.

3) these values are needed, so the gain can be calculated after the 5 year period

4) it seems odd about capital gains being distributed ? that complicates things a lot. it would make a lot more sense to distribute just the income from the trust, during the 5 years. and then distribute the principal less capital gains taxes at the end of the 5-year-period.

but like i said, i would need to read the actual trust document to make sure.

I was not at home and may have mistated something. Here is the actual text:
"
Forty % of the income and realized capital gains derived from the within trust shall be made available and paid on monthly basis..."

So I assume realized capital gains is what the initial investments have made. Is that correct?

 

[Pgh_sportsfan]

I was not at home and may have mistated something. Here is the actual text:
"
Forty % of the income and realized capital gains derived from the within trust shall be made available and paid on monthly basis..."

So I assume realized capital gains is what the initial investments have made. Is that correct?

I should have said it's 40% to my mother and 20% each to myself and two brothers. Trustee is my mom's brother / my uncle.

 

[TrustUser]

i am not sure what is meant by "realized capital gain" ?

one way to interpret that is if an asset was actually sold, then there would be the basis to it plus a gain, if there was a gain.

it makes a lot more sense, if trust is just adding gain of a sold asset to the monthly distribution

 

[Taxing Matters]

1) assuming the beneficiaries are related, there is a step-up in basis when the grantor dies, so there is no capital gains at the time of inheritance

The step up in basis for the assets of the trust only occurs if the trust is a grantor trust under the Internal Revenue Code (IRC). The most common type of grantor trust is the revocable living trust. While the revocable living trust is the most common type of trust used in estate planning, there is the possibility here that the trust is not a grantor trust. More information on the trust is needed to determine if it was a grantor trust at the time the grantor died. If it was, the step up in basis occurs regardless of who the beneficiaries are; the beneficiaries need not be related to get that step up in basis.

i am not sure what is meant by "realized capital gain" ?

In the language of tax law, a gain must be realized before it is subject to tax (other than stock where the taxpayer has elected to "mark to market"). Typically realization occurs when the asset is sold or otherwise disposed of, thus fixing the gain or loss in the asset.

 

[TrustUser]

you could have quoted my entire thought process, instead of just one sentence. of course i know what "realized gain" is supposed to mean. i dont know what was meant by it in that particular trust.

this is what i said

i am not sure what is meant by "realized capital gain" ?

one way to interpret that is if an asset was actually sold, then there would be the basis to it plus a gain, if there was a gain.

 

[TrustUser]

you continue to harp on the trust being a revocable grantor trust. to me, that appears to be someone attempting to look smart.

as i have told you a million times now - just about all of these trusts are revocable grantor trusts. to harp on the one in a million is a bit nonsensical.

i also stated that i would need to read the trust in order to make sure.

 

[TrustUser]

with regard to your point about beneficiaries, you do seem to be correct. i cant find anywhere that it states the heirs must be related.

has this always been the case for the past 25 years ?

i know in california, we can keep the original basis, in regards to property tax - but only if we are related.

 

[TrustUser]

to the op - i prepare my own trusts by myself. i dont know how your trust was written, but whenever i use a term like "realized gain", i attach a definition to it, in my definition section.

in this way, there is no need to interpret anything. lots of times a phrase can be used incorrectly. but when you read the actual trust document, and take everything into context (instead of quoting just one sentence), it can often be understood what was actually meant by a particular phrase or sentence.

so for example, in this document - if i had used the phrase "realized gain", i would explain that in my definition section that this meant a gain AFTER THE ASSET WAS SOLD.

i have many such definitions in my trust. and i even have a full section in my trust to fully define what i mean by the term "per stirpes"

in this way, there is no need for a judge or lawyer to charge a million dollars an hour to state the legal meaning of that aspect of the document

this is just one way to remove "lawyerese" from a trust document. make sure that everything is spelled out, using simple english.

 

[Taxing Matters]

you continue to harp on the trust being a revocable grantor trust. to me, that appears to be someone attempting to look smart.

as i have told you a million times now - just about all of these trusts are revocable grantor trusts. to harp on the one in a million is a bit nonsensical.

And I have told you before that I have dealt with a number of non grantor trusts in my practice. They do exist, and are more than just one in a million. The fact that revocable living trusts are the most common type of trust and perhaps the only type you deal with does not mean that they are the only game in town or that non grantor trusts are such a rarity that you can discount them. So assuming that the trust is a grantor trust without knowing all the facts risks making an assumption that is wrong and then leading the OP down the wrong path. The whole reason I mention this in these posts is to make the OP (and others reading them to learn) aware of the fact that the type of trust does matter because it may turn out in their situation to be important. It is not at all about me trying to sound smart. I'm a lawyer who does estate planning and tax, and I understand the details of this very well. I wouldn't mention these details if it wasn't important for the OP to know that it matters.

Note that my reply was not a knock against you, so please don't take it that way. Your reply seems a bit defensive, and there is no need to be. I'm simply filling in the details that you didn't provide. I'm not criticizing your replies.

 

[Taxing Matters]

with regard to your point about beneficiaries, you do seem to be correct. i cant find anywhere that it states the heirs must be related.

has this always been the case for the past 25 years ?

Yes. Indeed, that has been the case since the grantor trust rules were adopted in 1954. It has never been the case that the rules required that you be related to the decedent to get the step up in basis.

i know in california, we can keep the original basis, in regards to property tax - but only if we are related.

Correct, in California certain relatives inheriting real property from a decedent will keep the same property tax assesment that the decedent had rather than suffering a reassessment of the property to fair market value. That can be a huge benefit, especially for property in areas where the real estate prices have skyrocketed in recent decades.

Some other states also take into account the relationship to the decedent in their inheritance, estate, or real estate taxes, too. You also see the relationships matter to some extent in federal estate, gift, and generation skipping taxes.

 

[TrustUser]

And I have told you before that I have dealt with a number of non grantor trusts in my practice. They do exist, and are more than just one in a million. The fact that revocable living trusts are the most common type of trust and perhaps the only type you deal with does not mean that they are the only game in town or that non grantor trusts are such a rarity that you can discount them. So assuming that the trust is a grantor trust without knowing all the facts risks making an assumption that is wrong and then leading the OP down the wrong path. The whole reason I mention this in these posts is to make the OP (and others reading them to learn) aware of the fact that the type of trust does matter because it may turn out in their situation to be important. It is not at all about me trying to sound smart. I'm a lawyer who does estate planning and tax, and I understand the details of this very well. I wouldn't mention these details if it wasn't important for the OP to know that it matters.

Note that my reply was not a knock against you, so please don't take it that way. Your reply seems a bit defensive, and there is no need to be. I'm simply filling in the details that you didn't provide. I'm not criticizing your replies.

okay, fair enough. i will still disagree with you on the percentage of trusts that are not revocable grantor trusts, brought to this site.

in fact, i would be surprised if you could comb thru this entire forum, and come up with even 1 that is not so - ones in which they do not specifically denote an irrevocable trust, etc.

that is why i say 1 in a million.

 

[TrustUser]

Yes. Indeed, that has been the case since the grantor trust rules were adopted in 1954. It has never been the case that the rules required that you be related to the decedent to get the step up in basis.



Correct, in California certain relatives inheriting real property from a decedent will keep the same property tax assesment that the decedent had rather than suffering a reassessment of the property to fair market value. That can be a huge benefit, especially for property in areas where the real estate prices have skyrocketed in recent decades.

Some other states also take into account the relationship to the decedent in their inheritance, estate, or real estate taxes, too. You also see the relationships matter to some extent in federal estate, gift, and generation skipping taxes.

okay, here is a question for you. i am not positive how this basis works. my mom died this year. it has always been my understanding that we (me and my siblings) could get a step-up in basis for her house, BUT AT THE SAME TIME keep her original basis for property taxes, because we are related to her. is that your understanding of the california law ? i understand if you are not all that familiar with california law. i only try to keep track of the stuff that is important to me (fed and california)

 

[Taxing Matters]

okay, here is a question for you. i am not positive how this basis works. my mom died this year. it has always been my understanding that we (me and my siblings) could get a step-up in basis for her house, BUT AT THE SAME TIME keep her original basis for property taxes, because we are related to her. is that your understanding of the california law ? i understand if you are not all that familiar with california law. i only try to keep track of the stuff that is important to me (fed and california)

The term "basis" is an income tax term that essentially refers to the investment you (or the person who gave you the property in the case of a gift) had in the property. Under the rules for federal income tax, property you receive by inheritance gets a basis equal to the fair market value (FMV) of the property on the day the decedent died, or if the estate elected the alternate valuation date 6 months after the decedent died, then the value on that alternate valuation date. The alternate valuation date is not elected often in part because the estate must be large enough to pay estate tax in the first place to do that. Assets in a grantor trust also get that step up in basis to FMV when the grantor dies because under the grantor trust rules the assets are treated as though the grantor still owned them. Thus, they get included in the grantor's estate for federal estate tax and get the step up in basis the same as if the grantor still owned them himself/herself. Since California largely follows federal law on income tax, you get the same step up in basis for California income tax, too.

Property tax is a whole different deal. Property tax is determined from what is known as the assessed value of the property, not basis. In many states, like mine, the property tax assessor adjusts the assessed value every few years to reflect the changes in value of the real estate. The assessor also reassesses the property when the property is sold or changes hands, like when the property is passed to someone else after the death of the owner.

California is a bit a different because of Proposition 13. Under Prop 13, the local governments are prohibited from reassessing the property except when the property is sold or otherwise changes hands. This protectes property owners from huge increases in their property taxes while they own the property that would otherwise occur as their property values skyrocket. The idea was mainly to protect homeowners from having to possibly sell their homes because the property taxes got too high to pay if their incomes didn't rise as fast as the property taxes did. While the assessed value of the property is bumped up to current value on most sales or transfers of the property, Prop. 13 prohibits that reassessment when the property is a home passing to certain relatives of the deceased owner, like the owner's kids.

So the bottom line is that you would get the bump up in basis for federal and state income tax, but under California property tax rules you might still get to keep your mother's low assessed value on the home for California property taxes too — in short get the best of both worlds.

Note that Prop 13 has been a real killer for local governments, limiting their revenues they need to pay for the increased costs of services (particularly the ballooning costs of city pensions) they have because they cannot reassess property to keep the assessed values current. There have been proposals to change Prop 13 to at least allow reassessment of commercial and investment property every few years like other states do. I've long thought Prop 13 was a misguided law, but then I think a lot of things California does are weird.