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Step 1: Recognize this is a “grantor trust” because it is revocable. Step 2: Remember that a “grantor trust” is a “disregarded entity.”
Q: What is a grantor trust?
A: "Grantor trust" is a term used in the Internal Revenue Code to describe any trust over which the grantor or other owner retains the power to control or direct the trust's income or assets. If a grantor retains certain powers over or benefits in a trust, the income of the trust will be taxed to the grantor, rather than to the trust. (Examples, the power to decide who receives income, the power to vote or to direct the vote of the stock held by the trust or to control the investment of the trust funds, the power to revoke the trust, etc.) All "revocable trusts" are by definition grantor trusts. . . . If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor.
I recently reviewed the 2014-2018 tax returns prepared by a firm of four CPA’s in an Arizona county seat with a population of less than 100,000. The taxpayer was a widow whose husband died in 2013. Since the assets were community property, they received 100% stepped-up basis. But the returns still showed the original cost of stock bought in 1996 or earlier. I figured she overpaid about $5,000 a year in taxes. The preparers were obviously using the transactions details from the discount broker, who did not update the cost basis to date-of-death because no one asked them to do that. Such mistakes are like cockroaches – if you see one of them, you know there must be hundreds more.
