Cost basis of assets in a Revocable Trust

[MikeB_CPA]

I have a client who has inherited a home which had been placed into a Revocable Trust by the grantor several years prior to the grantor's death.  Now that the grantor has passed, I am unable to determine whether the basis of the home in the Revocable Trust is stepped up to the FMV at the grantor's date of death, or if the basis is the grantor's basis at the time the home was placed in the Trust.  The fact that the trust was Revocable leads me to believe that it is the FMV at the date of the grantor's death, but I have not been able to find anything that specifically addresses this scenario.

Any direction, references, or assistance will be greatly appreciated.

Thanks very much!

Mike

[Hub]

I believe the rules are clear if this was what is commonly known as a living trust, which I assume it is, in which case the beneficiary should be entitled to a stepped up basis at the date of death.  Might depend on which state they reside for the state basis. There would not have been any step up at the time the trust was established unless it wa

[BobKamman]

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.

https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-ques...

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.

[Norman2001 · Accepted solution]

Because the trust is revocable, the decedent had control of it.  IRS considers this an incident of ownership and for that reason it is included in the decedent's estate under §2033. Under §1014, the basis of the property is stepped to FMV at date of death or alternate date. 

[Taxes-by-Rocky]

Your client inherited what?  The deed to a piece of real estate, or a beneficial interest in a irrevocable trust?

Ask the executor and/or the trustee.

[MikeB_CPA]

Thank you. This reinforces what I had tentatively concluded by reviewing the IRC 1014 and 1015. I had not reviewed IRC 2033, so this additional reference is very helpful. 

I sincerely appreciate the response.

[MikeB_CPA]

Thank you!

[MikeB_CPA]

Thank you.