A parent wishes to establish a revocable or irrevocable trust for a child. Cash and real estate will be placed in the trust. Can the parent transfer their unused capital losses to the trust to offset future gains.
"researcher" wrote
Nope. Losses being carried forward can only be used by that individual.
Gift tax also applies I think. Amount transferred in excess of $13,000 uses up the lifetime exemption, which is $5 million in 2011, and then the gift tax which is an almost flat 35% kicks in.
Depends on what you mean by unused capital losses. If you mean you are transferring real property worth less than what you bought it for, the trust will take the same basis in the property that you have. So that if the trust then sells it, it will have a capital loss.
But otherwise, no, you can't just transfer gains or losses to someone else.
Careful, rg, a revocable trust is not a completed gift, it can be changed at any time or well, revoked. Gift tax does not apply.
When transferring to an irrevocable trust your answer is correct, the $13K per person combination, e.g. 2 parents cab gift a total $26K before hitting up their lifetime credit, etc.
That's normally correct, though in this case it may not apply. If property is transferred to an irrevocable trust (unless it's a Crummey or insurance trust), the annual exemption does not apply.
On the other hand if the gift is given to a trust revocable by the grantor, it is not considered a completed gift and there will be no tax consequences at that time.
Stu - I recall an issue that when one gifts stock but it's below its cost, there's an issue. From Pub 551 p8:
--------- If the FMV of the property at the time of the gift is less than the donor?s adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Your basis for figuring gain is the same as the donor?s adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis, earlier).
------------
The above section goes on to give an example where the basis is reduced to the value at the time of the gift since it was lower than the donor's basis.
We agree there's no issue for the revocable, but for the revocable, a completed gift, how is this different from the gift to individual, where as noted above, the loss is not allowed?
Joe
With a trust that is revocable by the grantor, for tax (and almost all other) purposes whatever is put into the trust is treated as still owned by the grantor. The reason is that the contribution to the trust can be changed or revoked at any time.
If a gift of cash is made from the trust to a beneficiary, at that point it can't be called back and is irrevocable.
With respect to a gift to an irrevocable trust, the Code says (or at least did the last time I checked) that the annual gift tax exclusion does not apply to gifts of a future interest. A gift to an irrevocable trust, one to which the beneficiary can't lay his hands on it now without consent of a trustee, is considered a gift of a future interest.
The way Crummey/insurance trusts work is that they require the beneficiary to be given notice of any gift. The beneficiary then has the power to withdraw the gift from the trust for a period of time - often 30 days. If the beneficiary doesn't do that, then the power to withdraw expires.
The 9th Circuit Court of Appeal in the Crummey case decided that this scheme was sufficient to constitute a gift of a present interest because the beneficiary could take it right away. When he doesn't he in effect becomes the grantor of that gift to himself. If the trust ever has taxable income (they are normally set up not to), the income will be taxed to the beneficiary as income of a grantor trust.
Is that confusing enough?
Sorry, no, I actually understood all that. I was questioning the handling of losses. I gift you stock with my basis $10,000, but valued at $8000 when I gift, you sell it for $8000 in a year. The piece I quoted implies that you have no loss.
I was asking how this changes when an irrevocable trust is in play. I believe the answer to the OP is 'no," you can't gift a loss.
Ok, sorry for misunderstanding.
I believe that's the case.
Right, and it;s because the property acquires a dual basis, which in practice prevents you from giving away a loss.
Example: Your basis is $20,000 and when you if it FMV is 9000.
Later the recipient sells it for 15,000.
What is he recipient's gain or loss?
To calculate gain, basis to use is 20,000, but that fails to produce a gain. So no gain.
To calculate loss, basis to use is 9000, but that fail to produce a loss. So no gain, no loss. The practical effect is the
11,000 (20,000-9000) donor's loss cannot be given away, for any sales inside that 11,000 loss region does not produce any loss for the recipient.
And to make matters more interesting: If stocks/etc were given to a irrevocable trust or person(s), and these stocks' FMV was more than the donors cost basis, and gift tax was paid, then the cost basis to the recipient is increased by a portion of the gift tax paid. See
Suppose you set up a revocable living trust for someone, and put money into the account. The money earns interest, or is used to buy stocks which pay dividends or capital gains. The someone pays tax on these profits. Yet if you decide to revoke the trust you get extra money (like the dividends, capital gains) but someone else paid tax on this. That sounds odd to me. Am I missing something?
The revocable living trust is not a separate tax entity. It's owned by the person funding it. All gains/losses flow right to that person until their death.
A revocable trust is treated as if it doesn't exist for tax purposes. So the grantor is taxed on all the income. Anything distributed from the trust to a non-grantor beneficiary is considered a gift at that time.
If a non-grantor beneficiary pays tax on trust income, that payment will likely be considered a gift to the grantor.
In the past people tried to shift income by making no-interest loans that could be called back at any time. From a financial standpoint the loans had zero value because it could be called at any time. The recipient would earn income from it, thus shifting income from one to the other.
The Supreme Court didn't like that and (wrongly in my opinion) decided that the no-interest demand loan had a gift tax value after all. Since then Congress changed the tax code to conform to the court's decision.
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