Effect of Trust on Step-Up Basis

Hi, my husband and I have a "standard" A/B Trust. We are both the trustees. It is set to divide into 2 trusts when the first one of us dies, split evenly, with the surviving spouse as the trustee of both trusts. I hope I understand this and have communicated it correctly. There is nothing special about the trust, just a husband and wife.
In any case, our stock accounts are "titled" in the name of the trust, with us both as trustees named. What happens when the first of us dies? Do the stocks in the account all get an updated basis? We live in Nevada, which is a community property state.
Phyllis
Reply to
Phyllis T
Yes, that is the standard way these trusts are structured.
Revocable trusts are transparent for tax purposes, meaning that they are treated like they don't exist.
The normal rule is that property you inherit gets a stepped up basis as of the date of the donor's death. However for community property, both spouse's shares of community property get a stepped up basis when the first spouse dies. This is the rule with or without a trust.
So say your husband dies first, and his half of the community property goes into the B trust, which then becomes irrevocable. It should be set up so that you have the right to all the income from that trust, and princple if you establish that you need it. But it is not considered owned by you. So when you die, it is not included in your taxable estate for estate tax purposes.
But that also means that the assets in the B trust don't get another step up in basis when you die. If your combined estates are low enough so that you don't have to worry about estate tax in any case (at this point under about $5.5 million), you may want to consider re-drafting your trust to eliminate the B trust, and preserve the second stepped up basis in the half of the property belonging to the first spouse to die.
Reply to
Stuart O. Bronstein
My recollection is that there can be a problem if the trustee is the beneficiary for the B trust when it becomes irrevocable; it's possible that the trust would be disregarded or still considered a grantor trust. I'm not a lawyer, though. My parents set up A/B trusts with us children as trustees.
-- Arthur L. Rubin, AFSP, CRTP, Brea, CA
Reply to
Arthur Rubin
Yes, there definitely are. But a lot of lawyers are still stuck in the rut of creating trusts the same way they have for many years. I think a lot of lawyers just use familiar forms without really understanding them or the implications.
So I wanted OP to understand that, if saving taxes was her reason for getting an A/B trust in the first place, the lawyer may have been doing her a disservice. I've seen it happen.
Reply to
Stuart O. Bronstein
Right. If the beneficiary of the B trust (surviving spouse) is not the trustee, the trustee can distribute whatever he wants to the surviving spouse from the B trust.
But if the surviving spouse is the trustee, she can be entitled to all trust income for life. But to get at principal she has to establish that she needs it for her health, education or maintenance. If she doesn't have that restriction, then the B trust loses its separate status from her estate for estate tax purposes.
These days very few people actually need A/B trusts for tax purposes. But they can be important in other situations, such as when there are kids from prior marriages.
Reply to
Stuart O. Bronstein
Thanks for the information. We are "fortunate" to have the situation that we are very close to the estate limit. I am the trustee for my husband's trust if he dies first, but I feel my own resources will be sufficient to support me if he dies first (and vice-versa). And I could use his money if for some reason my health costs require it. We don't have any children, so our estates are mainly set up for family bequests (on my side, he is an only child) and bequests to various charities once we have both died.
California, but think it is now time to have it re-looked at and you have all contributed some good questions to ask our lawyer.
Reply to
Phyllis T

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