I'm settling up some affairs for my mom who passed away earlier this year, and I have run into an interesting situation that googling doesn't help me solve.
She was the sole trustee of a revocable trust that contains stocks and cash. She didn't have any other assets outside the trust (living in a nursing home) and she had a pour-over clause in her will anyway.
My brother and I are named as trustees after her death, and the documents say we each get half of the assets in the trust. I understand the trust became irrevocable upon her death.
I understand that whatever stocks are in the trust will now get a step-up in cost basis, determined by the date of her death. So if my brother and I sell the stocks inside the trust (if we can) or after they are transferred to us, we will have very little capital gains.
However, earlier in the year prior to her death, she sold a bunch of stock from the trust, and the cost basis was quite lower than the selling price. So there's a pretty big gain there. The gain was used to pay off a loan that had been taken on the value of the trust/stock.
Based on my understanding of how revocable trusts work, if she had survived to the end of 2017, she would have had to claim that capital gain on her personal return.
So, what happens to the capital gain now that the trust has become irrevocable? Does it count as income to my mom (since the sale happened before her death)? Will we have to file a tax return for the irrevocable trust as a separate taxable entity?
She had a lot of medical expenses to deduct, but there would probably still be a tax obligation if the capital gain was her income.
If there is a tax liability, do we have to pay it from the trust before we distribute it?
Thanks for any help.
Submitted October 11, 2017 at 10:46AM by punocchio1 http://ift.tt/2ygFpzO
