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  1. #1

    Default Capital Gains on Inherited Personal Property

    Regarding personal property items inherited by a beneficiary under a Trust, is a potential, later sale of any of those inherited items subject to Federal capital gains tax if the sale value is greater than the original purchase price? E.g., a collectible antique, or a piece of artwork? If the answer is yes, how would one establish a value of an item 50 years old without available, long-lost purchase documents? Thanks for any help.

  2. #2
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    Default Re: Capital Gains on Inherited Personal Property

    The basis for inherited items is the value at the time of the death of the testator.

    For example, if you inherited that valuable antique from your grandmother, get a written appraisal at the time of her death. If you sell it at the appraised value there's no gain so there's no tax. If you kept it for a while and it appreciated then the gain would be the sale price minus the appraised value. That's overly simplified, of course.

    Learn more at the IRS website's Capital Gains Topic:

    https://www.irs.gov/taxtopics/tc409

  3. #3
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    Default Re: Capital Gains on Inherited Personal Property

    Quote Quoting edkrane
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    Regarding personal property items inherited by a beneficiary under a Trust, is a potential, later sale of any of those inherited items subject to Federal capital gains tax if the sale value is greater than the original purchase price? E.g., a collectible antique, or a piece of artwork? If the answer is yes, how would one establish a value of an item 50 years old without available, long-lost purchase documents? Thanks for any help.
    That depends on the details of the trust. If the trust was a revocable living trust up until the time the trust grantor died then for federal income tax purposes the trust is essentially ignored while the grantor is alive and the assets and income of the trust are treated as though they were owned/received by the grantor. So the trust income would, for example, end up on the grantor's income tax return and the trust would not file one. When the grantor dies, that then has several effects. First, the trust assets are included in the grantor's estate for federal estate tax purposes. Second, the assets are considered transferred from the grantor to an irrevocable trust at the moment of the grantor's death. And third, because the assets are included in the grantor's estate for federal estate tax the assets get their income tax basis reset to the fair market value (FMV) on the date of the grantor's death or, in rare cases, on the date 6 months after the grantor's death.

    Getting a good appraisal of the asset from a qualified appraiser or other qualified valuation expert at the time of death is very useful to establish that FMV basis if you plan to hold on to the asset for awhile. In that case, the difference between the later sale price of the asset and that FMV basis will determine the gain or loss you realize on the sale. If you sell the asset very shortly after death in an arm's length sale to an unrelated person, however, then typically an appraisal is not needed as that sale price would itself establish the FMV of the item. The idea being that if you sell it to an unrelated party in an arm's length transaction you are trying to get the most for it that you can, and thus the negotiated price you reach with the seller should be a good bench mark for the FMV.

    If the trust was not a revocable trust, i.e. was an irrevocable trust that the grantor set up during his/her lifetime, then you have to determine if there were other features of the trust that would still make it a grantor trust. If it was a grantor trust then the same outcome above occurs. Revocable trusts are the most common grantor trusts, but there are some other powers that the grantor could retain that would make an irrevocable trust still a grantor trust.

    If the trust was not a grantor trust, then the outcome changes significantly. In that case, when the grantor dies there is no change in basis in the asset. If the trust does not have the information to determine what the basis is then it needs to see if it can find some reliable way to establish the basis. If it cannot reasonably establish the basis then the basis is zero.


    Quote Quoting adjusterjack
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    The basis for inherited items is the value at the time of the death of the testator.
    Technically assets in a trust are not "inherited" by the trust beneficiaries, though many nonlawyers think of it that way.. So the rules for inherited assets don't apply here. The basis rules for assets in grantor trusts, which include revocable living trusts, work out the same as for inherited assets, though the way you get there is a bit different. But it matters greatly that the trust is a grantor trust to get that FMV basis adjustment. While the vast majority of trusts used in estate planning are revocable living trusts, not all the trusts out there fit that category, and for those other trusts at lot of them will not be grantor trusts.

  4. #4

    Default Re: Capital Gains on Inherited Personal Property

    Unofrtunately, I'm asking the question 3 years post-mortem of my father. So getting appraisals for various valuable items is going to be a big challenge. I had previously believed all inherited personal property under a Trust was free of any potential taxability.

    If the trust was not a revocable trust, i.e. was an irrevocable trust that the grantor set up during his/her lifetime, then you have to determine if there were other features of the trust that would still make it a grantor trust. If it was a grantor trust then the same outcome above occurs. Revocable trusts are the most common grantor trusts, but there are some other powers that the grantor could retain that would make an irrevocable trust still a grantor trust.

    The Trust was created in 1995 as "Revocable" until the death of either spouse, which occurred in 2000...then becoming "Irrevocable" for the duration of the life of the Surviving Spouse, which occurred in 2016. Is the Trust therefore "Irrevocable" by default at time of death of the Surviving Spouse?

    There are no stipulations within the Trust using the word "Grantor." The creators of the Trust were referred to within the Trust document as "Settlors."

    Does a "Irrevocable" Trust nevertheless become a "Grantor" Trust by some default in the eyes of the IRS?

    (I had thought the Trust attorney I'd retained after the death of my father had dealt with this and given me a heads up on potential capital gains. Despite a substantial fee he fulfilled the stereotype of many lawyers, to my deep chagrin. 3 years later I'm having to clarify things.)

  5. #5
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    Default Re: Capital Gains on Inherited Personal Property

    Quote Quoting edkrane
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    The Trust was created in 1995 as "Revocable" until the death of either spouse, which occurred in 2000...then becoming "Irrevocable" for the duration of the life of the Surviving Spouse, which occurred in 2016. Is the Trust therefore "Irrevocable" by default at time of death of the Surviving Spouse?
    Then in 1995 your father and his spouse were the grantors/settlors of the trust. From 1995 to 2000 it qualified as a grantor trust because it was a revocable trust during that time. Then, based on what you said above, when his spouse died in 2000 the trust became irrevocable. At that point the trust would cease to be a grantor trust unless your father retained one of the several other significant powers listed in the grantor trust provisions of the Internal Revenue Code (IRC), which is not very common in trusts today. If the trust ceased being a grantor trust in 2000 then there will be no FMV adjustment in the basis of the trust assets when your father died. You may want to take the trust instrument to a tax attorney rather than a trust attorney for a review to see if the trust may still have been a grantor trust at the time he died and for help with determining the basis in the assets. Trust attorneys who are not also tax attorneys generally don't have a deep knowledge of the taxation of trusts. I've had to cure problems in trusts drafted by attorneys who were unaware of the tax problems lurking in the way they set up trusts.

  6. #6
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    Default Re: Capital Gains on Inherited Personal Property

    Let's go at this another way.

    List the items that you are concerned with. Why are they "valuable"?

    Were those items specified in the trust documents and is there any documentation showing that ownership of the items was actually transferred to the trust?

    As for how you establish "value" at the time of death, that depends on what the items are so please answer both questions.

  7. #7

    Default Re: Capital Gains on Inherited Personal Property

    Thank you.

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