Stocks which you receive as a
distribution from a trust present
a special case for the determination
of cost basis. The correct cost basis
depends on what kind of trust it was.
If the shares are coming to you as a
distribution from a trust, ask the
trustee to provide you with a letter
stating your cost basis and holding
period date.
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Some trusts do not take on a new basis at the date of the most recent death. The trustee or estate attorney should know what kind of trust it is and whether a "step-up" to market value at the date of death (or six months later) is applicable to the trust that is making the distribution.
Bypass Trusts
A "bypass trust" is one that literally passes by the estate tax return at the time of the second death of a married couple. In the typical bypass trust, when the dad dies (no gender offense intended -- it's just the mortality tables being applied), the dad's estate tax exemption is set aside in a separate "bypass" trust from which the wife can draw income and principal as needed during her lifetime. At her death, the remaining principal is inherited by the children or other beneficiaries free of any levy of estate tax at her death. Stock which was owned at the time of dad's death was stepped up to market value at the time of his death, but stock which was acquired within the trust after his death has a cost basis of the purchase price. There is no further stepup at the time of mom's death.
Credit Shelter Trusts
A credit shelter trust is another name for a bypass trust.
Generation Skipping Trusts (GST)
In the typical situation, a generation-skipping trust (from one of your grandparents) would normally not receive a stepup at the time the assets are distributed to you. The cost basis of the assets in the hands of the GST trust carries over to you, the recipient.
Grantor Deemed Owned Trusts (GDOT)
If your dad (or mom) established a "grantor deemed owned trust," any transfer of stock between your dad (the creator) and the GDOT trust has no effect on the cost basis. There is no stepup at the time of dad's death because it is not included in the grantor's estate for estate tax purposes. Whatever the cost was inside the GDOT is the cost that will be passed to you as beneficiary if you receive a distribution from the GDOT after your dad has passed away.
Intentionally Defective Grantor Trust (IDGT)
Intentionally Defective Grantor Trust is another name for a GDOT trust.
Marital Trust
A Marital Trust is often used for the assets in your dad's estate which exceed the unitary estate tax exemption, i.e. the amount which funded the bypass trust. The marital trust is created to hold the rest of the assets to support mom during her lifetime. There is no estate tax levied at dad's death because the marital exemption is used. At the time of mom's death, all the assets in the marital trust are included in her estate tax return and a stepup to market value at the date of her death (or six months later) is applied. Note that it could also be a stepdown to market value if she happens to pass away during a stock market decline. All the assets you inherit from the marital trust are eligible for long-term capital gain treatment, no matter when the stocks were purchased.
Qualified Terminable Interest Property (QTIP) Trusts
A QTIP trust is generally one in which the surviving spouse has a right to all the income for rest of his or her life. It offers additional creditor protection. The cost basis method is the same as with marital trusts.
Residuary Trusts
This term usually refers to the marital trust which is the remainder (residual) amount after the credit shelter/bypass trust is funded with the maximum unitary estate and gift tax exemption available.
Revocable Living Trusts
If you have created a revocable living trust, any transfer of stock between you and the revocable living trust has no effect on the cost basis. Whatever the cost basis was when it was registered in the individual name of the grantor (creator) of the trust will remain the cost basis when it is transferred to or back from the revocable living trust. The assets of the revocable living trust will normally then pass to the bypass trust and the marital trust at the death of the grantor and receive a stepup or stepdown in cost basis at that time.
Survivor Trusts
This term refers to the surviving spouse's 50% share of a joint revocable living trust. Cost basis method is generally the same rules as joint tenancy.
Next Step
Once you determine the initial cost per share and acquisition date of the stock you received, you then must look at corporate actions (spinoffs), reorganizations, and return of principal payments since the date you received the trust distribution shares.
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