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When Are Assets in an Irrevocable Trust Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?

August 10, 2010

As I have suggested in earlier blog posts about Internal Revenue Code Section 1022, it seems that the modified carryover basis rules were not well-written by the 2001 Republican Congress that passed them.  It is possible that Congress may have wanted to allow a step-up in basis in very limited circumstances, but it appears to me that broad catch-all descriptions in Section 1022(e) such as “inheritance” and “[a]ny other property passing … by reason of death” were placed there to allow liberal interpretation of this tax law.  From that standpoint, it appears that the assets in an irrevocable trust may often be eligible for a step-up in basis.

As I suggested in Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?, it appears that the assets in an irrevocable trust that contains a reserved special power of appointment can be eligible for a step-up in basis.  A deeper reading of Section 1022, however, reveals other step-up opportunities as long as the assets are deemed owned by the decedent under Section 1022(d) and received from the decedent under Section 1022(e).

The grantor trust rules in Internal Revenue Code Sections 671-679 have long determined whether someone should be treated as the owner of an irrevocable trust for income tax and capital gains tax purposes.  In particular, Internal Revenue Code Sections 673-678 all begin with the general rule that the “grantor shall be treated as the owner of any portion of a trust” described in that section.  Since none of those sections are specifically negated in Section 1022, it appears that ownership under the grantor trust rules should suffice as the decedent’s ownership under Section 1022.  While there are special rules about ownership under Section 1022(d), those rules do not appear to be an exhaustive list.  Further, when Congress intended to negate certain planning maneuvers being treated as ownership in Section 1022, such as powers of appointment given to a decedent, it specifically did so. 

Thus, it appears that grantor trusts meet the “owned by the decedent at the time of death” standard in Section 1022(d)(1).  It is not much of a stretch to state that assets that were deemed “owned” by the decedent during lifetime were then at the time of death “received” from the decedent.  Assets in a grantor trust established and funded by the decedent would then fit into the category in Section 1022(e)(3) of “other property passing from the decedent by reason of death to the extent that such property passed without consideration.”

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6 Comments leave one →
  1. Marcia Sullivan permalink
    March 31, 2011 2:01 pm

    More of a question. My father recently passed away and there is stock in a trust he established that we are to receive. For financial aid planning purposes, I would prefer that the trust sell the stock for me and distribute the cash to me rather than receive the stock and sell it myself. If the trust sells the stock for me is this transaction eligible for stepped-up basis or will it be subject to taxation at the trust tax rate?

    • March 31, 2011 2:51 pm

      This blog is not meant to give legal or tax advice or as a means for the solicitation of free legal or tax advice. Please make an appointment with a qualified lawyer or CPA for your specific questions.

  2. Violet permalink
    April 8, 2013 2:39 am

    I know this if off topic but I’m looking into starting my own weblog and was curious what all is needed to get setup? I’m assuming having a blog like yours would
    cost a pretty penny? I’m not very internet savvy so I’m not 100% certain. Any recommendations or advice would be greatly appreciated. Appreciate it Violet,

Trackbacks

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  2. New Form 8939 Required to Be Filed with the Internal Revenue Service for Step-up in Basis for Estates of Persons Who Die During 2010 « Massachusetts Estate Planning, Probate & Elder Law
  3. Internal Revenue Service Releases 12/16/2010 Advance Proof Copy of Form 8939 Required for Step-up in Basis for 2010 Deaths « Massachusetts Estate Planning, Probate & Elder Law

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