Will I be taxed on stocks inherited from a living trust?

Submitted by jetpackforspacezebra t3_z7cng1 in personalfinance

Hello. Recently a member of the family passed; they had a living trust with stock values totaling 7-figures that was divided four ways. The portfolio manager told us not to cash the stocks because we would be taxed about half of the value. It's to my understanding that this is incorrect. Are the stocks cost basis not stepped up to their fair market value at the time of death, meaning there is no capital gains to be taxed, or would I still be taxed heavily if I chose to cash the stocks?

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grokfinance t1_iy5vq2e wrote

You should receive a step up in cost basis since you inherited (a very good reason why just gifting family members assets like houses or stocks is a bad idea - because if it was gifted to you versus inherited you wouldn't get a step-up in cost basis). I'd A) confirm this with a CPA and B) fire your "portfolio manager" because you 1) likely don't need him or her and 2) obviously they are clueless. This is a rather basic, straight forward thing to know.

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yes_its_him t1_iy5v822 wrote

When stocks, bonds, ETFs, or mutual funds are inherited in a taxable brokerage account or joint or separate revocable living trust, the beneficiary generally receives a “step up” in cost basis. A stepped up basis increases the value of the asset for tax purposes to the market value at the time of death.

When you sell the stock or asset, you’ll pay capital gains taxes on the difference between the step up cost basis and sale price. There’s no holding period requirement. In theory, you could sell it right away and still get a stepped up cost basis. In practice, the estate settlement process takes time. You’ll need to work with the financial institution to get everything properly retitled and the new cost basis applied.

https://darrowwealthmanagement.com/blog/step-up-in-basis-on-certain-inherited-assets/

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altmud t1_iy646g1 wrote

Assuming the living trust became irrevocable at the time of death (usually the case).

Assuming the stocks were in an account titled in the trust's name before death.

Then, if those assumptions are correct, at the time of death the trust received a stepped-up basis for those stocks owned by the trust.

If at some later time, the trust distributes the stocks in-kind directly to the beneficiaries of the trust, then the beneficiary's basis will be the same as the trust's basis (the stepped-up basis).

If instead, the trust sells the stock and then distributes the proceeds to the beneficiary, then when the trust sells the stock there will be either a loss or gain from the stepped-up basis. At the discretion of the trustee, and depending on what the trust document says about it if anything, the taxable gain or loss can either be declared on the trust's tax return or the tax liability can be transferred to the beneficiary (listed on the K-1 they receive from the trust).

You should confirm this with a CPA familiar with trusts. "Portfolio managers" are not always experts on either trusts or taxes.

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Wallstreetsosa t1_iy674us wrote

I would double check to make sure you’re not dealing with an AB trust situation.

With an AB trust half the assets would receive a step up on the survivors side while half the assets in the bypass side would not.

If you’re inheriting assets from an AB trust then that is absolutely correct that only half the assets will receive the step up.

Don’t blindly take advice from hardos on here that are quick to shit on any financial professional. They could very well be telling you correct info… but if it’s just a living trust then yeah they would be wrong lol

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KReddit934 t1_iy5uj50 wrote

Don't know...but aren't trusts different than individually owned assets?

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grokfinance t1_iy5vv21 wrote

No, the fact the assets were held in a living revocable trust is of absolutely no consequence. It is just smart estate planning. The vast majority of adults should have a living revocable trust. People think a will is enough. It isn't.

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AdditionalAttorney t1_iy5xpx2 wrote

Do you have a go to resource you recommend to learn abt living revocable trusts?

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grokfinance t1_iy5y5ug wrote

https://www.suzeorman.com/blog/Revocable-Living-Trust-Do-You-Need-One

Another resource is Nolo. Nolo is an amazing publishing company that publishes books on a whole range of self-help legal topics. I've been following their stuff for decades. They have great educational content on their web site for free and excellent books / e-books you can buy on topics like wills, trusts (and a whole lot more). Today they are having a 40% of Cyber Monday sale too.

https://www.nolo.com/legal-encyclopedia/living-trusts

Essentially there are 4 estate planning documents that you need: 1) a will, 2) a living revocable trust with an incapacity clause (helpful for everyone, really needed once you have a house and/or kids), 3) durable power of attorney for finance and 4) durable power of attorney for healthcare. Wills only come into play when you die. The much more complicated situations are when you are still alive but incapacitated (stroke, illness, accident, etc).

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AdditionalAttorney t1_iy5ypc4 wrote

Great thank you so much!

I’ve also seen abt needing to have a digital power of attorney. Basically a way for who you name to have access to passwords and online things.

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grokfinance t1_iy5zcom wrote

You can put wording into your will / power of attorney to grant access to your digital assets. Some of the big companies like Google allow you to name someone. They call it Inactive Account Manager.

https://www.theverge.com/22812264/digital-legacy-death-estate-google-apple-how-to

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AdditionalAttorney t1_iy5zrer wrote

Oh this is great!!

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grokfinance t1_iy60i0v wrote

Out of curiosity I went back and pulled up the wills I did for family members last year to check the wording. Now I am not a lawyer so I cannot and am not giving legal advice, but this type of language is what can go into a will...

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Digital Assets. My executor may access, handle, distribute, and dispose of my digital assets, and may obtain, access, modify, delete, and control my passwords and othis electronic credentials associated with my digital devices and digital assets.

For the purpose of this Will, “digital assets” includes the following:
Files stored on my digital devices, including but not limited to, desktops, laptops, tablets, periphisals, storage devices, mobile telephones, smartphones, and any similar digital device now or later developed; and
Emails received and sent, email accounts, digital music, digital photographs, digital videos, software licenses, social network accounts, file sharing accounts, financial accounts, banking accounts, domain registrations, DNS service accounts, web hosting accounts, tax preparation service accounts, online stores, loyalty program accounts, affiliate programs, othis online accounts and similar digital items, regardless of the ownership of any physical device upon which the digital item is stored.

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AdditionalAttorney t1_iy63w73 wrote

Ok cool. Makes sense. I mostly wasn’t sure how wide spread it was. Like if I showed that to google how hard would it be to get access. I’m also not a lawyer haha You’ve given me lots of good links to look at. Thank you!

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